Amazon to set small suppliers adrift

Discussion
Source: Amazon.com
May 29, 2019
George Anderson

For more than a decade, Amazon.com has publicly pronounced that it is not a destroyer of small businesses but a creator of growth opportunities for those that take advantage of the reach offered by its platform. Fifty-three percent of Amazon’s online sales are made by third parties, after all, and nearly three quarters of those selling directly to consumers on the site have between one and five employees. Many other small businesses sell products on a wholesale basis to Amazon. And so goes the rationalization that Amazon is small business friendly.

New reporting by Bloomberg, however, suggests Amazon may soon seem a less hospitable place for small third-party sellers as the e-tailer cozies up to larger retailers (Best Buy, Chico’s, Party City, etc.) and consumer brands such as Nike choose the path of coopetition to drive greater direct sales to consumers. Amazon is also shifting its percentage of products sourced from small suppliers to larger entities such as LEGO, Procter & Gamble and Sony as it focuses on competing directly with rivals selling popular name brand goods.

Small businesses that had sold products in bulk to Amazon will have to make a shift in coming months as they work under new vendor relationships that require them to sell items to shoppers one customer at a time. While there is still a possibility that Amazon will pull the plug on the plan, it appears to be full speed ahead at this point in time, according to three unnamed sources familiar with the matter who were cited in Bloomberg’s reporting.

Amazon’s approach seems to mirror other retailers that have sought to optimize SKU productivity by limiting the number of choices available in select categories where the 80/20 rule (eighty percent of sales are generated by 20 percent of products) may apply.

While not an exact parallel because Amazon is the final distributor in this case, the e-tailer’s decision to expand direct relationships with large national suppliers is reminiscent of the approach that many consumer packaged goods manufacturers took with Walmart in the nineties. The rationale many executives expressed at the time, typically off-the-record, was that selling directly to Walmart rather than going through grocery wholesalers or directly to small supermarket chains enabled them to meet or exceed current volume levels at a much lower cost because of a reduction in distribution points. Walmart benefited as well, by becoming the distributor of choice and realizing savings on the cost of goods that came with steadily increasing shipments.

EDITOR’S UPDATE – May 30, 2019: Amazon.com issued the following statement in response to Bloomberg’s report that the e-tail giant was planning to cut loose many of its small wholesale suppliers: “We informed Bloomberg prior to publication of their article that their story and sources are wrong. We review our selling partner relationships on an individual basis as part of our normal course of business, and any speculation of a large scale reduction of vendors is incorrect. Like any business, we make changes when we see an opportunity to provide customers with improved selection, value, and convenience, and we do this thoughtfully and considerately on a case-by-case basis.”

DISCUSSION QUESTIONS: Will Amazon’s apparent decision to reduce the wholesale business it is doing with small vendors have an impact on its performance? What will the reality of the plan, if enacted, mean for the vendors who no longer sell to Amazon in bulk?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Now the question is who will emerge as the new champion of the smallest sellers? Etsy? Pinterest? Facebook?"
"I don’t buy that Amazon will reduce their assortment. Part of their whole value proposition is the endless aisle."
"Brands should be taking advantage of the 3P marketplace and selling directly to the consumer. It gives them more control over their brand."

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14 Comments on "Amazon to set small suppliers adrift"


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Art Suriano
BrainTrust

I see little impact on Amazon with this change, but there could be serious issues for the small third-party vendors. Unfortunately, the phrase “it’s not personal, it’s business” applies here because companies today are not just interested in making a profit, they’re determined to make as much money as possible without concern for whom they harm along the way. Focusing on the 20 percent of products that cover 80 percent of their sales makes sense, and that is just smart business. If a small third-party vendor can’t adapt to the new program selling to one customer at a time, they’ll have to look for business elsewhere and leave Amazon. Amazon, however, won’t even feel a bump because there are so many other vendors out there ready to take their place. Today big isn’t big enough; companies aspire to be huge and to be the biggest. That has always been Amazon’s plan, and nothing so far has been able to stop them.

