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Why Amazon's Rising Shipping Costs Could Make Prime More Expensive

By Rich Duprey - Feb 19, 2020 at 7:45AM

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E-commerce sales are growing, but delivery costs are escalating faster.

One-day delivery may be making Amazon.com's (AMZN 1.12%) Prime membership program just too successful. 

Although the number of paid members surged to 150 million worldwide at the end of 2019 (a massive 50 million increase over the year before), the costs of shipping packages are growing exponentially as well, and that may force Amazon to hike the membership fee once again.

Female Amazon employee delivering package

Image source: Amazon.com.

The prime reason for the holiday season success

The superlatives for Prime in Amazon's fourth-quarter earnings release were not just hyperbole.

Amazon said the number of packages delivered to U.S. Prime customers via free one-day and same-day delivery had quadrupled from last year. Just during the two-month November-December holiday period, it said billions of products were sold, with third-party retailers alone selling more than 1 billion items.

It indicates the shortened holiday calendar had no impact on Amazon's results, as it did with other retailers, and this was despite having increased the Prime membership from $99 to $119 a couple of years ago.

Getting free shipping in return is undoubtedly why most people sign up for the loyalty program, but the tech giant also noted that members watched double the hours of original movies and TV shows via Prime Video in the quarter, and its original programming received 88 nominations and 26 wins at major awards shows. Members also get streaming music, photo storage, and more.

While those ancillary services also impose a cost on Amazon, it is shipping that is the most expensive.

An expensive free service

Amazon reported shipping costs soared 43% in the fourth quarter, hitting $12.9 billion, while for the full year they came in at $37.9 billion, a 37% jump from the year ago, mostly as a result of initiating the one-day delivery guarantee in last year's second quarter. 

Amazon said one-day delivery itself was responsible for almost $1.5 billion of the higher costs in the fourth quarter, though that was slightly less than what it had expected. But it will be spending another $1 billion on the program in the first quarter. Also during the quarter, Amazon eliminated the delivery fees for groceries from Amazon Fresh and Whole Foods Market.

But even if all 150 million worldwide Prime members were paying the full $119 fee, which they're not, that would have only offset the cost of shipping by less than $18 billion, and doesn't touch any of the other services available under the program. 

While Prime's costs are increasing and Amazon keeps adding new features and benefits, sales growth isn't keeping up. For a company of Amazon's size, a 21% jump in quarterly sales is tremendous, but shipping costs are outstripping them by a two-to-one margin. 

That means it may be time for Amazon to raise the Prime membership fee again.

All reward, no risk

There likely will be little downside to hiking the program's costs, assuming the increases are reasonable. In the late 1990s, the internet was jolted when America Online broke ranks with other service providers by raising its monthly subscription fee from $19.95 to $21.95 and suffered no mass exodus of subscribers. Netflix has similarly been unfazed by raising the monthly cost of its streaming video service.

An argument could even be made that Amazon Prime members obtain measurably more value from the program than members of either AOL or Netflix, and therefore few would drop their subscription if the cost rose.

Still, unless Amazon doubled the fee, it wouldn't cover the program's costs, and even then, Prime's expansion would quickly have it exceeding the revenue the fees brought in.

Amazon is growing Prime internationally and noted that since launching the loyalty program in Brazil in September, it experienced the fastest growth in Prime membership in Amazon's history. It also expects to expand the program further in Europe and Japan in 2020.

Yet as its logistics aspirations grow and it assumes greater control over the delivery of its packages -- from acquiring aircraft to purchasing last-mile vehicle fleets -- Amazon can't continuously absorb all the costs associated with Prime. Members may very soon be asked to again share in the burden.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.

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