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Amazon: One Up on eBay

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Consider this: (Nasdaq: AMZN  ) spent $4.6 billion on its warehouses last year, amounting to 9.5% of its sales, making it the company's single biggest operating expense. However, Amazon is spending to increase both the size and efficiency of its fulfillment model. The company expects the recently announced $775 million all-cash acquisition of robot technology maker Kiva Systems to help contain costs in the distribution network over the long term.

Increasing sales and declining profitability
In 2011, Amazon's net sales soared by an impressive 41% in the wake of an expanding e-commerce market. That also led the company to increase its number of warehouses by 32% to a total of 69. Amazon's warehouses -- or "fulfillment centers," as the company prefers to call them -- are a critical component of its business model, helping to ensure timely delivery.

As the company pushes its shipping volumes to a new high, its "fulfillment" costs have climbed a staggering 58%, outpacing revenue growth. Consequently, Amazon's net profit took a beating in the recently reported quarter, falling by 58%.

A good move
As of now, human workers have to walk around the huge warehouses, hand-pick items, and pack and ship them. With Kiva robots, they will have help that should improve their productivity. Kiva's robots specialize in moving boxes and shelves full of products around warehouses in a fast and efficient manner. The robots also efficiently organize the warehouse shelves, maximizing storage space. And they also keep a close check on their error-prone human counterparts. That makes four positives: cost savings, increased throughput, increased space, and less room for error.

Kiva claims that its technology can double or even triple a company's hourly order-processing capability -- something Amazon can surely use to cut costs. It's also a tried and tested idea. Kiva already has companies such as Gap and Staples on its customer list.

Competitive advantage, eh?
Let's see. For one, the company may need to build fewer warehouses as it accommodates more in the existing ones. Secondly, improved customer service owing to fewer errors and quicker deliveries surely has long term benefits. Finally, Amazon can even choose to continue with Kiva's present customers and add an additional source of revenue, as well.

But, the big question remains: Will the acquisition provide a competitive edge over its nearest rival, eBay (Nasdaq: EBAY  ) ? I think so, if we take into account all of the factors above. Also, Amazon is surely not licensing the technology to GSI/eBay or Wal-Mart, and having a technology advantage in the warehouse segment definitely puts the company in the sweet spot.

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Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of and Staples. Motley Fool newsletter services have recommended buying shares of, eBay, and Staples. Motley Fool newsletter services have recommended writing puts on eBay. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (1) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 27, 2012, at 6:33 PM, Secs27 wrote:

    eBay is a far superior compny than amazon. Not only can one find unique and rare items, but eBay has a tremendous selection of items from vendors.

    Amazon has become a glorified middleman selling items through third party vendors that can be found everywhere else on the Internet. Additionally, amazon's prices are not the most competitive. One can find far better deals at or or a myriad of other sites.

    I have yet to find a product on amazon that I have mot found much cheaper elsewhere on the web. Their kindle fire is a subpar product and a blatant rip off of rims play book.

    Amazon profit margin is as low as a supermarket chain yet the stock trades at 149x earnings.

    If one would value it fairly, amazon is a $50.00 stock. The only reason that it is trading at $205 is because it is being manipulated by hedge funds.

    There is a tremendous amount of competition, amazon faces a sales tax battle and amazon does nothing proprietary. They simply resell others items that can be found elsewhere at better prices

    When I see someone with a kindle fire or with and amazon box t the curbside, I think what an ignorant consumer. Jeff Bezos has been quoted ar saying "thank god for stupid people" .

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