The Biggest Challenge Facing Amazon

After shipping delays over the holidays, Amazon faces its biggest challenge yet.

Jan 8, 2014 at 7:00PM

Amazon.com (NASDAQ:AMZN) has used incredible scale and efficiency to beat out competitors for online retail dominance, but now it faces its biggest challenge: shipping.

Over the holidays, thousands of shoppers (including myself) received packages purchased with Amazon's Prime membership later than the promised two-day delivery time frame. This normally may not be a big deal, but the holidays involve deadlines consumers have to hit to give presents. Amazon takes the fall for missing those deadlines.

You could blame UPS (NYSE:UPS) or FedEx (NYSE:FDX) for late packages, since it was actually their fault, but when Amazon makes the two-day promise, it's the company's responsibility to partner with organizations that will live up to expectations.

This may be a small snafu for Amazon, but it highlights a major challenge for such a large online retailer over the long term.

Pricing power
The shipping problem is already starting to show up in Amazon's results. Since second-quarter 2011, fulfillment costs have risen from 9.5% of sales to 11.9% of sales. UPS and FedEx are eating up any improvement Amazon may have seen from improved gross margin over that time frame.

Amzn Fulfillment Cost

Source: Amazon earnings releases.

The problem is there aren't a lot of large-scale options for Amazon to use for shipping. FedEx, UPS, and the U.S. Postal Service handle most of the company's shipments, and Amazon has little bargaining power unless it builds its own shipping business. But that's simply not a business Amazon is in.

Amazon doesn't do big capital
Some people have suggested that Amazon will buy USPS or UPS sometime in the near future to have its own shipping business. This is crazy for a number of reasons, but mainly because Amazon doesn't have the balance sheet or business model for such a move.

In its lifetime, Amazon has invested about $10 billion in capital infrastructure, which includes warehouses, data centers, etc. This low-level investment is why Amazon can generate incredibly high returns on cash and why many think the sky is the limit for the stock.

But shipping is a high-capital-cost business. UPS and FedEx both have about $40 billion of gross property, plant, and equipment on their balance sheets and that's not going to change anytime soon.

AMZN Gross PP&E (Annual) Chart

AMZN Gross PP&E (Annual) data by YCharts.

That kind of capital outlay isn't what Amazon does and it isn't a business that can suddenly be upended by Jeff Bezos. Buying a shipping company would change Amazon's whole capital model and change return on investment drastically. 

Amazon has a shipping problem
Prime's two-day shipping pledge draws customers to Amazon, but it also makes the company extremely reliant on its shipping partners to make that promise a reality. That puts the power in the hands of those shippers, which have managed to squeeze more and more out of Amazon as it has gotten bigger and bigger. It's a challenge that isn't going away anytime soon and will hinder Amazon's hopes of making a long-term profit.

How to play retail now
The face of retail is changing, that's without question. To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Fool contributor Travis Hoium is short shares of Amazon.com. The Motley Fool recommends Amazon.com, FedEx, and United Parcel Service. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers