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Your impulse buys are costing Amazon a fortune

The online retailer missed Wall Street projections during its all-important holiday quarter, and shipping and fulfillment costs didn't help the situation.

Ben Fox Rubin Former senior reporter
Ben Fox Rubin was a senior reporter for CNET News in Manhattan, reporting on Amazon, e-commerce and mobile payments. He previously worked as a reporter for The Wall Street Journal and got his start at newspapers in New York, Connecticut and Massachusetts.
Ben Fox Rubin
4 min read
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You don't really need that $12 package of Kleenex tissues to arrive in 48 hours, yet you insist on ordering it through Amazon Prime. You have no idea how much it's costing.

All right, fine, let's not feel bad for the world's biggest online retailer. After all, Amazon lets its Prime membership customers buy a few cheap items at a time and that's helped it build up its business. But Amazon, having to shoulder the cost of getting those items to you so quickly, is now paying for that liberal approach.

As the Seattle company's shipping and fulfillment costs keep soaring, a big question for Amazon is: Will it be able to keep sending you small orders of soap or trash bags with free, two-day shipping or will something have to change?

The answer, it seems, is yes and yes.

"They will continue to experiment to make that very rapid delivery possible," said Yory Wurmser, a retail analyst for researcher eMarketer. "They're trying to get as many people to buy as much as they can online."

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With its two-day shipping, Amazon Prime helps satisfy customers' desire for (nearly) instant gratification. Those shipping costs, though, are taking a toll on Amazon's profit.

Ben Fox Rubin/CNET

Amazon has been able to hook you with Prime, its $99-a-year membership service that offers two-day deliveries at no additional fees. While Prime has been a success, helping the company grow faster than the broader e-commerce market, it's also resulted in big shipping costs that the annual fees don't fully cover. And while Amazon tends to think in the long term, happily giving up a buck today to keep you satisfied through tomorrow, it has a handful of projects that could help ensure those speedy deliveries get to you without losing so much money in the process.

On Thursday, Amazon posted weaker-than-expected earnings for its all-important holiday quarter, which drove down its stock by more than 13 percent after hours. Shipping and fulfillment costs didn't help the situation, with both growing at a faster rate than revenue. Overall shipping costs shot up 37 percent from a year earlier to $1.8 billion, outpacing a 22 percent rise in revenue to $35.7 billion.

"This is all tied in with the increase in [Fulfillment by Amazon] growth and the demand from Prime members," Amazon finance chief Brian Olsavsky said on a call with analysts Thursday when asked about the higher shipping costs. "We're shipping more units -- more of our units, so this ripples through our ship cost per unit."

He added that the company's new Prime Now service, which offers free two-hour deliveries to Prime members in 25 markets, "is difficult and expensive, but customers love it."

So far, Amazon hasn't pushed customers all that much to change their behavior, but it's included a few tools to coax people to bundle purchases or request a slower shipping option. For instance, the company offers Prime members a $1 credit for future e-book or digital video purchases when they opt for five-day shipping instead of two. Also, under its "add-on" program, Amazon ships thousands of lower-priced items only when they're bundled in a $25 order.

Amazon Prime Now: A peek inside the Manhattan warehouse (pictures)

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Retail and shipping experts expect Amazon to test more ways to get customers to pick cheaper shipping, though folks accustomed to two-day deliveries may still reject those options.

Of course, Amazon could also raise the price of Prime, which was last increased in early 2014 by $20. Yet, with the company making a huge push to expand the ranks of Prime, now estimated at 54 million US members, such a move seems unlikely.

That push has paid off in some ways. Despite missing Wall Street's expectations, Amazon posted sales of $107 billion for 2015, the first time it's crossed the $100 billion mark.

Amazon will probably keep moving into physical locations to help it cut down on shipping costs, Wurmser said. The company has created pickup and return locations in office buildings and retail stores through its Amazon Locker program. It's also been expanding its staffed pickup centers at universities, coming to two more schools this year. It even opened its first brick-and-mortar bookstore late last year in Seattle.

Behind the scenes, Amazon has been building up its delivery infrastructure in hopes of cutting expenses. Last month, it unveiled a fleet of thousands of Amazon-branded truck trailers, which it will use to move its inventory among its warehouses. Beyond that, Amazon has reportedly been testing plans to lease 20 Boeing cargo jets, which could help it avoid storing the same inventory in multiple locations around the US to guarantee its two-day deliveries. Amazon also opted to purchase the portion of French package-delivery company Colis Prive it didn't already own and now offers an Uber-like service called Flex, which hires regular folks to deliver packages in 14 US markets.

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"No-rush" shipping? No thanks, I'd rather get this $12 package of soap in two days.


"Amazon is effectively making its own carrier in the US," said Jarrett Streebin, CEO of EasyPost, which offers e-commerce shipping services.

Whether this means Amazon will eventually compete with delivery specialists FedEx and UPS is a question hotly debated in the shipping industry.

"I don't know how far they're going to take it. I don't know that they know," Wurmser said about Amazon's expansion in deliveries. "If it does save them money, I think they'll go far with it."

For now, Amazon's work to restrain its shipping and fulfillment costs hasn't made a significant dent in its earnings reports, with those big cost centers contributing to the company consistently posting a meager profit at best.

For the quarter, Amazon posted a profit of $482 million, more than double the year before, but still a sliver of its overall revenue.