To fully appreciate the way online shopping is transforming the economy, look at how much Amazon spends to put packages on doorsteps around the world.
The Seattle-based e-commerce giant has shelled out more than $14 billion on shipping in the first nine months of this year, up 36 percent from the same period last year. If the trend continues, Amazon could easily spend another $7 billion, if not more, on shipping in the holiday quarter — a record sum that reflects the ongoing shift toward e-commerce and away from traditional stores.
The $7 billion figure is a conservative estimate, assuming 30 percent growth over the company’s gross shipping costs of $5.6 billion for the 2016 holiday quarter. That’s slightly less than its growth of 35 percent between the 2015 and 2016 holiday quarters, and similar growth between the 2014 and 2015 holiday quarters.
For the full year, Amazon’s gross shipping costs could easily top $20 billion. To put the numbers in context, that would equal more than 30 percent of United Parcel Service’s projected $65 billion in 2017 annual revenue — although, to be clear, Amazon spends the money across a variety of shipping companies, and increasingly uses its own shipping infrastructure to move packages around the world.
Amazon’s rising shipping costs reflect its push to get products to customers at faster and faster clip, along with the increasing popularity of the $99/year Amazon Prime program, with its core benefit of free two-day shipping.
The company’s traditional retail rivals, including Walmart, Best Buy and Target, are spending big on their own e-commerce and shipping initiatives in an effort to keep up with the e-commerce juggernaut.
Amazon has an advantage over those competitors, in that it can leverage growing profits from its Amazon Web Services cloud computing division to allow its e-commerce operations to run on razor-thin profits margins, and even at a loss. Without AWS, Amazon would have posted an operating loss of nearly $1 billion through the first nine months of this year. Instead, thanks to AWS’s operating profit of nearly $3 billion, Amazon overall has posted a year-to-date operating profit of about $2 billion.
The rising shipping costs demonstrate the larger shift toward online shopping. For the first time this year, shoppers surveyed by Deloitte say they are planning to spend a majority of their holiday budgets online — 51 percent — compared with 42 percent in store, and 7 percent through catalogs and direct mail.
The firm estimates that holiday e-commerce sales will rise in the range of 18 to 21 percent, to as much as $114 billion, while overall retail holiday sales will climb 4 to 4.5 percent, to as much as $1.05 trillion.
Amazon offsets its gross shipping costs by charging customers for shipping, either directly when they order, or indirectly through the annual Prime membership fee. The company also charges third-party sellers that use its Fulfillment By Amazon (FBA) program, further offsetting its overall shipping costs.
The amount the company generates through those charges, known as shipping revenue, was covering about 55 percent of its gross shipping costs as of the first quarter of this year. Since then, the company has stopped reporting its shipping revenue, leaving its net shipping cost — the shipping costs not covered by the shipping fees it collects — a mystery starting in the second quarter of this year.
This much is clear: there will be an unprecedented number of brown boxes landing on doorsteps around the world over the next month, and Amazon will be spending billions to get them there.