After many quarters of plunging earnings and margins, Amazon.com (NASDAQ:AMZN) finally saw the need to have higher margins. The pressure from the analyst community, egg profusely in their faces, must have been too great for former Wall Streeter Jeff Bezos.
So Amazon.com decided to do something about it. But it turns out that Amazon.com is playing in a very competitive market, with thousands of suppliers both online and offline. So to increase margins is not as easy as no longer offering free shipping or raising prices. That would be too obvious, and quickly affect revenues.
Knowing this, what did Amazon.com supposedly do? Well, it stood up, and decided to pull an underhanded move on its most loyal customers. You see, Amazon.com has this program, "Subscribe & Save", where customers can set up regular deliveries of Amazon.com-supplied goods and receive them monthly at their doorstep (delivery is free). Naturally once they get into a buying routine, customers are much less aware of the prices they're paying. And that's why Amazon.com might have decided there was room to increase prices … not by a little, but by a lot. At least, that's what seems to be emerging in Amazon.com's own forum, as customers recently got aware of the changes. What follows is a summary of the complaints that are now showing up frequently:
Prices shooting up the roof
In a true bait and switch, prices of many items regularly bought by "Subscribe & Save" customers shoot up. They didn't go up with regular volatility or inflation. No, they shoot up, above and beyond any reasonable level, to the point where customers started finding out that much of the stuff they were buying could be had cheaper in the offline world.
This move is recent, but the comments on Amazon.com's "Subscribe & Save" board lay testament to it. Just a few samples:
No longer convenient
The prices are now too volatile and subject to huge increases. The customers can no longer trust what they'll be billed and thus needs to monitor it constantly.
Discounts going lower
"Subscribe & Save" discounts were originally 15% on the price Amazon.com was charging for the products. This has been substituted by 5%-15% recently, which naturally led to some complaints as well.
Leaning on suppliers leading to canceled subscriptions
Checking Amazon.com's "Subscribe & Save" forum also brings up another recent, interesting trend. There's a raft of people complaining on how Amazon.com canceled their subscriptions for individual products. It's quite clear that this is happening because the suppliers are declining participating in the program. So why would that happen? Obviously Amazon.com went on another supplier push initiative, trying to squeeze further margin concessions from suppliers. This has been reported in the book segment as well. And also obviously, some suppliers declined further concessions and were thus removed from the program, leading to the subscription cancellations.
Customers complaining of not being warned about items shipping
A recent complaint, whose importance is hard to gauge, is that Amazon.com doesn't seem to be notifying some customers of their impeding shipments. Usually this could be down to some technicality, such as the e-mails ending up on the spam folder or something. But given that Amazon.com has been gauging the prices heavily, this gains relevance as it might help in the overall scheme, and disturb customers more than normal.
This is the topic where customers complain about this event.
As usual, Amazon doesn't provide enough information to understand what impact these price increases will have on margins. Surely, the impact is positive as long as customers don't defect. It might happen that these actions are made not really to show profits, as much as to compensate the free delivery that Subscribe & Save promises. After all, if customers have taken to order low price items with regular deliveries, these products could make for quite a negative margin once delivery is taken into account.
Still, the most important thing is that Amazon.com exposes its hard-earned image of being a low-cost destination for shoppers. The increases being reported are sometimes 100%-200% or more, and they make prices uncompetitive with retail stores. If this goes on long enough, slowly the public will see Amazon.com as no longer a competitive destination. Here one has to remember that Amazon.com does not have the lowest costs in the retail industry (operating cost/revenues), so it isn't easy for Amazon.com to keep low prices and generate returns at the same time. Competing on price without having cost leadership is not a viable long term strategy: Amazon.com's operating costs ex-cost of sales/revenues come to 22.5% of sales (Q1 2012), whereas Wal-Mart's (((NYSE:WMT))) are 19.2% (2012 FY), and Costco's (((NASDAQ:COST))) are 9.5% (Q1 2012).
Conclusion as a Shopper
If you are using Amazon.com's Subscribe & Save program, you will need to keep close tabs on the costs of everything you're ordering. You will need to check your e-mail every month (for monthly deliveries) and redo your comparisons. If you don't do so, you're liable to get ripped off. Repeatedly.
Conclusion as an Investor
This is perhaps the first real test of Amazon.com's brand. Amazon.com is increasing prices and worsening terms. In its own message boards, the backlash can already be seen quite clearly, showing how price was the prime determinant.
At this point, Amazon.com is doing this mostly on the type of buying (subscription) that isn't as directly influenced by comparison shopping. On the other hand, the move here seems quite a bit more underhanded than would be the case with a straight price increase. In a way, Amazon.com decided to take advantage of its own most loyal customers - this can easily lead to significant image degradation for the company, as knowledge of it spreads through the web.
In this we also have another data point confirming Amazon.com as a sell. Not only does it trade at outrageous multiples to earnings, but its only way to try and increase margins is to plunge a knife into its most loyal followers - confirming that a company that's not a leader in costs (and AMZN isn't), cannot be a leader in price.
I first came upon this development when reading firstadopter's excellent blog posts on Amazon, which reflect many of the same Amazon issues I've been covering over time.
Disclosure: I am short AMZN.