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A Big Reason for the Amazon Prime Price Hike

By Dan Moskowitz - Mar 27, 2014 at 8:00PM

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Yes, part of the reason for Amazon's recent Prime price hike was to offset shipping costs and increase profitability. But there’s another reason.

James Tompkins is the head of Tompkins International, a consultancy firm with close ties to Amazon ( AMZN -1.38% ). According to Tompkins, via ValueWalk.com, a big part of the reason for the price hike is to pay for a new shipping fleet. This fleet is expected to play a big role in the coming massive expansion for AmazonFresh.

fresh.amazon.com

Before getting to the details and related future potential for Amazon, let's first take a look at Amazon's track record. While past results don't guarantee future success, it can be used as a valuable indicator.

Amazon first went after the book business. It has succeeded in a big way. In addition to many book stores going out of business, Amazon has hurt Barnes & Noble ( BKS ).

Think about what Barnes & Noble would be today if there was no Amazon. It would be a much different company, seeing a lot more demand. But the reality is that Amazon exists, and it's not going away. Barnes & Noble has yet to find a way to combat Amazon.

Then came electronics. Amazon selling almost any electronic device you can think of where consumers don't have to trek to the store has hurt Best Buy ( BBY 1.88% ). For Best Buy, this is on top of consumers generally having less disposable income than in the past, which has made for a very challenging situation. The last thing most consumers will spend on when struggling is electronics.

And let's not forget everyday items, which can be found at Wal-Mart Stores ( WMT 1.51% ) and Target ( TGT 0.84% ). Do you remember when Wal-Mart was expanding all over the country, crushing its competitors. Main Street hated it; investors loved it. Well, Amazon is yesterday's Wal-Mart.

For a broad picture of the differences in top-line growth for these retailers, which helps indicates demand, let's take a look at five-year top-line growth comparisons:

AMZN Revenue (TTM) Chart

AMZN Revenue (TTM) data by YCharts

For Amazon, this chart can be described in two words: see ya!

The one thing that Amazon doesn't offer is a dividend. Best Buy and Wal-Mart both offer somewhat generous dividend yields of 2.6%. Target is a little more generous with a 2.9% yield. Barnes & Noble doesn't offer any yield. This is expected since it needs its available capital to put toward becoming consistently profitable again. 

Next up for Amazon: grocery stores.

Getting fresher
AmazonFresh costs $299 annually, but it includes Amazon Prime membership ($99 value), and all orders over $35 have free delivery. That recent rate hike for Amazon Prime membership will help Amazon pay for a shipping fleet (supposedly/according to industry speculation), which may help drive down shipping costs and delivery times.

Apparently, AmazonFresh has broken the country into three segments based on population: top 40 markets, next 60 markets, remainder of country. Amazon will use its own shipping fleet for the top 40 markets. If this is accurate, then it will be bad news for FedEx.

AmazonFresh is currently offered in San Francisco, Seattle, and Los Angeles. Throughout the remainder of this year, it plans on expanding to between 30 and 40 markets.

This eastward expansion is expected to begin in the Baltimore/Washington D.C. area. This makes sense since Amazon has an enormous distribution center in Baltimore – 1 million square feet to be exact. Duke Realty is building a warehouse right across the street (346,000 square feet). Is this a coincidence, or is it possible that this warehouse will be used for AmazonFresh? The answer to that question is unknown.

The Foolish takeaway
What is known is that Amazon continues to tackle other markets, and it does so effectively. Amazon simply finds ways to win. The one concern is that the stock is currently trading at 618 times earnings. However, if you ignore valuation and focus on the underlying company, then future potential is very high. Please do your own research prior to making any investment decisions.  

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,389.79 (-1.38%) $-47.57
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$137.51 (1.51%) $2.04
Barnes & Noble, Inc. Stock Quote
Barnes & Noble, Inc.
BKS
Target Corporation Stock Quote
Target Corporation
TGT
$247.57 (0.84%) $2.07
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$105.87 (1.88%) $1.95

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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