Tour’s Books Blog

May 4, 2013

The Never Ending Story of Amazon

Filed under: Editorial,General — toursbooks @ 5:20 pm
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Start up companies are business soap operas.  The emotional highs, and tearful demise happen every day.  From the day Jeff Bezos started Amazon, its profit margins have been the subject of questions.  For years there were no profits, just huge losses, yet each time Amazon provided quarterly figures, the stock would jump.  Those were the good old days before ‘back to basics’ investing took the glow off start-ups and began asking, “Where’s the money?” It’s why people question new stock offerings so closely now – excluding that FaceBook debacle.

Amazon saves a lot of money by not having brick and mortar stores, but it has got a lot of warehouses in different states and employs over 20,000 to 70,000 people in their 40 US based fulfillment centers, depending on the season.  Actually, their order fulfillment operations are considered a benchmark against which others are measured.  Unfortunately, it also has a remarkably inefficient way of warehousing, picking, and packing orders.  It’s not unusual for me to order 3 books and get them from 3 different locations in 3 separate packages.  Now this is not pre-orders, this is in print books, often the same genre.  I questioned how they could make money even with the deep discounts small package carries offer large volume shippers and this week, I read an article about just that – Amazon Prime’s free 2 day shipping.

Amazon Prime isn’t cheap at $80/year, but you get free movies, cloud computing, can borrow a Kindle book a month free, and the biggie – free shipping.  Buy 40 print books a year, and that’s cheap when you consider other companies charge $3.50 for the first book and $1.95 or more for each additional book.  Now, as a PBS (PaperBack Swap) member, I ship a LOT of books via media mail so I know how much shipping that little mystery mmpb can be.  And how cheap that heavy box of hardcovers is by comparison.  A small cozy mystery between 250 and 350 pages will run under $3 first class and about the same media mail.  That 10 pound box of hardcovers will run about $6 media mail for 5 hefty books.  Parcel post would be about twice that or more.  Yes, you have the cost of the shipping envelopes or corrugate cartons and wrapping the books in plastic to protect from water hazards, but we’re talking under $0.50 in materials, so shipping one little mmpb is a break even and shipping those hardcovers you make a profit on the shipping costs.

Check the freight costs for UPS or Fed Ex and you’ll faint.  So yeah, I get Amazon’s switch to FedEx Smartpost, an efficient compromise between small package at door delivery and using the postal service that probably saved them millions.  But what it isn’t saving is their pick-pack operation and the number of packages shipped.  So they use bubble envelopes for a small number of shipments, but the majority are in corrugate cartons shrink wrapped to a corrugate pad.  One book per box.  I cringe on a big release day when I find myself with 10-15 individual boxes 80-90% with 1 lone book.  As a customer, I love the efficiency of release day delivery.  As a package engineer, I shudder at the waste and shipping cost for mmpb’s.

Apparently, I’m not the only one wondering how the hell Amazon can make money off of their Prime customers, stock analysts have been looking at their profits and think the stock is over-valued.  I’m no market guru, but when profit margins are 7-8%, the REAL cost of Prime memberships has to be questioned.  One analyst opined that Amazon would NEVER improve their profits margins as long as they kept the Prime program as it stands!  But changing it is a risk, especially when Books-A-Million is offering the same free shipping for $20/year.  So Amazon is looking at options of getting that cost under control – the reason behind the recent switch to FedEx Smartpost and the new locker system.  Smartpost is a compromise, one Amazon knows will result in delivery delays since the last mile is managed by the USPS, not a small package carrier.  The post office has cut staffing to the bone, so the surges on major release dates really strains facilities in many locations, including where I live.  Combine that with temporary summer or Christmas holiday help and you have chaos.  I already have to check my mail because I get so many mis-delivered first class items and parcels.  If it’s an immediate neighbor, I’ll walk it over, but if it’s on another street in the complex, I take back to the PO and they can find the proper owner. In five years of UPS delivery, I think one package went astray.  So Amazon has already traded down on the service ladder to get some cost efficiency.

