Why Amazon's Higher Fulfillment Fees Could Generate $3.1B In Revenue

Amazon.com, Inc. (NASDAQ: AMZN) has announced it will be raising its Fulfillment by Amazon (FBA) fees starting Jan. 18, 2022, a move that could generate $3.1 billion in incremental revenue.

What Happened: Amazon will be raising FBA fulfillment fees by an average of 5.2%. The fee changes will be based on package size and weight. FBA monthly storage fees will also increase from 75 cents to 83 cents in off-peak months of January through September.

Related Link: Amazon Analysts Break Down Q3 Earnings: 'Would Be Buyers On Weakness'

Why It’s Important: In its announcement, Amazon said it has already absorbed billions of dollars in increased costs, and the new fees are still 30% lower on average than if sellers were to fulfill orders via alternative shipping options. Amazon also said it has hired more than 628,000 new U.S. employees and increased its average starting wage to $18 per hour.

Bank of America analyst Justin Post said Friday that the fee hike could generate $3.1 billion in incremental revenue for Amazon and help the company offset margin pressures in 2022.

“Although an incremental $3bn in revenue would represent less than 1% of Amazon’s projected $548bn in total revenue for 2022E, the flow though to profits could be quite high,” Post said.

Amazon may need every dime of profit it can find to meet analyst expectations for operating profit in 2022. Post is projecting $25 billion in GAAP operating profit in the coming year, well short of consensus analyst estimates of $34 billion.

Yet he remains bullish on the stock given strength in Amazon’s cloud business and the likely acceleration of retail unit growth in the second half of the year thanks to expanded one-day fulfillment.

Bank of America has a Buy rating and $4,250 price target for Amazon.

Benzinga’s Take: Assuming Amazon’s claims that alternative fulfilment options are still far more expensive, sellers seemingly have no choice but to pay the higher fees. Given Amazon will be providing no additional services for those higher fees, almost all of the incremental revenue should be profit.

Photo courtesy of Amazon.