“For many businesses, Amazon is simultaneously a sales channel, a potential service provider and a competitive threat.” – Forrester Research
The meteoric rise of Amazon in the past twenty years has been something to behold. More has been written about this company than any retailer in the history of the world. So why do we need another article about Amazon? Have we missed something?
The answer quite likely is yes. Amazon affects the entire retail industry, from vendors/manufacturers to consumers and every company in between. The ironic thing about this is that even Amazon is not making money due to a raft of factors and is making it difficult for its competitors to make money, as well.
Amazon’s Prime has led tens of thousands of retailers to try to match their free shipping policies. While Amazon can for the time being lose money offering free shipping due to its Wall Street subsidies, most of those emulating them have no such luxury. Yet the practice prevails with oceans of red ink being the standard.
As a matter of rule, “free shipping” plus deep discounts is a recipe for financial disaster. Yet as long as keeping up with Amazon drives your strategy, financial ruin is your likely destination. This is why so few online retailers actually make money and their numbers are quite deceiving because top line sales growth is what gets reported.
How are vendors affected by Amazon?
First, let’s take a look at what so often happens to vendors who sell directly to Amazon. Amazon has a predatory pricing strategy where they want to be the cheapest price out there. I call this “the last man standing” strategy. One vendor showed me an invoice in which he sold 1000 units for $8.80 each. Amazon sold it for $10; that included free shipping.
Amazon obviously lost money selling that item, but how would other vendors’ customers react to the pricing? Vendors have a hard time pricing the same product over Amazon’s price. Why? Because people go to Amazon first to research prices … even those of their competitors. Walmart, Costco, New Egg, CVS, etc. all check Amazon first, just like consumers do. Amazon has supplanted Google as the primary retail search engine.
If big box retailers see Amazon selling a product for $10 they will demand to buy it for much less than $8.80 per unit. If a vendor cannot sell for lower, big box retailers quite often will pass on purchasing it. The Amazon Effect here is to crush vendor margins through predatory pricing. This is not theoretical. Our buyers at PulseTV search Amazon for each and every product we sell. We refuse to sell products that are too heavily discounted on Amazon that would lead to our margin erosion.
Many big box retailers are now suggesting that if vendors continue to sell to Amazon, they will reduce orders or stop purchasing those items completely. We have vendors selling to us at PulseTV insisting that we cannot sell their items on Amazon’s Marketplace. They want to protect their margins. This trend will continue.
It is not just selling directly to Amazon that is a problem for vendors. Amazon’s Marketplace has millions of sellers and vendors’ products can end up being sold by someone in Paducah, KY, for pennies over cost -- even below cost. Remember, profits seem not to matter in the digital space as long as top line sales growth is maintained. So pricing strategies on Amazon’s Marketplace are not necessarily economically rational, meaning geared to earn a profit for the seller.
Amazon made and continues to make an impact on logistics. This includes fulfillment and shipping practices. In just twenty years, consumer expectations have changed significantly. Once upon a time, ordering and expecting to receive that shipment in 2-4 weeks was common. Not anymore. If you are a retailer and not shipping within one business day, you have problems.
So order processing, pick, pack and ship and customer service requires more vigilance and resources to make sure that time is compressed. All of this compresses margins for retailers even further, which is why when you unravel clever and creative accounting, online retailers only achieving profitless prosperity.
And lastly: To those online retailers who rely on Amazon’s Marketplace to sell their goods, I have a bit of a warning for you. You become more fragile the more you rely on the marketplace. Amazon can and does change their rules, not to benefit you, but to benefit Amazon. The nature of the marketplace is like a gladiator arena.
90% of all sales come from the “buy box” in Amazon’s Marketplace. The most common way to earn that position is to have the lowest landed cost to consumers. So there is a never-ending race to the bottom to secure the “buy box.” This makes every retailer susceptible to the clown who does not care about making money but is in the top line sales growth game. And worst of all, Amazon insists you do not own that customer. They do, so there is not a great back end earning potential for retailers. (It is estimated that 10% of purchasers will find their way back to the retailer, but this is an estimate of dubious origin.)
Much more could be written about how Amazon has changed the retail game for online as well as offline. The Amazon backlash will pick up speed once Wall Street demands profits from this company. Stay tuned.
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