One look at their finances and it's clear why they're doing this. According to their SEC filings, last year Amazon brought in $6.5 billion in shipping revenue [1], and spent $11.5 billion on shipping costs. Take those numbers together and they lost $5.0 billion subsidizing shipping. They lose more money on shipping every year than most startups make in a decade. It's a huge cost on their budget, not hard to see why m…
Shipping revenues will never cover shipping costs as long as they provide even one free shipment a year (and don't overcharge people paying for shipping). Shipping is one of those costs that you have to pay like having storefronts. The goods have to actually be purchasable by customers somehow. Retail shops sink costs in their stores. It's made up for by the margins on the items they sell.
I'm not saying that Amazon shouldn't try to minimize their losses on shipping just as stores should figure out whether having one retail presence in a city is more cost effective than having two. But I think a more interesting piece for me would be a comparison of Amazon's shipping costs to other retailers' storefront costs. If the $5B in shipping subsidies is way lower than what Walmart or BestBuy are paying in "storefront subsidies", it isn't necessarily something so outrageous. It's a cost of doing business.
$5B sounds like a lot of money (and indeed it is), but what is it compared to the storefront costs of competitors? How much does Amazon save by having highly-productive warehouse workers as opposed to lower-productive retail employees?* Maybe $5B is huge compared to what Walmart spends on its retail presence. Maybe Amazon warehouses aren't much more efficient than BestBuy stores. Or Maybe this is simply a move that Amazon is making because it thinks it has gained enough market power (and enough buy-in to Prime) to start making anti-consumer moves rather than a cost that's unsustainable compared to the costs of retail.
Walmart's revenue was $485.7 billion in 2015. Amazon's revenue was $107B last year. Spending less than 5% of revenue on getting the products to the customers doesn't sound outrageous. Does it seem likely that Walmart spends $24B on store-front costs that Amazon doesn't have to get their revenue?
You're not wrong that companies will try to cut costs. I guess my question is simply: is this really an onerous cost compared to revenue (as judged by what competing retail firms pay)? If it's par for the course (or less), it feels like Amazon flexing its market power against consumers. If it is an onerous cost compared to what Walmart or BestBuy have to spend, then life has crappy trade-offs that need to be made to make things reasonable.
*This isn't a dig at retail employees. It's just pointing out that when customer traffic is low at a retail venue, they're around with less to do. By contrast, warehouse workers can be utilized more efficiently.