Amazon’s Gift-Giving and Future Delivery Potential

If you ordered items from Amazon.com (NASDAQ: AMZN  ) prior to Christmas hoping they would arrive in time for a special gift recipient to unwrap and open those items from under the Christmas tree, then you might have been disappointed. While most people found their gifts arriving on time, which led to satisfied customers and smiling faces, others weren't quite as lucky.

What makes this story interesting is that Amazon promised its Prime members that their ordered items would arrive on time. However, those items didn't arrive on time due to extremely high volume and over-capacity for the United Parcel Service (NYSE: UPS  ) . Therefore, an argument can be made as to which company is to blame.

UPS was expected to ship approximately 7.7 million packages via air on the Monday before Christmas, but the actual number has yet to be revealed, and it's likely much higher. This year featured a deluge of last-minute shoppers, which likely stems from procrastination due to the difficulty of consumers to make ends meet. Whatever the case may be, it's going to have a negative short-term impact on Amazon. On the other hand, it might lead to a positive long-term result. Let's take a look at why.

Amazon's reaction
Not many things are worse than a company failing to get its ordered items to its customers in time for Christmas. And since Amazon founder and CEO Jeff Bezos is all about taking care of the company's customers -- even at the expense of consistent profitability -- you can only imaging his reaction when he was told of this unfortunate circumstance. I'm imaging bloodshot, glaring eyes on a head that's titled and attached to a body that's about to charge like a raging bull targeting a matador, smoke emanating from somewhere on the back of his hairless head, and fists clenched so tight that you can hear knuckles crackling louder than a bag of popcorn in the microwave.

This is exactly why Amazon will eventually have its own delivery service. Sure, Amazon is helping out the United States Postal Service at the moment, but Amazon is not the kind of company that likes to rely on third parties. To understand companies like Amazon, Wal-Mart Stores (NYSE: WMT  ) , and Google, you must understand that their true long-term goals are to steamroll all competition and industry counterparts and to take over the world from a consumer standpoint. That's why betting on any of these companies is likely to be a long-term win. The only downside to investing in Amazon at this point in time is an extremely high valuation of 144 times forward earnings. But that's a story for another time.

For now, Amazon is going to make up for this debacle by sending $20 gift cards to affected customers. It will also refund shipping costs. This is all part of the Amazon philosophy, which is customer first, always! This philosophy has helped lead to significant top-line growth. On the other hand, Amazon's razor-thin profit margin of approximately 0.2% and inconsistent bottom-line performance mean that returning $20 gift cards isn't going to help the bottom line. No exact numbers can be offered because no one knows how many customers were affected. But there is something we do know if historical trends tend to repeat themselves. 

A likely future trend
Many people will say that Amazon isn't capable of building its own delivery system, but remember when every pundit on Wall Street thought Amazon would go bankrupt in the early 2000s? How about when many people felt as though AmazonFresh (food delivery service now available in select cities and growing) would never get off the ground?

The point here is that while it's OK to not bet with Jeff Bezos, you should never bet against him. If he sees an opportunity where he can keep more of his operation in-house, he will take advantage of it. And it will be as efficient as possible. This might be a distant future reality, but I'm going to put the odds of fruition at 75%. This would be bad news for the United States Postal Service and possibly even UPS and FedEx. This might seem delusional right now, but it's about betting on winners. They find ways. And they crush those in their way. 

Don't forget about Wal-Mart, either. Wal-Mart might not be a big-time growth story anymore, partially thanks to Amazon. But it's another company that finds ways to win. It's currently working on its Walmart To Go service (food delivery), and while it might take years, don't be surprised if Wal-Mart figures out a solution and then expands this service.

The bottom line
Amazon might take a short-term hit, and its valuation combined with its lack of consistent profitability is concerning. On the other hand, Amazon customers ordered 36.8 million items on Cyber Monday, which translates to 426 items per second. A company like that isn't going anywhere and is definitely worthy of further inspection by Foolish investors. 

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Comments from our Foolish Readers

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 January 02, 2014, at 10:16 AM, ecl3jxb wrote:

    Brilliant move by Amazon, get new customers in a repetitive purchase program on a breakeven or small loss initial purchase transaction after refunding $20 and shipping charges. Anyone with any knowledge of the transportation industry will tell you the deadlines they promised for the last 2 days prior to Christmas were impossible regardless of the time of the year. Place all the blame on UPS and look like a hero for such a generous offer to makeup for late deliveries and tell customers you will be reviewing shipper performance. Unbelievable! I woud not call that taking care of your customers!

  • Report this Comment On January 02, 2014, at 11:16 AM, vfmonkey31 wrote:

    I disagree with your analysis that Amazon is going to be able to send hundreds of thousands of drones to its customers with packages attached. You point to the fact that Amazon didn't go bankrupt in the 2000s... but it also didn't make money from a P&L perspective. You point to the innovative delivery system they've unveiled as their future way to get people what they want... and I point to the other countries who have tried to get this adopted. You point to the failure of the delivery companies to fulfill its promises and I can tell you that this is just as much of an issue with Amazon being unable to project its demand for shipping services in the days leading up to Christmas and the fact they were shipping out goods at 11pm on 12/23 with a delivery promise of 12/24....

    The true fact here is that the cost to start up any delivery operation is enormous. Whether the package is delivered by a drone (huge capital development/IT costs) or man, the barriers to entry are daunting. The better question is why is the entire investing community focusing on Amazon's video instead of critically assessing the fact that this will likely be unprofitable in the future... seems like a lot of smoke an mirrors coming from a company that really hasn't demonstrated strong earnings for the last decade.

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