The locker system is a whole different animal.  Now they are pushing the cost for the ‘last mile’ of delivery onto the customer under the guise of ‘pick it up today!’  Yup, makes sense for me to waste my time and gas running heaven knows where to go to some soulless locker and get my order.  But by pushing the cost of that last leg onto the customer, Amazon would save big time.  The lock system is still in process and its success is not a given.  People order books to avoid the hassle of going to the store, but driving to a locker really isn’t any different – and could be very inconvenient, especially during bad weather.  So this program is not a sure bet for success.

One of the options that Amazon seems loathe to consider is a more efficient is multiple order consolidation – combining  multiple orders from one customer into a single order for new releases.  The vast majority of my pre-orders are mystery and paranormal/UF in a mix that’s 70% mmpb and the rest split between trade and hard cover.  Now books with the same release date might enter Amazon’s sales catalog at different times, so I might 5 – 8 orders with product being released the same day.  It is rare indeed for these orders to be combined in a single box, but common for one order to arrive in multiple parts on the same day in some cases partly by UPS and partly by FedEx Smartpost!  Now anyone who has walked a warehouse knows how complex shelf placement gets, but instead of placing items by demand – obviously new releases will have a demand surge – they place them randomly by space.  There are people on bikes that pedal to the far end of warehouses to fetch goods.  Orders bounce from one facility to another based on inventory.  And that’s how I end up with over a dozen individual boxes from 4 different states on a major release date.  The cost of that is huge.

That’s also the reason Amazon is looking at a neutral stock rating, and some analysts are rating it ‘sell’ because they think it’s over-priced at $258/share.

Does this mean Amazon’s customer base is not growing?  Maybe.  Or maybe it’s just slowing as they saturate a market already crowded by electronic devices, holding back of their Fire tablet.  Certainly the number of prints books sold will be down as ebooks bite into that market more each year and the new generation of readers get more and more dependent on electronics for their entertainment.  And ebooks are VERY attractive since the goods are delivered wirelessly, take up only computer space, and there’s no packing or shipping involved.  I expect the profit margins are better for both publishers and sellers – but not authors.  What I did find surprising is the small drop in profit despite the attractively priced Fire tablet and overall increase in ebook sales ve print books.  Are shipping costs growing faster than they can be contained by the growth in ebooks?  Given fuel costs, that’s very likely.  That was reflected in a quarter percent or more drop in profits.  Something that really gnaws on some investment types, despite all the innovation and new toys, Amazon’s profits have flatlined.

Does this mean the days of Amazon Prime are numbered?  Or does it mean the annual cost will go up?  Or a change in service to USPS media mail, delaying the books arrival?  Amazon owns The Book Depository in the UK.  I buy there since they carry British authors hard to find in any US store, especially thriller, mystery, and espionage.  I do get free shipping, but it comes international ground.  I see some of those titles on Amazon – with 1 to 3 weeks delivery dates, meaning they source from Book Depository.  Is this something Amazon would consider in their US operations for Prime?  Or maybe just free shipping with standard ground delivery, 2-5 days with no guarantee of release date delivery?  Interesting questions, but so far, Amazon has offered few answers.  I have to assume the ‘price point roulette’ they’re playing with mmpb’s is one way to up profits.  But the loss of 4-for-3 still is inhibiting my buying fairly dramatically.  Maybe that’s the intent.  Push more customers to consider ebooks.  Of course, there will always be the risk of losing business, but is it PROFITABLE business?  Maybe customers like me who prefer print books are no great loss to Amazon’s bottom line.  Investing gurus seem to believe that Prime is the albatross around Amazon’s neck.  That’s not something they can ignore.

All this makes me wonder about the future of print books in general.  Libraries have cut way back on purchases as they deal with budget cuts and increase their ebook inventory.  It saves purchase costs, manhours, and space – all reductions in overhead.   Another interesting development is the quick sellout of copies of some books.  Now Amazon has to be the single largest retailer of books in the US, if not the world, but are they reducing their order quantities based on pre-release sales and allowing the books to go out of stock?  It happens more often then you might think.  It is a boon to used book sellers who can ask staggering prices for a print book.  Is this another cost containment move?  It seems so to me.  Or maybe small press publishers just don’t have the willingness to risk print overruns.  Neither do some larger ones.

Regardless, Amazon will need to improve their margins to get a ‘Buy’ recommendation on their stock.  It will be interesting to see how the next year or two plays out for Amazon Prime and their profit margins.  Who knew selling books could be a soap opera?

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