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Could Seller Flex Offer Cost-Saving Opportunity for Amazon?

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Oct. 19 2017, Updated 7:37 a.m. ET

Shipping expenses eat deeply into revenues

Amazon’s (AMZN) retail operation has thin profit margins compared to its cloud computing business Amazon Web Services (or AWS). That means that Amazon is constantly looking for ways to cut costs in its retail business.

Package shipping expenses are among the larger pieces of Amazon’s cost structure. In 2Q17, shipping expenses rose 36.0% year-over-year to $4.6 billion. As a result, Amazon’s operating expenses for the quarter rose more than 28.0% to $37.3 billion, wiping out a significant portion of the company’s revenue in the quarter. Amazon generated revenues of $38.0 billion in 2Q17.

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A more efficient delivery system

The above chart illustrates how Amazon’s revenues and operating expenses compare over the past few quarters.

A program such as Seller Flex, which Amazon is reported to be testing in parts of the United States (SPY), could bring a much-needed relief to the company’s delivery operations. Under the Seller Flex program, Amazon picks up packages from third-party merchant warehouses and then delivers them directly to customers. That approach could make Amazon’s delivery system more efficient since overcrowding in its warehouses would be reduced and Amazon could lower a lot of its overhead costs in its delivery department.

Achieving greater financial flexibility

Amazon’s delivery system could also end up relying less on courier companies such as United Parcel Service (UPS) and FedEx (FDX), whose systems can sometimes be overwhelmed during busy seasons and lead to delivery delays.

With a more efficient delivery system, Amazon could save more money as well as gain greater financial flexibility to battle growing competition from rivals Walmart (WMT) and eBay (EBAY), which are investing in faster delivery and broader offerings to win more customers.

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