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Let’s say you earn $29 billion in revenues a single quarter and more than $100 billion for the year. Do you make a profit? The question is more than a hypothetical, because if you earn these revenues, then you are Amazon. And if you are Amazon, the answer to the question has and continues to be, maybe.

Lo-res_BLD159836-SWhen studying Amazon’s revenue and profit streams, a key point is to consider merchandise sales, rather than sales in electronic categories, because those purchases inherently incur logistics and shipping costs. When a consumer downloads a song or movie from Amazon, there are no shipping costs; when that same consumer buys a CD or DVD, Amazon has to pay to get the product to that consumer.

Despite the sense that everything is becoming digital, these merchandise sales keep growing for Amazon—by nearly 32 percent in North America and 30 percent internationally. Therefore, in one recent sales quarter, Amazon earned more than $20 billion of its revenue from sales that required it to perform some other action: sourcing, shipping, and so forth. For example, spending on shipping in that same quarter exceeded $3 billion, for which consumers paid for only $1.8 billion. Overall then, Amazon lost $1.4 billion, just in shipping costs. When it comes to fulfillment costs, Amazon spent $3.68 billion.

The shipping losses amount to nearly 7 percent of merchandise revenue. Together, shipping and fulfillment costs are equivalent to nearly one-quarter of Amazon’s sales of merchandise. Accordingly, Amazon’s profits reached only 1.7 percent of its total sales.

Even as Amazon struggles to earn profits though, its stock prices keep jumping, likely because the retailer seems to defy all the existing predictions about sustainable sizes and advantages.

Discussion Question:

  1. How do Amazon’s shipping and fulfillment costs affect the financial ratios discussed in Chapter 6?

Source: Retail Wire, May 16, 2016