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We already knew that Amazon.com (NASDAQ:AMZN) was penny pinching hard by not making a proper presentation for its new Kindle Fire tablets. Bill Maurer also found out that Amazon.com has been aggressively slowing down content purchases. And we already knew that the new Kindle Fire HDX was selling poorly.

But today, something else happened which confirms Amazon.com must be under tremendous earnings pressure: Amazon.com is raising the minimum threshold to get free shipping. It's moving this threshold from $25 to $35. This is Amazon.com's press release:

Changes to Amazon Free Shipping

These changes relate specifically to FREE Super Saver Shipping. All other services remain unchanged.

Amazon's minimum order size for free shipping has changed to $35. This is the first time in more than a decade that Amazon has altered the minimum order for free shipping in the US. During that time, we have expanded free shipping selection by millions of items across all 40 product categories. Look for "FREE Shipping" on product pages to discover eligible items.

Millions of Amazon customers have already made the choice of faster shipping by becoming Amazon Prime members. Prime includes unlimited Free Two-Day Shipping, with no minimum order size, on more than 15 million items, as well as unlimited streaming of over 41,000 movies and TV episodes through Prime Instant Video and access to over 350,000 books to borrow through the Kindle Owners' Lending Library. The service is so popular that more than a year ago we began shipping more items with Prime than with free shipping. Click here to start a 30-day free trial of Amazon Prime.

Free shipping has long been a cornerstone of Amazon.com's growth strategy. Moving this threshold is a borderline desperate measure. A measure which would only be taken if Amazon.com internally was looking at some seriously ugly numbers. Yet Amazon.com took this measure.

Consequences

There are two main consequences we can draw from this move:

  • One is that Amazon.com is about to report earnings which will be worse than expected. And the expected number is already a loss, to begin with;
  • The second is that if free shipping was a great growth driver, increasing the threshold will be a great growth headwind. And with such a headwind impacting at the same time revenues are already slowing down materially and the Kindle Fire HDX is stumbling, it will amplify the effect.

One should remember that free shipping is a central tenet of Amazon.com's strategy to grow its business. A central tenet repeated often in its communications. For instance, every 10-Q and 10-K includes these lines:

We expect our net cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, our product mix shifts to the electronics and other general merchandise category, we reduce shipping rates, we use more expensive shipping methods, and we offer additional services. We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing placement of fulfillment centers, negotiating better terms with our suppliers, and achieving better operating efficiencies. We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers.

Free shipping is thus a central tenet of Amazon.com's growth strategy. And here, what Amazon.com is doing is backtracking on this central tenet. It would not do so lightly, it's a significant change, so its decision must be informed by something the market is not yet seeing - that is, earnings are so ugly that they demand action, even at the risk of maiming growth or provoking customer backlash.

This is even more significant when revenue growth has already been on a sustained deceleration and with this move the deceleration promises to become even more pronounced.

AMZN Revenue Quarterly YoY Growth Chart
(Click to enlarge)

AMZN Revenue Quarterly YoY Growth data by YCharts

Conclusion

Amazon.com moving the free shipping threshold from $25 to $35 is another sign that earnings must be ugly. While the move might alleviate some shipping cost pressure over the next few quarters, it will also pressure its already slower growth rates, to the point where these might approach eBay's (NASDAQ:EBAY) (the spread will be just 4% in Q3 2013 and closing fast).

Source: Amazon.com Shipping Change Means The Earnings Miss Is Probably Massive