It takes a lot of money for Amazon (NASDAQ: AMZN) to ship billions of packages around the world, but it could see some relief in that department in 2023. The online retail giant spent $83.5 billion on shipping via its own logistics network and its partners in 2022. That’s up nearly 9% from 2021, faster than the sales growth across Amazon excluding its cloud computing business.
While shipping expenses may go up in 2023, Amazon is showing signs that it’s gaining leverage in the area again. And when it accounts for 20% of revenue, saving on shipping could be a major lever available to boost its operating income.
Looking at the trends
Here’s how Amazon’s shipping expense growth compared to its paid unit growth over the last eight quarters. Paid units are physical and digital units sold by Amazon and sellers in Amazon stores as well as Amazon-owned items sold in other stores.
| Period | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 |
|---|---|---|---|---|---|---|---|---|
| Paid units growth | 44% | 15% | 8% | 3% | 0% | 1% | 11% | 8% |
| Shipping expense growth | 57% | 30% | 20% | 10% | 14% | 9% | 10% | 4% |
Data source: Amazon.
Amazon’s shipping costs outpacing its paid unit growth isn’t a pandemic-fueled phenomenon. It’s invested in its own logistics network and faster shipping for years as it grows its Prime memberships. But we saw a reversal in the trend in the second half of last year. What’s more, while we saw an acceleration in paid unit growth in the third and fourth quarters, the rate of shipping expense growth slowed.
That indicates Amazon’s finding efficiencies in its logistics network or getting better rates from shipping partners like UPS. Investors should expect both factors to play a role in 2023.
Getting its shipping expenses down
After investing heavily in its logistics network in 2020 and 2021, Amazon is getting more focused on improving the efficiency of its network as it shifts more shipments to Amazon Logistics.
CFO Brian Olsavsky emphasized this idea on the fourth-quarter earnings call in February. He said that after doubling the fulfillment network footprint, Amazon is “now trying to, again, regain our cost structure that we’ve had in the past … and get more efficient on the assets we’ve added in the last two, three years.”
While Amazon is working to get the most out of its own logistics network, it may find it less expensive to negotiate rates with logistics partners. Analysts expect carrier contract rates to decline in 2023 as demand softens. That could open the door for Amazon to get a better deal from UPS, to whom it paid roughly $11 billion last year.
A rate reduction of even 5% would translate into about $500 million in additional operating income for Amazon. That’s good for a 4% improvement from last year’s operating income — and that’s with zero revenue growth.
While Amazon may not see the huge growth in sales and shipments it saw in 2020 and 2021, it’s poised to show significant improvements in its operating income in 2023, thanks in part to the potential improvements in its shipping efficiency. But with shares trading around the same price they did at their pandemic lows, it makes sense for investors to buy shares today as Amazon moves to improve operating efficiency going forward and cement the gains it’s made over the last three years.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
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