Most investors would agree that Amazon has been a winner during the COVID-19 pandemic. After all, in two short years from 2019 to 2021, sales soared to $469 billion from $280 billion and their market cap surged towards a $1.7 trillion valuation.
But even the best of companies have had to navigate choppy waters and uncertainty during this time. For Amazon, this has come in the form of cost pressures in their shipping and fulfillment department, which are now representing an increasingly large share of revenues.
Just how large are Amazon’s shipping and fulfillment costs becoming?
In 2021, shipping and fulfillment costs added up to $151.8 billion. Shipping, which includes sortation, delivery centers, and transportation costs amounted to $76.7 billion. Fulfillment costs, which include cost of operating and staff fulfillment centers, were $75.1 billion.
As a result of these trends, Amazon’s shipping and fulfillment expenses now represent 32% of their revenues:
|Year||Cost as a % of revenue|
As you can see, costs are escalating, and today’s figure is almost twice that of the 18% figure seen in 2011.
Amazon Web Services to the Rescue
While these expenses are rising, it’s important to remember that Amazon’s profits are still healthy. They generated $33 billion in profits for 2021. One reason for this is that the majority of Amazon’s profits never came from ecommerce to begin with. Amazon Web Services (AWS), which is a much higher margin segment of their business, accounts for over 50% of their operating profits, but only 13% of their sales.
AWS is such a profit generating machine that prominent investors have called for Amazon to spin off AWS into its own entity. They argue that pure play technology companies are often assigned a higher equity multiple, and spinning off AWS would be accretive to shareholder value.
Rising Costs to Scale
The $151.8 billion in expenditures towards shipping and fulfillment is absolutely massive. On a per minute basis, this results in $288K per minute in expenses, compared to their $956K in revenue per minute.
Another way to put this gargantuan figure to scale is to remember that this business expense is greater than the equity value of about 90% of all companies in the S&P 500.