It used to be that ordering household items from Amazon Prime meant stocking up.
Many brick and mortar-resistant shoppers relished 48 rolls of toilet paper or 24 cans of cat food arriving at their address in two short days.
Until recently, to protect Amazon.com, Inc.'s (NASDAQ: AMZN) retail margins, Amazon has made it difficult to purchase a single item in the $1-$5 range and also get fast and free shipping – items like a stick of deodorant, a make-up brush or a tube of toothpaste.
In September, analysts at Edgewater Research started noticing that Amazon had disabled its add-on program, the system Amazon used to allow the purchasing of low-priced items, but only if they were added to create a $25 minimum, for example. On their own, items below $5 didn't quality for free-shipping, until now.
Not only has Amazon recently increased its delivery speed from two days to one, but this shift in Amazon's logistics should make brick and mortar competitors like Walgreens (NASDAQ: WBA), CVS Health Corp (NYSE: CVS), Walmart Inc (NYSE: WMT), and Target Corporation (NYSE: TGT) nervous.
Conversely, it should make brand names expect a sales bump. Former Amazon executive and Vice President at Ideoclick Andrea Leigh believes that while this growth will be great for manufacturing, companies need to beware of selling hoards of low-priced items when profit is questionable.
"I want to warn them all not to get too comfortable," said Leigh. "In six months, Amazon is going to come back to [them] asking for money and could hold the brand hostage."
It's easy to understand why Amazon might have created those add-on barriers to protect its own retail margins, because how could Amazon profit by selling a $1 item with shipping costs?
"This enhanced Prime coverage of extremely low-cost goods is a sign that Amazon Logistics is providing the flexibility sought through insourcing," said Matthew White, strategist at iDrive Logistics. "Insourcing would refer to in-house transportation procurement in this case, examples being Amazon Logistics instead of utilizing outside carriers or the dumping of XPO in favor of their own truckload network."
Because Amazon's fulfillment centers can be found all across the U.S., the company can rely on its own transportation to deliver these goods across the final mile, which is the most costly and time-consuming aspect of the shipping process.
"Granted, some of these packages will always be loss leaders," White continued. "These loss leader shipments will be defrayed by Amazon Prime membership fees, higher customer satisfaction, and higher per-household annual spend. Overall, a great bet by Amazon and one that Walmart and other large brick and mortar retailers will have a tough time matching."
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