Amazon’s shipping costs increasing faster than revenues
Previously in this series, we discussed how Amazon (AMZN) is looking to find new ways to deliver goods more quickly. Another advantage that Amazon is seeking through these options is to save on the shipping costs associated with the delivery of goods.
As the chart below shows, Amazon’s shipping costs as a percentage of revenues has increased from 9.3% in 1Q14 to 10.2% in 1Q15. The main reason for this increase is that package delivery companies such as United Parcel Service (UPS) and FedEx (FDX) have been raising freight charges by about 5% each year.
This ratio has also gone up sequentially except for the last quarter. Declining crude oil prices (XOP) might have played a role in shipping costs as a percentage of revenues. They have fallen from 10.4% in 4Q14 to 10.2% in 1Q15. Despite this slight decline, Amazon still wants to trim its shipping costs.
Amazon seeks to trim its shipping expenses
Having its own delivery mechanism will help Amazon reduce its dependency on these package delivery companies. In Part 9 of this series, we discussed Amazon’s various delivery options. Another way Amazon seeks to save on shipping costs is through the sortation centers that it has opened.
Another way to save on the shipping costs is by opening a brick-and-mortar store to let customers place orders online on Amazon’s site and then pick these items up from this physical store. Amazon opened a pick-up and drop-off store on the campus of Purdue University in West Lafayette, Indiana, in February 2015, and it has plans to open more. Such stores will help customers avoid shipping costs and will also help them return or exchange items conveniently.
You can get exposure to Amazon by investing in the Consumer Discretionary Select Sector SPDR Fund (XLY), which has 7.1% exposure to the company.