At a time when Amazon is under financial pressure, one of its solutions seems to be to dip its beak a little deeper into the sales made by the two million third-party merchants on its Marketplace.
Bloomberg reports that "for the first time, Amazon’s average cut of each sale surpassed 50% in 2022, according to a study by Marketplace Pulse, which sampled seller transactions going back to 2016.
"The research firm calculated the total cost of selling on Amazon by tallying the commission on each sale and fees for warehouse storage, packing and delivery, as well as money spent to advertise on a site where hundreds of millions of products jostle for attention. Paying Amazon for logistics services and advertising is optional, but most merchants consider these a necessary part of doing business."
The story goes on: "Sellers have been paying Amazon more per transaction for six years in a row, according to Marketplace Pulse, but were able to absorb the increases because the company was attracting new customers and rapidly increasing sales. That abruptly changed when pandemic lockdowns eased and people began traveling and dining out again, sucking the oxygen out of online shopping. Last year, Amazon generated the slowest sales growth in its history."
One example cited by the story: "Chuck Gregorich, who sells fire pits and outdoor furniture, says turning a profit on Amazon is getting harder.
"One of his popular fire pits costs $200, of which Amazon takes $112 for its commission, warehouse storage, delivery and advertising. That leaves him with $88 to pay the manufacturer, ship the product in from China and cover his overhead. He expects his Amazon logistics expenses to increase up to 8% this year due to a new fee structure that took effect in January and additional changes scheduled for later this year."
Bloomberg also offers the Amazon explanation:
"Amazon sellers choose to use its logistics services because, on average, they cost 30% less than alternatives from other shipping companies, and merchants are free to buy advertising anywhere, company spokesperson Mira Dix said in an emailed statement. The fees Amazon charges reflect the company’s own costs and investments, she said.
"'Many selling partners have built and run their businesses without advertising,' she said. 'If they choose to advertise their products, they have many service providers to choose from. Sellers are not required to use our logistics or advertising services, and only use them if they provide incremental value to their business'."
- KC's View:
My first thought when In saw this story was that if Amazon wants to give the Federal Trade Commission (FTC) even more ammunition for an antitrust probe, it is doing a pretty good job. There may be competition to Amazon's Marketplace, but let's face facts - the company has built such a powerful sales engine, backed up by an enormous logistics machine, that in many ways it has a chokehold on e-commerce sales by small and medium sized companies. Sure, you can do it without Amazon … but its access to customers is so pervasive that it is hard to ignore.
Does Amazon have the right to charge what it wants for that access to customers, as well as access to its logistics network? Sure … but when its practices appear to be crushing smaller companies, it can expect heightened scrutiny by lawmakers, regulators and the media.
Interestingly, "The Intelligencer" column in New York magazine just had piece that made the following observation (in the context of a larger piece about Amazon):
"Sellers serve a lot of purposes for Amazon and joke among themselves about the free labor they provide. In exchange for access to the largest sales channel on the internet, they do a lot more than just pay Amazon its fees. They perform market research, obsessively investigating review data and marketplace trends to figure out what’s going to be popular on the platform next. (Recent red-hot third-party product types include miniature waffle-makers, reading lights that drape around your neck, and dog puzzles.) They handle customer service. They exert downward price pressure on one another, and they absorb a lot of risk (dozens of dog-puzzle sellers fail so that one may thrive). No matter what happens to them, whether their own businesses succeed or fail, Amazon makes money."
And the thing is, this is all happening at a time when Amazon increasingly is being criticized for a customer experience that, in a phrase, ain't what it used to be - Prime benefits that seem less than prime, delivery windows that seem less precise than even during the day of the pandemic, and pages that are cluttered by ads that generate revenue for Amazon without improving the experience for the shopper.
The Atlantic the other day observed that "last week, the journalist John Herrman published a theory on why, exactly, Amazon seems so uninterested in the faltering quality of its shopping experience: The company would rather leave the complicated, labor-intensive business of selling things to people to someone else. To do that, it has opened its doors to roughly 2 million third-party sellers, whether they are foreign manufacturers looking for more direct access to customers or the disciples of 'grindset' influencers who want to use SEO hacks to fund the purchase of rental properties.
"In the process, Amazon has cultivated a decentralized, disorienting mess with little in the way of discernible quality control or organization. According to Herrman, that’s mainly because Amazon’s primary goal is selling the infrastructure of online shopping to other businesses - things like checkout, payment processing, and order fulfillment, which even large retailers can struggle to handle efficiently. Why be Amazon when you can instead make everyone else be Amazon and take a cut?"
None of this is good for Amazon.
I've been an Amazon customer since the mid-nineties. I was an early adopter, and always - though I hope, not blindly - have been a fan of the company's disruptive nature.
But there is something wrong at Amazon. Maybe some of it is the inevitable corporate detritus that comes after an event like the pandemic. Maybe some of it is hubris, that Amazon and Jeff Bezos, like Icarus, became so arrogant that they flew too close to the sun.
There is, of course, another possibility - that what you are seeing in in New York and The Atlantic and countless other publications, including MNB, is a kind of piling on, an over-reacting to a confluence of bad news that doesn't really reflect the reality of Amazon's existence.
But I hope that Amazon's leadership is not embracing this last possibility. There's no percentage in that approach, largely because it would reflect a Day Two mentality.
There is no such thing as an unassailable business model. That's been a tenet that we've repeated over and over here on MNB. For most of the last two decades, it has been a tenet that Amazon brought to the marketplace, carnivorously fueling its own growth. But now, it has to consider the possibility that it is on the other aside of that precept, and act accordingly.
There's another tenet that we've often used here - that when businesses suffer, often the problems are self-inflicted … a result of being unable to see the bigger picture, to accept reality, and to understand that the moment you put your own priorities ahead of the shopper's, you've taken a first step on the path of irrelevance.
I think Amazon has to at least seriously consider the fact that it is looking down that path, and that its next steps need to be carefully considered.
Here's a passage from FT about the challenges Jassy is facing:
"The longer term challenge is similar to the one Tim Cook faced at Apple: to take over from a visionary leader who created one of history’s most successful companies in their own image, and somehow put his own stamp on it. Yet one year on, and investors will want to see what fresh ideas of his own the 55-year-old has to fend off 'Day Two', the uncomplimentary term Bezos used to describe the 'stasis' of a company that was no longer innovating after the outpouring of ideas on 'Day One'.
"There are as yet no 'Jassyisms' to add to the evangelical 'Jeffisms' imprinted on employees; no significant projects that were not already well under way during the founder’s quarter-century in charge. His decisions are also hampered by Amazon’s balance sheet. Prior to the pandemic, the company’s multiple high-margin operations drove up net income. That was supercharged by the boom in sales in 2020. But a combination of high spending and falling demand led the company to report a $2.7bn net loss for 2022. Long-term debt now exceeds cash, cash equivalents and restricted cash. Jassy is sanguine about the challenge."
"Companies that last for long periods of time have to find ways to adapt, and be successful, in lots of different phases,” Jassy tells FT. “And this is just one of them.”
Call me crazy, but now seems like the wrong time for sanguinity.