Amazon.com 2005 Annual Report Download - page 43

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North America segment gross margin in 2004 was consistent with 2003. Changes in mix of product sales
towards lower gross margin product categories and price reductions for our customers, including from our year-
round free shipping offers, were offset partially by increased sales volume by third-party sellers and volume
discounts we receive from our product suppliers.
International segment gross margins in 2005 improved by 162 basis points compared to 2004 resulting from
several factors including increasing sales by third-party sellers and increases in discounts we receive from our
product suppliers, offset partially by changes in mix of product sales and our efforts to continue reducing prices
for customers, including from our year-round free shipping offers.
International segment gross margins in 2004 declined 70 basis points compared to 2003 resulting from
efforts to continue reducing prices for customers, including from our free shipping offers, and from a shift in mix
of product sales towards lower gross margin product categories, offset partially by increases in sales volume by
third-party sellers.
Supplemental Information
Supplemental information about shipping results is as follows:
Year Ended December 31,
2005 2004 2003
(in millions)
Shipping Activity:
Shipping revenue (1)(2) ............................................ $511 $420 $372
Outbound shipping costs ............................................ (750) (617) (508)
Net shipping cost ................................................. $(239) $(197) $(136)
Year-over-year Percentage Growth:
Shipping revenue ................................................. 22% 13% 2%
Outbound shipping costs ............................................ 22 21 26
Net shipping cost ................................................. 22 44 245
Percent of Net Sales:
Shipping revenue ................................................. 6.0% 6.1% 7.1%
Outbound shipping costs ............................................ (8.8) (8.9) (9.7)
Net shipping cost ................................................. (2.8)% (2.8)% (2.6)%
(1) Outbound shipping charges to customers do not include amounts earned on shipping activities by third-party
sellers where we do not provide the fulfillment service.
(2) Includes amounts earned from Amazon Prime membership program.
We believe that offering low prices to our customers is fundamental to our future success. One way we offer
lower prices is through free-shipping offers that result in a net cost to us in delivering products, as well as
through membership in Amazon Prime. To the extent our customers accept and use our free shipping offers at an
increasing rate, including memberships in Amazon Prime, our net cost of shipping will increase. We seek to
partially mitigate the costs of lowering prices over time through achieving higher sales volumes, negotiating
better terms with our suppliers, and achieving better operating efficiencies. In addition, we anticipate that the
costs of lowering prices over time will be partially mitigated to the extent product sales by third-party sellers
continue to increase.
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