Why are Amazon’s fulfillment costs rising?



Amazon’s fulfillment costs have gone up

In Part 1 of this series, we discussed how Amazon (AMZN) took its biggest net loss last quarter in 14 years. One of the reason for this loss was the failure of Amazon’s Fire smartphone. However, there are a number other reasons that contributed to this loss. Amazon’s main segments of operating expenses—Fulfillment, Technology & Content, and Marketing—each showed a marked increase in terms of revenue proportions. Here, we’ll discuss the reason why Amazon’s fulfillment costs have gone up.

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Fulfillment costs are the costs associated with fulfilling an order, which includes storing products in warehouses and then shipping them to the customer. As the chart below shows, fulfillment costs as a percentage of revenues have increased from 11.5% in 3Q13 to 12.4% in 3Q14. During the company’s earnings conference call in 3Q14, management mentioned that it’s adding a number of warehouses and more capacity in preparation for the holiday season, which is pushing up its fulfillment costs.

The holiday season is the most lucrative season for retailers

The holiday season is generally the busiest period for retailers. It seems that this time, this period has benefited traditional retailers the most. Wal-Mart (WMT) announced that this year’s Thanksgiving was its second-biggest day ever for online sales. Similarly, Target (TGT) mentioned that Thanksgiving was its biggest online day ever.

Best Buy (BBY) faced some issues with its website, as it crashed repeatedly due to huge mobile traffic. However, pure e-commerce players Amazon and eBay (EBAY) haven’t revealed any detail on the kinds of online sales they saw on Thanksgiving Day.


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