retail news in context, analysis with attitude

Bloomberg reports that Amazon is getting ready to change the way it deals with small, mom-and-pop suppliers, which have “long relied on Amazon for a steady stream of orders … Rather than selling in bulk directly to Amazon, they’ll need to win sales one shopper at a time.”

Amazon’s goal, the story says, “is to cut costs and focus wholesale purchasing on major brands like Procter & Gamble, Sony and Lego … That will ensure the company has adequate supplies of must-have merchandise and help it compete with the likes of Walmart, Target and Best Buy.”

Here is some context from the Bloomberg story:

“Amazon secures inventory two ways. The company buys products directly from wholesale vendors, reselling them like a traditional retail store, and it lets independent merchants post their own products on the site in a marketplace model similar to EBay Inc. or a consignment shop. About half of the goods sold on Amazon come from independent merchants, and the change will push the marketplace share of revenue even higher.

“The vendor purge is the latest step in Amazon’s ‘hands off the wheel’ initiative, an effort to keep expanding product selection on its website without spending more money on managers to oversee it all. The project entails automating tasks like forecasting demand and negotiating prices which were predominantly done by Amazon employees. It also involves pushing more Amazon suppliers to sell goods themselves so Amazon doesn’t have to pay people to do it for them … By forcing many existing wholesale vendors to sell their products directly to consumers, the company holds less inventory itself -- reducing the risk that it gets stuck with unsold merchandise. Moreover, Amazon can collect a commission on each sale a vendor makes and charge them fees to store, pack and deliver their goods -- boosting profits.”

A final decision has not been made to commit to this approach, but sources tell Bloomberg that the company is proceeding in this direction.
KC's View:
Some of the stories about this move by Amazon describe it as a “purge” of small suppliers, but it doesn’t really sound like that to me. It does seem like the acceleration of a change that already is taking place, since gross merchandise sales from Amazon’s Marketplace now accounting for 58 percent of sales on Amazon.

The rule always has been that if you are a vendor, you do business through Amazon, not with Amazon … and this will continue to be the case. Some of this will be invisible to the shopper, who won’t much care about how Amazon structures its relationship with vendors as long as he or she gets good prices and fast delivery. I would expect that however relationships are structured, Amazon will continue to put the customer first … that is its greatest advantage, and at the moment, an immutable reality of how it comes to market.

I do think that this notion of having vendors more in charge and control of their products could find its way into Amazon’s much-speculated-about opening of a new supermarket chain later this year. If, rather than buying product from suppliers and then reselling it to consumers, Amazon decided to fill the entire store with product owned by suppliers, never owning anything itself, it could be a potentially disruptive approach to traditional food retailing.

It is one of the secret sauces that Amazon brings to its business recipes, and I fully expect Jeff Bezos to use it where and when appropriate.