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How Amazon Is Addressing Its Elephant in the Room

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Amazon’s fulfillment costs are growing rapidly

Previously in this series, we discussed how Amazon.com (AMZN) has managed to increase its revenues and margins steadily. In this part, we’ll focus on the company’s fulfillment costs, which have grown rapidly in the past few quarters.

Fulfillment costs are the costs associated with fulfilling orders, including storing products in warehouses and shipping them to customers. The chart below shows that Amazon’s fulfillment costs have grown quickly. The YoY (year-over-year) growth rate of these costs rose from 21% in 2Q15 to 35% in 2Q16.

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Why Amazon plans to increase fulfillment centers

Fulfillment centers allow sellers to sell their products under the Fulfillment by Amazon, or FBA, program. The company considers FBA to be an important growth driver, as it provides customers with a variety of products to select from. Selection growth makes Amazon’s Prime program more valuable to customers, which in turn boosts the company’s overall growth.

Amazon plans to grow its fulfillment capacity before this year’s holiday season in order to compete with rivals, including eBay (EBAY), Wal-Mart (WMT), and Target (TGT). It has already opened new fulfillment centers in a number of US (IVV) states such as California, Texas, New Jersey, and Illinois in the past few months. On a net basis, Amazon expects to have 21 Fulfillment centers by the end of 3Q16.

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