Amazon, others to suck up holiday shipping costs

Online retailers cannot afford to raise shipping prices. The high cost of fuel is hurting the wallets of American consumers and businesses alike, but online retailer Amazon.com Inc and others will likely forgo shipping price increases on its discount programs this upcoming holiday shopping season for fear of alienating hard-pressed shoppers in the weak economy.

Long-term contracts with shippers may insulate Amazon and some others, even as companies small and large scramble to find other costs to cut. Margins could suffer more as time goes on, but the biggest companies could watch smaller rivals fade away as the move to online shopping continues to accelerate.

Avoiding shipping price hikes may appear foolhardy — after all, the cost of diesel fuel has risen 154 percent in the last year. But companies such as Amazon and Overstock.com Inc rely on low or free shipping to stoke business in good times — so any rise in bad times could be a major problem.

Free shipping is a major competitive advantage for Amazon, which has already been lowering prices to stave off rivals, said Forrester analyst Sucharita Mulpuru.

U.S. carriers like United Parcel Service Inc, FedEx Corp and the U.S. Postal Service have been raising prices due to higher fuel costs.

But Amazon and some brick-and-mortar companies with major online businesses say they’ve largely been able to insulate themselves by being more efficient elsewhere in their businesses, whether through better distribution or less waste.

Overstock will not raise its blanket USD 2.95 shipping price on a full order, and fuel increases have not affected the company’s profit margins, Chief Executive Patrick Byrne said.

Large online shippers have bargaining leverage over transport carriers when it comes to contracts, Amazon and Overstock said.

However, smaller online retailers that aren’t as nimble as Amazon will be struggling this holiday with higher fuel costs and be forced to raise shipping prices. Online retailers cannot afford to raise shipping prices. The high cost of fuel is hurting the wallets of American consumers and businesses alike, but online retailer Amazon.com Inc and others will likely forgo shipping price increases on its discount programs this upcoming holiday shopping season for fear of alienating hard-pressed shoppers in the weak economy.

Long-term contracts with shippers may insulate Amazon and some others, even as companies small and large scramble to find other costs to cut. Margins could suffer more as time goes on, but the biggest companies could watch smaller rivals fade away as the move to online shopping continues to accelerate.

Avoiding shipping price hikes may appear foolhardy — after all, the cost of diesel fuel has risen 154 percent in the last year. But companies such as Amazon and Overstock.com Inc rely on low or free shipping to stoke business in good times — so any rise in bad times could be a major problem.

U.S. consumers have pared back spending in the weak economy and many have headed online, welcoming free shipping as they avoid unnecessary, gas-guzzling trips to the mall.

Free shipping is a major competitive advantage for Amazon, which has already been lowering prices to stave off rivals, said Forrester analyst Sucharita Mulpuru.

"They'll continue to take the hit on the margins in spite of the fact that gas prices are high and shippers may pass on the cost to the E-commerce players," she said.

U.S. carriers like United Parcel Service Inc, FedEx Corp and the U.S. Postal Service have been raising prices due to higher fuel costs.

But Amazon and some brick-and-mortar companies with major online businesses say they've largely been able to insulate themselves by being more efficient elsewhere in their businesses, whether through better distribution or less waste.

Overstock will not raise its blanket USD 2.95 shipping price on a full order, and fuel increases have not affected the company's profit margins, Chief Executive Patrick Byrne said.

Large online shippers have bargaining leverage over transport carriers when it comes to contracts, Amazon and Overstock said.

"We can do a better job in keeping those price shocks from rippling through our system," Byrne explained.

Amazon's net shipping costs have been about 3 percent of revenue over the last five quarters, a spokeswoman said. But that revenue number includes sales Amazon makes off independent sellers advertising on its site who ship their own orders, meaning that the real shipping cost to Amazon would be a bigger percentage.

Amazon's shipping costs rose 47 percent to USD 128 million from USD 87 million in its most recent quarter, while total sales, which again include sales from independent sellers, rose 37 percent.

Still, others on Wall Street see less to fear, at least in the short term. Jeffrey Lindsay of Bernstein Research said Amazon locked in its transport rates before the major oil price rise earlier this year, which makes them "fairly well protected" from margin deterioration.

And while Amazon has not raised prices on Amazon Prime or Super Saver — under which shipping is free with a minimum USD 25 order — the company is "very effectively passing the costs" along on other rates, he said.

Moreover, he said, these higher incremental rates have a further benefit: The aversion to higher shipping prices means more Amazon customers opt to join Amazon Prime or buy more goods to qualify for Super Saver shipping.

However, smaller online retailers that aren't as nimble as Amazon will be struggling this holiday with higher fuel costs and be forced to raise shipping prices.