“We’re spreading a lot of the Prime benefits that we see in North America to other countries.” Indeed, this statement seemed to be the theme of Amazon’s first quarter 2017 earnings call. To meet the needs of this expansion of Prime benefits, Amazon’s logistics services are also expanding.
During first quarter, Amazon announced the follow Prime benefit expansions:
- Amazon Fresh and Prime Now in Tokyo
- Amazon Business in the UK
- Amazon Business in Germany (Ok, it launched in December…close enough.)
- Prime in India, China and Mexico
- Expansion into Australia
As Amazon increases perks, its logistics network grows a bit more to support them. By chance if you caught one of the previous Amazon articles I penned, I noted that Amazon is focused on growing its customer ecosystem. This is how they are “competing” against DHL, FedEx and UPS. They want to control the entire customer experience and the supply chain connected with the experience – B2C, B2B, it doesn’t matter.
So, how big is Prime? The company reported that its global Prime membership grew 53% in 2014 and another 51% in 2015. Consumer Intelligence Research Partners (CIRP) estimates Amazon has 80 million members in the U.S. alone as of the end of the first quarter, 2017. That’s double the 40 million members CIRP estimated at the end of 2014.
Costs and Net Sales
The backbone of Amazon’s logistics services is its Fulfillment by Amazon (FBA). Amazon indicated on its earnings call that demand for FBA services increased 40% in 2016. As a result, investments in warehouses, fulfillment and delivery capacity are being made. And, surprise, the costs are high. Consider the following for first quarter, 2017:
- Overall fulfillment costs increased 27.4% to $4.7 billion.
- Overall net shipping costs increased 29.6% to $1.9 billion.
Even though costs remain high, what’s particularly eye-catching are the net sales Amazon earned via its retail 3rd party seller services which includes commissions related to fulfillment and shipping fees and other 3rd party seller services. For the first quarter, this component of net sales increased 34.1% to $6.4 billion.
A recent Financial Times article describes this $6.4 billion as Amazon’s logistics’ revenue. I’m not ready to go that far but if you squint your eyes a bit, $6.4 billion would put Amazon among the leading global 3PLs. Consider CEVA’s first quarter total revenue (note Amazon reports in net sales instead) was about $1.6 billion. UPS’ first quarter total revenue in comparison was $15.3 billion and operating profit of $1.8 billion.
Amazon recognizes the fact that they have high costs and they’ve accepted that they’ll probably continue to accrue high costs. But, the company is working towards improving efficiencies. Utilizing robotics in fulfillment centers. In addition, it highlighted its sort centers. Describing these centers as a “collaboration between warehouse, sort center and end customer”, the control has allowed it to extend cutoff times from 3:00 p.m. in most cases until midnight.
More Prime members, more perks, more fulfillment facilities, more countries. The list keeps getting longer and longer and will continue for the foreseeable future.
Prime plays a major role in Amazon’s growth strategy. According to Brian T. Olsavsky, CFO of Amazon, “The Prime program attracts more people to Amazon, and they buy more including FBA products and conversely more FBA products in our warehouses helps our in-stock of things that people want to buy, Prime eligible in-stock, and that helps reinforce the Prime program.”
Even though eye brows tend to be raised because of the associated costs, Mr. Olsavsky further notes that “there’s over 50 million items that people can get delivered to their doorstep within two days or, in some cases, next day or same day. So it’s going to be a big part of our cost structure but it’s an investment we work hard to reduce as far as rates, and we’re glad to spend it to support our Prime program.”