Merchants that are using the Fulfillment by Amazon service of the e-commerce behemoth received bitter news in mid-April. Amazon informed them that effective April 28, 2022, it would add a 5% surcharge for higher fuel costs and inflation on top of its regular fees. It is the first time that the company has imposed a charge on fuel.
The memo stated that Amazon’s fulfillment and delivery rates had increased at a slower rate than those of its competitors, but this is cold comfort for online sellers in light of overall costs surging.
Amazon has deep pockets, but the rise in its costs has been drastic. Its spending on shipping and fulfillment has nearly doubled since 2019 to more than US$150 billion.
The company posted strong annual results, but those mask headwinds in the core e-commerce sector. Much of the profit on the 2021 balance sheet stems from a gain of nearly US$12 billion from the investment in electric vehicle manufacturer Rivian Automotive.
In the e-commerce sector, Amazon booked a US$206 million operating loss in the U.S. and a US$1.63 billion operating deficit in international e-commerce.
Other operators in the e-commerce sector are also hurting from higher costs. SF Holdings, the parent company of SF Express, saw its market capitalization plunged by US$12 billion within a week after it projected a loss of up to Rmb1.1 billion (US$168.4 million) for the first quarter of this year.
Management blamed the deficit on rising labour costs, intensified competition putting pressure on margins, and on increased investment in new business.
Online sellers are struggling to cope with their elevated costs. Cathy Morrow-Roberson, founder and head analyst of Logistics Trends & Insights, diagnosed a shift in focus from last year. While 2021 was characterized by efforts to secure fulfillment capacity at almost any cost, this year the cost factor has assumed prominence.
She expects efforts to avoid residential deliveries to intensify in the coming weeks and months. A large emphasis is going to be on getting consumers to order online but pick up their purchases at stores, which eliminates delivery costs altogether.
Another strategy to rein in fulfillment costs that she sees on the rise is partnering with brick-and-mortar retail chains to act as drop-off points. This boosts shipment density compared to residential deliveries.
Increasingly the options for consumers to collect their purchases either at the vendor’s stores or third-party stores acting as drop-off points are going to become the fulfillment choice on which consumers are not charged, Roberson reckons. Merchants will continue to offer a spectrum of choices but will charge for residential deliveries, she said.
This constitutes a paradigm shift from the free delivery scenario that consumers have come to take for granted over the years.
John Haber, the Atlanta-based chief strategy officer at 3PL logistics provider Transportation Insight, remarked that free two-day shipping is not viable for most e-commerce players in the U.S. at the current cost levels. Companies will offer next-day and faster delivery options, but they will charge for these, he said.
“There's no such thing as free shipping,” he added.
Amazon was the chief driver of the trend towards shorter delivery windows at no charge for consumers, offering free next-day delivery for subscribers to its Prime program. Prior to the pandemic the company was working on same-day delivery options, a strategy watched with trepidation by rivals, but the pandemic and subsequent supply chain disruptions have stopped that drive. In light of significantly higher costs, Amazon is unlikely to forge ahead with its ambitions for same-day delivery.
Providers of rapid deliveries are struggling, noted Horst Manner-Romberg, the Hamburg-based principal of parcel research and consulting firm M-R-U.
“Very fast delivery is not profitable, not even in urban centres,” he observed, adding that not one of the players in this market in Europe has produced profits and that cash burn rates in this segment are staggering.
Even consumers seem to be losing their desire for fast deliveries. A recent survey published by UPS Capital indicates that a majority favour other aspects over the rapid speed of delivery. They prefer elements like being able to dictate arrival times or getting insurance, the study shows.
“While two-day shipping has long been considered the e-commerce ‘gold standard,’ today’s consumers have new priorities,” the report’s authors wrote.
According to another study, consumers’ appetite for online shopping may be less rooted than widely assumed. Research from Rensselaer Polytechnic Institute in Troy, New York, which surveyed more than 900 consumers, indicates that many are likely going to revert to in-store shopping when the pandemic is behind us. Half of the shoppers who switched to online shopping during the pandemic will not continue to do so, the authors wrote.
For many online merchants, the prospect of consumer demand going into reverse at a time when they are struggling with elevated costs means an existential challenge for their business that should reinforce their efforts to trim costs.
One area that will be in the crosshairs is returns. According to one report, Amazon has stopped shipping returns back to the source. Instead, returned goods are either resold or destroyed to avoid the associated cost.
In this gloomy situation, Manner-Romberg sees some light on the horizon.
Online shopping across borders has intensified markedly as a growing number of consumers have begun to look beyond their domestic market, he noted.
“The share of cross-border e-commerce keeps rising,” he said.
By Ian Putzger
Correspondent | Toronto