Wells Fargo believes that raising fees from Amazon FBA will increase the company's profitability and increase its operating margin by 100 basis points.
The Zhitong Finance App learned that although US regulators have begun investigating the fees charged by Amazon (AMZN.US) to its merchants, Wells Fargo believes that increasing the fees charged by Amazon (Fulfilled by Amazon, FBA for short, is a logistics and delivery service provided by Amazon) will increase the company's profitability and increase its operating profit margin by 100 basis points. The bank maintains Amazon's “plus” rating and target price of $211.
According to information, on December 5, Amazon announced that it would increase FBA fees by $0.15 per unit. Unlike previous FBA rate increases, the company reduced its basic FBA fees while introducing two new fees. These include inbound delivery service fees and low inventory level fees, which are designed to “incentivize” merchants to distribute FBA inventory across multiple distribution centers rather than all in one location.
In response, Wells Fargo said that the reaction to the new FBA fees and costs may make merchants more inclined to use the “Prime Fulfilled by Seller” service, which allows merchants to obtain the “Prime” logo without shipping through FBA.
Wells Fargo analyst Ken Gavrelsky said in a research note on Wednesday: “Historically, sellers have not fulfilled a high rate of Prime (SFP) adoption due to burdensome shipping requirements. Seller feedback indicates that Amazon is now selectively easing SFP terms, and we think this, combined with higher FBA costs, may drive adoption of SFP.”
Amazon will continue to be profitable as local governments try to understand the impact of these fees on sellers and whether any regulatory action is needed. Gavrelsky anticipates that the combined impact of the North American FBA fee restructuring will increase annual operating profit of 5.2 billion US dollars.
As FBA fees rise by $0.15 per unit, Gavrelski believes Amazon may pass on an additional $0.35 per unit of distribution center costs to sellers, which indicates that the North American FBA's profitability per unit will increase by about $0.50.
“We estimate that FBA changes in 2024 will increase operating profit by 5.2 billion US dollars per year,” Gavrelsky said, adding that since this new fee structure will be fully implemented on April 1, Amazon's results for the second quarter of 2024 will fully reflect this benefit for the first time.