Dive Brief:

• Citing the expansion of member benefits and rising labor and transportation costs, Amazon on Thursday said the annual price of its Prime membership will rise from $119 to $139 as of Feb. 18, the first hike since 2018.
• Amazon's operating expenses grew 12.9% to $134 billion in the fourth quarter, according to a company press release. Online store sales fell 1% to $66.1 billion, sales at physical stores rose 17% to $4.7 billion, and product sales were flat year-over-year at $71.4 billion. 
• Operating income fell 49.7% to $3.5 billion, while net income ballooned 98% to $14.3 billion, thanks in part to an investment windfall.

Dive Insight:

Amazon took it on the chin at the holidays, with GlobalData finding that it lost market share to physical retailers, especially those with strong e-commerce of their own, curbside pickup or other omnichannel options.

Experts note the company is leaning harder on service fees to make up for that, and the cost increases it faces itself. As a retailer, (outside of its cloud services, where revenues rose 40%) the company is seeing more growth from fees it takes in from customers and sellers than from product sales. Revenue from its third-party services rose 11% to $30.3 billion, and subscription revenue (including Prime membership fees) rose 15% to $8.1 billion and advertising revenue rose 32% to $9.7 billion.

Observers think Amazon's Prime members will likely take this fee hike in stride. The monthly fee will increase from $12.99 to $14.99. For current members paying annually, the increase will apply after March 25, on the date of their renewal, per the release.

"History has shown that when Amazon raises the fee for Prime membership, consumers barely seem to notice," Brendan Witcher, Forrester Research principal analyst, said by email. "This is likely a reflection of Amazon doing its due diligence and understanding the elasticity of the program's price before making the change. Total income from Prime at the top line is larger than most retailer's total sales — so having the confidence to increase the fee can almost always can be seen as a positive for Amazon."

But the e-commerce giant may have to take care that the membership is worth it, according to GlobalData Managing Director Neil Saunders, who called the Prime fee bump "reasonable." On a call with analysts, Amazon Chief Financial Officer Brian Olsavsky noted that Prime benefits are expanding, as with its new prescription delivery services, improvements to its video and music streaming services, and more products available for fast shipping.

According to research from loyalty provider Clarus Commerce, fast, free shipping was the top reason for renewing Prime, and the video streaming service was second. The latter will remain important as long as the pandemic continues, according to Clarus Commerce CEO Tom Caporaso.

"While it's inevitable that some shoppers could discontinue their memberships with a price raise, I'd expect most Prime members to stay enrolled," Caporaso said. 

Some of the company's massive cost increases came from the expansion in its warehouse and fulfillment capacity to meet demand in the fourth quarter, another bet that could pay off given consumers' appreciation for speedy fulfillment, according to Julian Skelly, retail lead at digital consultancy Publicis Sapient. 

"Although Amazon's revenue growth has slowed down since the height of the lockdown, it continues to climb at a good pace," Skelly said by email. "Amazon has done well by investing heavily in hiring, while others have struggled to bring on additional capacity. But if online shopping habits that consumers have developed over the past 2 years change, Amazon may be stuck with a large cost base and declining revenue."

Amazon nearly doubled its operations capacity in the past two years, expanding its fulfillment center footprint and "adding significant transportation assets to ensure fast, on time delivery," Olsavsky said, adding later, "The onus is on us to get our operational efficiency back."

Amazon also now has to contend with meaningful competition in retail, GlobalData's Saunders said. 

"Perhaps the most interesting thing about the numbers is that they show there are limits to Amazon's growth," Saunders said. "What's now clear is that Amazon must work much harder to generate future gains, especially as competitors are making much more effort with their omnichannel and digital services. This is one of the reasons why Amazon is starting to pull on some alternative growth levers."