Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

How Amazon Prime Is Driving Up Shipping Costs

By

If e-commerce is changing the way we shop, it's also changing the way we ship, and creating inefficiencies that weren't present before.

PrintPRINT
In a typical December, United Parcel Service, Inc. (NYSE:UPS) and FedEx Corp. (NYSE:FDX) see their volumes peak mid-month as folks wrap up their Christmas buying. Last year, however, the packages just kept coming. "More consumers shopped last-minute," said an analyst from NPD Group, as events unfolded. "E-commerce shipments far exceeded peak projections," noted UPS during its quarterly earnings call. "Last-minute promotions by online retailers drove extraordinary volume growth leading up to Christmas."

The result was massive delays. Many presents spent the holiday in a warehouse rather than under a tree. In an email sent to customers on Christmas morning, Amazon, Inc. (NASDAQ:AMZN) placed the blame squarely on the shipping companies, noting that its own fulfillment centers were running on time. But the e-commerce giant issued a press release the very next day, congratulating itself on the more than 1 million Amazon Prime members it had signed up in the third week of December alone - a flood so great that it had to suspend enrollment.

Could it be that free two-day shipping encourages people to procrastinate, creating bottlenecks like the one we saw late last year? FedEx Ground CEO Henry Maier suggested that this might be the case a week before the incident ever occurred. He remarked that, "not only is e-commerce increasing our volumes during peak, it's making holiday volume spikes peakier.... Network expansion costs [have] increased to insure we have capacity for the forecast volume."

UPS made a similar announcement during its earnings call last month, saying that December's unexpected volume had resulted in "hiring and training costs, overtime hours, and additional weekend operations." To prevent a repeat, the shipper would have to "make appropriate investments such as facility expansions, process automation, job simplification, and acceleration of technology implementations."

A representative from JPMorgan Chase & Co. (NYSE:JPM) asked whether these costs would be passed on to customers (duh). UPS management demurred, but the analyst got his answer eight hours later, when Amazon held its own earnings call and announced that that Prime's annual fees could be going up, due to "the increased cost of fuel and transportation, as well as the increased usage amongst Prime members."

If e-commerce is changing the way we shop, it's also changing the way we ship, and creating inefficiencies that weren't present before. Unpredictable demand is just the tip of the iceberg. For years, UPS and FedEx have been raising rates, not because of higher fuel costs -- the price of diesel hasn't budged since 2011 -- but due to a more adverse mix of packages. Online retail and free shipping have resulted in lighter, smaller boxes as consumers buy what they want when they want. A proliferation of distribution centers means that these boxes are often being moved shorter distances, or even shipped in separate packages from different warehouses.

The rub is that more of what we're paying for (or not paying for) is handling costs, and more of what we're shipping is cardboard and plastic bubbles.

These costs are coming back to bite Amazon. For every dollar of revenue the company earned in 2013, it paid out $0.09 for shipping - up from $0.07 in 2009. Meanwhile, Prime has grown at an exponential rate, with membership doubling last year from 10 to 20 million. That Amazon cited "increased usage" as a reason for a price hike would seem to imply that it's losing money on Prime orders. This would in turn imply that the free-shipping program is doing exactly what one would have expected it to do: encouraging wastefulness and subsidizing costly consumer behavior.

"At the end of the day, it's very expensive to deliver things to residences," says FedEx chairman Fred Smith. This is likely to become even truer as Amazon, Google Inc. (NASDAQ:GOOG), and eBay Inc. (NASDAQ:EBAY) experiment with new services like same-day delivery, brick-and-mortar retailers like Wal-Mart Stores, Inc. (NYSE:WMT) try to up their Web games, and e-commerce looms ever larger in the rate schedules of shipping companies.

Related stories:

Amazon's Prime Move May Be Just Fine With Customers and Investors


Microsoft's Satya Nadella Does Not Need Our Advice

Google Launches Chromecast's Most Important Phase
No positions in stocks mentioned.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE