Amazon jacks up price on storage for holiday fulfillment
The 2016 holiday season is still a long way off, but Amazon is already looking for a way to prevent a costly mistake it made last winter. Amazon recently informed third-party sellers that, if they want to keep stock in the Amazon warehouse in November and December, they will have to pay extra.
Fulfillment By Amazon, the e-tailer’s service for handling order fulfillment for third-party sellers, relies on sellers keeping a portion of their stock in the Amazon warehouse. But according to Recode, the stock owned by sellers last holiday season pushed the limits of Amazon’s warehouses. The costs attached to the overfilled warehouses cut into Amazon’s margins, negatively affecting quarterly results. By increasing fees for storage in November and December, Amazon hopes to encourage sellers to only keep stock in its warehouses that is certain to move during the holidays. Amazon will be lowering the fees in October before increasing them in the following months.
While the fees were increased slightly last year during the holiday months, the increases this year are far greater. According to Internet Retailer, Amazon will charge $2.25 per cubic foot for standard-sized products and $1.15 for oversized products, compared to last holiday season’s 72 cents for standard-sized and 57 cents for oversized.
Aaron Leon, CEO of ink cartridge retailer and manufacturer LD Products said in the Internet Retailer article that, while the move would probably make Amazon a less profitable marketplace for sellers, most don’t have better options.
In January, Amazon released statistics for its third-party seller marketplace. According to a Wall Street Journal article, the e-tailer boasted delivering one billion items from independent sellers stored in Amazon warehouses.
Amazon has taken further steps year-round to prevent its warehouses filling up with items that may or may not move. The e-tailer recently opened up its express Amazon Prime shipping to some trusted vendors, according to Recode. Previously, only vendors who stored their merchandise with Amazon could be considered for express Prime shipping.
- Amazon just raised its warehouse fees because it ran out of room last holiday season – Recode
- Sellers who use Fulfillment by Amazon consider their options after a fee hike notice – Internet Retailer
- Amazon Touts Marketplace Stats but It’s Hard to Tell How Good They Are – The Wall Street Journal (sub. required)
 Image: Amazon
Discussion Questions
DISCUSSION QUESTIONS:Â How likely is it that Fulfillment By Amazon will see significant seller attrition during the holiday due to the increased costs? Does Amazon run a risk by allowing trusted sellers holding their own inventory to be part of the Prime/express shipping program?
Poll
BrainTrust
Max Goldberg
President, Max Goldberg & Associates
Tony Orlando
Owner, Tony O's Supermarket and Catering
This move is going to hurt sellers, but as the article says, what are their better options? With this increase, Amazon is looking to make more money, just as much as it is trying to reduce warehouse costs. The company is squeezed in making money from selling goods, but it is doing well in cloud storage and in handling distribution for other retailers. To keep its soaring stock price high, Amazon will take profits wherever it can.
This is not surprising to me, especially now that Amazon is looking for space for their own highly-profitable private label products to store away. Also now that the businesses are comfortable selling product through Amazon this was inevitable, as the 800 pound gorilla can demand more for their highly-successful joint venture. Some businesses will leave, but Amazon is pretty confident that the remaining ones will more than offset the losses, and they are right.
Price increases will be coming to offset this increase, as the businesses know how powerful of an engine Amazon is to move their products. As Mel Brooks once said, “It’s good to be the King.”
This is a smart move by Amazon. Their algorithms prioritize suppliers who keep their products in their warehouse for FBA, and warehouse space is becoming difficult to manage during the holiday season, so Amazon should continue to raise fees until they discover the best balance of warehouse space costs and FBA charges during the holiday season.
Of course Amazon has to manage its warehouses as efficiently as possible. This ties in with the old way of retailers ordering “inventory” and then figuring out how to get rid of it — getting overanxious and competitive in the process and offering sales before even trying to get reasonable prices.
The new way, which we saw coming from listening to our clients, and giving them the tools, is to use predictive analytics and price optimization. i.e. helping retailers adopt new strategies to maximize data outcomes and optimize revenues. This is what Amazon’s latest move will force retailers to do — which isn’t a bad thing.
RSR Research, in Merchandising 2016: Big Changes Coming, noted the need for retailers to introduce new science, improve their ability to adjust to deviations from sales forecasts, and optimize markdowns to their fullest extent.
Will Amazon see some seller attrition because of this move? Maybe some, for whom it will be too expensive. Does Amazon run a risk by allowing trusted sellers to be part of the Prime shipping program? Not at all, it will probably help the “inventory” problem discussed above and be more efficient.
This is not surprising, though the amount of the increase is higher than expected. While some attrition might be expected, it will be offset, as others have mentioned. It also forces sellers to make smarter inventory choices — it may even save them margins by reducing excess inventory instead of later being forced to drop prices to move excess.
As sales from partner merchants approach 50% of Amazon’s sales, the company must balance third-party margins as well as its own. In this case it seems to have struck a good compromise — it avoids its fulfillment cost shock of last year, encourages sellers to store only the fastest-moving items, and gives enough advance notice for sellers to adapt.
Sellers are likely to make adjustments in the following areas:
Good job Amazon! I think a lot of retailers think they have found a near loophole by sending all their stock in to you guys so that they don’t have to think about their own business storage space, but now that this is going to be implemented, it looks like they are going to have to man up and find their own solutions for all their extra holiday volume. It makes business sense for Amazon, but I think in a way, they need to ensure that this new rule is implemented fairly for the vendors who aren’t purposely exploiting the system too.