How Amazon’s Business Practices Harm American Consumers: Why Amazon Needs a Competitor and Why Walmart Ain’t It
$1,950,000.
That’s what our company paid Amazon last year.
We sell plush and construction toys on Amazon. Well, technically, we sell toys on our website, on eBay, on Walmart.com, to brick-and-mortar stores, and we sell on Amazon. But, really, we only sell on Amazon. In 2018, we had about $4,000,000 in sales but Amazon.com accounted for over 98% of that.
Harvard Business School would call this “vendor/customer concentration”. In the e-commerce world, we call it being Amazon’s bitch.
While Amazon received $1.95 million from us last year, they are not afraid of losing our business for a couple of reasons. First, there are thousands of companies out there eager to take our place. Second, Amazon had $277 billion in gross merchandise revenue in 2018. Our $3.9 million in sales on Amazon accounted for .0014% of that. Finally, we have nowhere else to go and Amazon knows it.
Mom and pop toy stores are dead or dying. Costco, Target, and Walmart brick-and-mortar stores together maybe sell 300 different toys. Few slots remain for us after they fill their shelves with Mattel, Hasbro, and Lego. Toys “R” Us is dead because it took on a lot of debt and then Amazon came in and killed it. We sell on eBay, Walmart.com, and our website, but together these non-Amazon channels account for less than 2% of our sales, which is not enough to support a business.
Were we to be suspended from selling on Amazon.com, it would probably take 3–6 months before we’d be bankrupt. We are not alone. This is typical for small to medium sized businesses which sell online today. In fact, most companies like our own, would probably go bust even faster. Ironically, Amazon is not just the biggest sales channel for almost everyone who sells online, but they are also one of the biggest lenders. When you go bust, they seize your inventory and sell it on Amazon.
Because Amazon accounts for such a huge chunk of everyone’s business, sellers like us are scared to publicly talk about Amazon. We worry that if we speak about what it is like to sell on the platform, we risk our right to sell there, which means likely bankruptcy. I’ve never seen Amazon retaliate against a seller for this, but the threat is real. For example, check out this nasty clause in the contract sellers sign to sell on Amazon. It prohibits us from issuing a press release or making public statements related to selling on the platform.
As a friend of mine says, what business gets $1.95 million of your money and won’t even assign you an account manager? Now Amazon will, but they’ll charge $1600 + 0.3% of your previous months sales for it. For us, we would need to pay about $2625/month on average, just to be heard. Without an account manager, you can regularly expect to wait months for Amazon to address problems with your account. Amazon’s power over online merchants is not just in sales, but also in the way that sellers are treated.
But is that a bad thing for consumers? To answer that we need to understand better how products are bought and sold on the Amazon marketplace. There are three main ways.
Method 1, Amazon Vendor Central:
Brands and private label manufacturers who make AmazonBasics sell goods directly to Amazon. Amazon takes ownership of the goods, stores them, and when they sell, ships. Amazon Vendor Central products will say “Ships from and sold by Amazon.com”. It’s old school retail, done online, but it’s something that Amazon does less of with every year. In 2018, third party marketplace sales, which we will discuss below, overtook Amazon first-party sales to account for the majority of the $277 billion dollars in sales Amazon generated. Amazon may not have big margins on their first party Vendor Central business, but the reality is that most of Amazon’s retail business is their third party marketplace, which is highly profitable and growing fast.
Method 2, Fulfillment by Amazon:
Online merchants store their products in Amazon’s warehouses, and when Amazon sells the goods, they ship it to the customer on the merchant’s behalf. Amazon does not take ownership of these goods, they are merely stored and shipped by Amazon. Ever seen a product that says “Sold by _______ and Fulfilled by Amazon”? That’s what we’re talking about.
This is a construction toy we sell. It ships from Amazon’s warehouses. Whenever we sell one for $15, here is what we pay Amazon:
- 15% commission on the price, $2.25
- Shipping, $5.09
- Advertising to appear in search results, $0.28
- Storage, $0.22 (these charges quadruple from September through December)
We start with $15 and are left with $7.16. Amazon captures about 53% of the total price of the product.
Method 3, Merchant Fulfilled or Seller Fulfilled Prime:
Merchants store their products in their own warehouses and when Amazon makes a sale the merchant ships directly to the consumer. Amazon does not touch the product. “Ships and Sold by _____” is what we’re talking about now. This, along with Method 2, form Amazon’s third party marketplace.
This is a giant plush tiger we sell. We ship it from our warehouse in Texas. Whenever we sell one for $150, here is what we pay Amazon:
- 15% commission on the price, $22.50
- Advertising to appear in search results, $17.58
In this case, Amazon takes a lower percentage of the total price of the product, 27%, compared to the 53% taken when fulfilled by an Amazon warehouse. However that is 27% of the total price taken by Amazon when all they did was host the product on their website.
We designed, manufactured, imported, stored, shipped the item, and then we did customer service. Amazon hosted some images, swiped a credit card, and got $40.
This is the core problem. Were it not for Amazon, this item would be $40 cheaper. And this is how Amazon’s dominance of the industry hurts consumers.
Amazon takes a 15% commission on every product we sell on their website. We don’t have this fee when we sell toys on our own website, so we could sell our products for 15% less and make roughly the same amount of money as we do on Amazon.
Unfortunately, Amazon prevents us from doing so in a couple of different ways. First, diverting customers away from Amazon.com is grounds for suspension, which means bankruptcy. Second, Amazon prohibited us from listing products on our own website for less than we sold that same product for on Amazon. Perhaps fearing regulation, Amazon quietly ended this “price parity” policy, but now enforce it indirectly. If we sell our products for less on channels outside Amazon and Amazon detects this, our products will not appear as prominently in search and, if you do find them, they will lose their prime check mark and with that, their sales.
If Amazon either charged us less or stopped restricting our ability to sell on other platforms for less, we could pass on those savings to consumers. Amazon charges a separate and reasonable price for shipping and storage. However, their 15% commission and Amazon search advertising, together $763,000 for us in 2018, are too high. In exchange for this $763,000, they operate an online catalog and deliver search results. We sell about 200 products on Amazon. Does it cost anywhere near $763,000 to display our products there? Definitely not.
Every year that we’ve been selling on Amazon, they have raised their prices, sometimes significantly. When we first started on Amazon, we paid about 33% of our sales on Amazon to Amazon. In 2018, we almost hit 50%.
In recent years, given the regulatory scrutiny, they seem to have gotten more creative. Rather than just increasing the cost of shipping, they’ll reduce the amount of free support they provide to sellers, increase storage fees, charge for reviews, or dedicate more search space to sponsored advertising instead of organic search results. This means you see advertised products before you see results based on customer satisfaction. It also means that online sellers must pay more money to sell the same products, so prices go up.
Amazon charges a lot for the services they provide, but it’s not clear that a reduction in these fees to sellers would result in lower prices for consumers. Couldn’t Amazon sellers pocket these fee reductions as additional profit? They cannot. Most sellers are locked into commoditized competition. Whether it’s the 38 different sellers trying to win the buy box for Cascade® detergent or us attempting to capture your eyeballs, followed by your heart, when you search “plush goat”, price is essential to winning the sale. Most sellers on Amazon do not have unique differentiated product and so when margins widen, it just creates more ammo for a price war, which means lower prices for consumers.
When you see entire UPS trucks full of boxes with Amazon’s logo on them, you get the feeling that Amazon is a powerful force in the economy, but it’s hard to explain how that affects consumers. Now you know how. They charge online merchants exorbitant amounts, online merchants have no choice but to pay, and online merchants pass the bill onto consumers. So, how do we fix this?
Some politicians in Washington call for regulation, but it’s not obvious how to best to check Amazon’s power. In the past, monopolies were broken up by geography. That does not seem like a good solution when so many packages are delivered from one part of the country to another. And reducing Amazon’s 15% commission on the products sold on their website, which is an increasingly large part of the entire American economy, feels like setting the cost of bread in a communist country. Further, Amazon could respond by increasing other fees levied on sellers.
Amazon’s share of the US e-commerce market is over 50%². I’ll let you decide whether or not that qualifies Amazon as a monopoly. However, regardless of your opinion, the US Department of Justice should investigate Amazon’s “pricing parity” and “buyer diversion” policies right now. They are a restraint of trade that results in harm to consumers in the form of higher prices.
