Amazon seeks hedges for shipping costs

Published Thu, Feb 4 20164:36 PM EST

Breakingviews

Robert Cyran

Amazon may be about to become a bricks-and-mortar book selling chain. The chief executive of General Growth Properties on Tuesday told his investors that Jeff Bezos' $270 billion internet-retailing giant may open hundreds of stores. That may inspire fear in rival U.S. bookshop owners, but for Amazon it could be more about hedging the cost of shipping goods bought online. The company spent $5 billion subsidizing shipping last year, and the figure is rising. Amazon isn't commenting, and its plans may be more modest than GGP CEO Sandeep Mathrani hopes. But Amazon did open a bookstore in Seattle in November. Physical outlets could serve several purposes. As with Apple 's stores or those opened by trendy online eyewear retailer Warby Parker, they would help build Amazon's brand. Gadgets like the company's Kindle electronic-book readers would have a showcase. Scaled geographically and expanded beyond books, there could be big savings, too. Amazon has relied on cheap or free delivery options to help keep users hooked. In 2015, it spent $11.5 billion on shipping but only charged customers $6.5 billion. This cost is climbing: Shipping as a percentage of the company's net sales in its North American and international divisions rose from 7.5 percent in 2010 to 11.6 percent last year. More from Breakingviews : Activist Draghi is failing to make his mark Stores could be used as mini-warehouses where customers pick goods up, removing the "last-mile" cost of delivering from a single hub to many individual addresses. Returns, which tend to be frequent in categories like clothing, could be handled this way too. Stores could even attract new web-resistant customers. Retail outlets are, however, expensive to open and maintain. A combination of physical and online sales has been tried by many retailers, and it has not proved the answer for the likes of Barnes & Noble . Amazon's market value is now over 400 times that of the bookstore chain once considered a rival. Read More ConocoPhillips cuts dividend; Who is safe? Bezos can afford to experiment, and Amazon's scale means there may be big benefits to exploit, especially from stores in big cities with dense clusters of customers. After all, that's also where delivery drones may struggle to catch on. Editor's Note: In a press release Wednesday, General Growth Properties CEO Sandeep Mathrani stated the comments he made concerning Amazon during GGP's earnings conference were not intended to represent Amazon's plans. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com

A customer uses a Kindle Fire tablet device at the Amazon Books store in Seattle, Washington.

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The company spent $5 billion subsidizing shipping last year, and the figure is rising. Amazon isn't commenting, and its plans may be more modest than GGP CEO Sandeep Mathrani hopes. But Amazon did open a bookstore in Seattle in November.