Is Amazon.com Secretly Raising Prices?


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There's an interesting trend taking place at Amazon.com (NASDAQ: AMZN  ) that can only be detected by looking at its financial statements. That is, the Seattle-based e-commerce company appears to be marking up the price of its products by a bigger amount each year.

You can see this in its gross margin -- the difference between what Amazon pays for products and then turns around and sells them for. From 2006 to 2011, its gross margin was 22%. But starting in 2012, it increased to 24.75%. And in 2013, it shot up to 27.23%.

If you're at all familiar with Amazon's customer-centric mantra, this might strike you as odd. Indeed, if there's one thing it wants to be known for, it's a relentless focus on customers. And, aside from providing excellent service, the one way to embody this is through low prices -- which Amazon has consistently delivered since its founding two decades ago.

How should we reconcile these contradictions? The answer is that Amazon's business model has dramatically changed over the past few years. Prior to 2010, almost all of its revenue was generated from the sale of physical products discounted to the lowest possible price. Since then, however, a quickly growing share has come from online services -- namely, cloud computing.

Although it's impossible to say with complete certainty, as Amazon is notoriously secretive when it comes to the specifics of its performance, it seems safe to assume that the company's margins from services are much more generous than its margins on, say, the sale of a book or knife set. There are a number of reasons for this, but the main one is that the scalability of data facilities is, at least on its face, much greater than that of physical fulfillment centers.

When you take all of this into consideration, in turn, it seems unlikely that Amazon is in the process of secretly raising prices in order to boost its bottom line. If anything, in fact, one would be excused for concluding that the company will use its higher services margins to subsidize product margins and thereby drive the latter's prices down even further.

For Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) , this is horrible news. Their one-dimensional business models structured around brick-and-mortar retailing simply won't be able to compete if Amazon chooses to behave like an integrated conglomerate -- that is, by allowing its higher-margin businesses to subsidize lower-margin ones. Their niche would increasingly revolve around groceries and other types of low-priced, commoditized goods like diapers and paper towels.

Lest there be any doubt about the relative prospects for these companies, one need only look at the valuation of their respective shares. Wal-Mart and Target trade for 49% and 51% discounts to revenue per share. Meanwhile, Amazon trades at a 115% premium.

That sounds like a big difference, but it might still be cheap on a relative basis when you consider that Amazon is in multiple other product lines, is still at the beginning of its corporate existence, and could eventually capitalize on its growing market share by, yes, raising prices. It's not there yet. But someday it will be.

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Read/Post Comments (8) | Recommend This Article (11)

Comments from our Foolish Readers

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  • Report this Comment On February 16, 2014, at 8:00 AM, McMC wrote:

    No mention of increase in Amazon Prime membership and orders from Prime members? Where's the DD????

  • Report this Comment On February 16, 2014, at 10:22 PM, Harland wrote:

    I stop due to there new wish list is now sent to you with out permission, and you pay shipping if you need to send it back.

  • Report this Comment On February 17, 2014, at 6:35 PM, suziathome wrote:

    I haven't experienced my wish list being ordered w/o my actually choosing to order the products on it. I'm a Prime member b/c of my Kindle, so I've been enjoying the free 2-day shipping on Prime products after I take into consideration how much I pay for my membership. So far, it's working to my advantage, since I live out in the country and order quite a lot from Amazon.com. A few months ago I discovered how many free Kindle books Amazon has in its stable - most are little known authors - and I've discovered some very good murder mysteries to while away my spare time.

  • Report this Comment On February 17, 2014, at 7:00 PM, Keithx13 wrote:

    I used to buy most of the music CDs I picked up from Amazon. In the last year or so, Amazon has gotten beaten by BestBuy in this category virtually every time, at least in my case.

  • Report this Comment On February 17, 2014, at 10:23 PM, biju77 wrote:

    You are on the mark, but prices are higher for products such as books and CDs as well. Many of these items are priced above people who sell thru

    Amazon, in a way that if you order from others and add shipping , you tend to pay Amazon's higher

    Prime price because of 2 day delivery and easy returns.

  • Report this Comment On February 18, 2014, at 11:15 AM, KingOfPizza wrote:

    It's not a secret if you do any comparison shopping. Sometimes my local brick and mortar stores beat Amazon's prices. It's no longer a given that Amazon has the lowest price. Stores like Home Depot will often have the same products for less.

  • Report this Comment On February 18, 2014, at 11:16 AM, KingOfPizza wrote:

    It's not a secret if you do any comparison shopping. Sometimes my local brick and mortar stores beat Amazon's prices. It's no longer a given that Amazon has the lowest price. Stores like Home Depot will often have the same products for less.

  • Report this Comment On February 18, 2014, at 4:39 PM, strattitarius wrote:

    John,

    I am not much for the click-bait question in the title, but thank you for saying what so many people seem to miss... Amazon is not just about Prime, 2 day shipping, online retail, etc. It is also a major player in the technical sector.

    I find it funny that every time I see amazon compared it is usually to Wal-Mart or Target. Why aren't they compared to cloud providers such as Salesforce, SoftLayer, Microsoft, etc?

    Sometimes they are compared to Netflix, but it is unusual. Why not compare to Netflix and Comcast and other content giants?

    Many times they are compared to Apple, simply due to the Kindle vs iPad debate... but in my mind these two have less to compare than others I have named (except that novice traders love them).

    Amazon has focused on growth and expansion into new markets. They have created a new market segment and comparisons to the soon-to-be-old-school B&M stores, or even to tech giants seems to consistently be missing an angle.

    To sum up, thanks for a good article and no you can't value AMZN based on any single industry sector.

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