I wrote earlier that our $3.9 million in sales on Amazon in 2018 accounted for .0014% of Amazon’s total sales, way too little to have any leverage in negotiation with them. According to Marketplacepulse.com there are approximately 900,000 active sellers on Amazon’s United States marketplace³. If these 900,000 sellers were able to form a cooperative to negotiate with Amazon, it is possible that this could result in lower fees, which would then be passed on to shoppers. The goal of this article is to reduce consumer prices, not create a cartel. An estimated 39% of those 900,000 sellers are based in China and this number grows ever year¹. It may not be possible to achieve cooperation between so many parties and maintain the noble intention of creating a healthier marketplace for consumers.
What Amazon really needs is a competitor.
Today, it does not have one. Walmart.com gets a lot of media coverage, but the sales on Walmart.com are just not there. We launched our products on Walmart.com in 2019, and despite taking 20x as long to set up than eBay, it accounts for about 45% of the sales volume eBay does (less than 1% of our sales). Amazon recently launched a program called Amazon Renewed where we sell refurbished items. It alone is doing more revenue than Walmart.com. Walmart is a household name, but in e-commerce, they’re a non-player.
However, there’s a recipe for creating a competitor to Amazon. It’s unlikely to happen, but it may be a better option than having government tell Amazon what to do.
- Walmart needs to team up with a package delivery company to offer cheap shipping and a US wide fulfillment network⁴. UPS and FedEx also have too much of their revenue tied up in Amazon and would love to see a competitor develop.
- Walmart needs to merge their platform with eBay’s to increase both their seller and customer base. The better the selection, the better the store is. The more buyers on a platform, the more sellers will come. By combining eBay’s and Walmart.com’s product catalog and buyer group, you can make a better marketplace.
- Walmart needs to have a real tech company like Facebook, Shopify, Rakuten, or Microsoft run the software to support their website. 197 million people visited Amazon every month in 2017 and you need to have tremendous servers and tech infrastructure to prevent your website from going down before Christmas. Walmart’s current software backend sucks.
- Walmart needs to lower their commission fee by about 10% on average (different categories have different commission fees). This will reduce the prices of products on their website for consumers and drive more sellers to the platform, increasing variety, thereby driving more customers to Walmart.com. Amazon did similar when they bought Whole Foods, a market where they are a small player.
Forming a partnership between Walmart, eBay, FedEx or UPS, and a tech company like Google will be enormously difficult to pull off, but if it works, Amazon will have a legitimate competitor. Competition keeps prices low and we’ve seen, both with their acquisition of Whole Foods, and their lowering of their free shipping minimum in response to Walmart, that Amazon is no exception. We need to create an Amazon competitor to ensure continued innovation in e-commerce and low prices for American consumers.
Jeff Bezos, Amazon’s CEO and the richest person in the world, has many famous sayings. Two of my favorites are “Your margin is my opportunity” and “There are two kinds of companies: those that try to charge more and those that work to charge less. We will be the second.” Recently, Amazon has been much better about executing on the first quote than the second, and that’s a damn shame.
Amazon’s business, its outsize power in our economy, and its deleterious effects are not well understood by the general public or even our own government. I hope that this piece has made some progress towards curing that. The more people that know about the hidden harm in Amazon’s business practices, the sooner we can address it and create a better environment for American consumers. So, please share this article. Thank you.
Footnotes
[1] : Sellers based in China have numerous structural advantages over their American counterparts and have, for a few years now, not only been crushing their American competition, but have been frustrating American consumers in the process. If this article finds an audience, I can explain why this is and what can be done about it.
[2] : That same article also says that Amazon’s sales are only about 5% of overall retail sales. It’s important to remember that overall retail sales include gasoline, cars, groceries, food, and beverage — categories that Amazon either has no foothold in or does not sell at all.
[3] : It’s a great article with tons of information on the state of e-commerce. Highly recommended.
[4] : Since writing the first draft of this article Shopify, an e-commerce platform for sellers who wish to mainly sell on their own website instead of marketplaces like Amazon, has announced their intention to operate fulfillment centers all over North America to create a 2-day Amazon prime competitor.
Thanks!
Great thanks to David Short, Macy Frazier, Samuel Lee, and many others who read early drafts of this piece. Their edits and suggestions were huge improvements to the article. Thanks y’all!
