Amazon: One Up on eBay

Consider this: (NAS: AMZN) spent $4.6 billion on its warehouses last year, amounting to 9.5% of its sales, making it the company's single biggest operating expense. However, Amazon is spending to increase both the size and efficiency of its fulfillment model. The company expects the recently announced $775 million all-cash acquisition of robot technology maker Kiva Systems to help contain costs in the distribution network over the long term.

Increasing sales and declining profitability
In 2011, Amazon's net sales soared by an impressive 41% in the wake of an expanding e-commerce market. That also led the company to increase its number of warehouses by 32% to a total of 69. Amazon's warehouses -- or "fulfillment centers," as the company prefers to call them -- are a critical component of its business model, helping to ensure timely delivery.

As the company pushes its shipping volumes to a new high, its "fulfillment" costs have climbed a staggering 58%, outpacing revenue growth. Consequently, Amazon's net profit took a beating in the recently reported quarter, falling by 58%.

A good move
As of now, human workers have to walk around the huge warehouses, hand-pick items, and pack and ship them. With Kiva robots, they will have help that should improve their productivity. Kiva's robots specialize in moving boxes and shelves full of products around warehouses in a fast and efficient manner. The robots also efficiently organize the warehouse shelves, maximizing storage space. And they also keep a close check on their error-prone human counterparts. That makes four positives: cost savings, increased throughput, increased space, and less room for error.

Kiva claims that its technology can double or even triple a company's hourly order-processing capability -- something Amazon can surely use to cut costs. It's also a tried and tested idea. Kiva already has companies such as Gap and Staples on its customer list.

Competitive advantage, eh?
Let's see. For one, the company may need to build fewer warehouses as it accommodates more in the existing ones. Secondly, improved customer service owing to fewer errors and quicker deliveries surely has long term benefits. Finally, Amazon can even choose to continue with Kiva's present customers and add an additional source of revenue, as well.

But, the big question remains: Will the acquisition provide a competitive edge over its nearest rival, eBay (NAS: EBAY) ? I think so, if we take into account all of the factors above. Also, Amazon is surely not licensing the technology to GSI/eBay or Wal-Mart, and having a technology advantage in the warehouse segment definitely puts the company in the sweet spot.

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At the time thisarticle was published Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of and Staples.Motley Fool newsletter serviceshave recommended buying shares of, eBay, and Staples.Motley Fool newsletter serviceshave recommended writing puts on eBay. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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