Chris Petersen, PhD.
BrainTrust

The long tail works very well with digital products. It gets very expensive when the retailer has to hold inventory for large quantities of physical SKUs with low volume. Marketplace strategies of Amazon and other large retailers is all about assortment breadth with SKU rationalization and productivity. We have now entered an age where consumers are saying there is “too much choice.” One quick way to cut costs is to cut back on the wholesale business where Amazon incurs more of the sell-through costs when it buys in bulk. Retail is always a balancing act. This is a pendulum swing where data will be essential in finding the right balance for Amazon and other e-tailers.

Neil Saunders
BrainTrust

Amazon does need to undertake some consolidation. The amount of choice, while a core part of what Amazon has to offer, is bewildering and confusing. There are now so many different suppliers – often with the same product – that shopping on Amazon has become more of a chore. Amazon’s reach may be a great benefit for small suppliers, but having so many providers on one platform is an increasing issue for Amazon. This is a circle that needs to be squared.

Ben Ball
BrainTrust

An internet-era lesson in the fundamental drivers of business. The virtual shelf provided a huge cost reduction to offering broader assortment of “long tail” products. Amazon perfected it and has wrung more efficiency out of it than any other e-tailer. Yet the reality of increased costs outweighing the sales benefit of the longest portion of the long tail still catches up to Amazon eventually. Now the question is who will emerge as the new champion of the smallest sellers? Etsy? Pinterest? Facebook?

Paula Rosenblum
BrainTrust

I suppose this is mostly Amazon’s quest to move into retail profitability. by reducing its shipping costs – which remain, in my opinion its biggest barrier – the breadth of its product assortment.

It’s not going to help Amazon in the eyes of those who believe its tactics are monopolistic, however. The drumbeat will get louder as we head into 2020.

I get why the company is doing it … but it is still very bad timing. Watch Amazon become a real conversation piece in the 2020 elections.

Richard J. George, Ph.D.
BrainTrust

Today, the majority of consumers (52 percent) start their online shopping search on Amazon rather than search engines like Google. Part of this search behavior emanates from the consumer perception that “Amazon has everything.” While one can understand the cost savings with a more focused logistics approach; this needs to be compared to the potential impact on customers, specifically to those customers who will turn to other online marketers who can better fulfill their complete shopping needs. If enacted, there is no doubt that small vendors will be negatively impacted.

Phil Masiello
BrainTrust
Let’s not misinterpret this. There is the vendor relationship (1P) where these companies were selling a product to Amazon and Amazon was the seller to the consumer. Then there is the seller relationship (3P) where the companies list their own products on Amazon and the brand is the actual seller to the consumer. What Amazon is doing is reducing the 1P side and allowing these companies to sell on the 3P side. So the brands can still sell, just not to Amazon, but directly to the consumer. It is actually better for the brands as they have more control over pricing, brand messaging and the consumer experience. The other side to this is the elimination of some less than stellar sellers who have been gaming the system and causing brand damage to larger brands. So brands like Nike, P&G brands and others become “gated.” Whereby only certain sellers are allowed to sell them. This reduces counterfeit products, unethical sellers and poor performers. Brands should be taking advantage of the 3P marketplace and selling directly to… Read more »
LAURA RAMIREZ
Guest

Co-signed. And as someone who offers both consulting and SAM services to small and mid-tier vendors, I see this as good news. Not necessarily because I will benefit from potentially garnering more clients, rather that managing the ownership of one’s brand is and always has been my imperative for the past 20 years.

Ken Lonyai
BrainTrust

The real lesson here is for all the Amazon fanboy pundits. They’ve believed everyone should capitulate and hitch themselves to Amazon’s wagon because not doing so would spell doom. This is yet another data point that Amazon is out for Amazon only and any olive branch it seems to extend to others is only fleeting until Amazon chooses to turn on them. One day it will happen to those who think they are too big for Amazon to do them the same way.

Kiri Masters
BrainTrust

I don’t buy that Amazon will reduce their assortment. Part of their whole value proposition is the endless aisle. Amazon is able to manage this, at near-zero cost, because of their marketplace system (Seller Central).

This is why there’s a rumored “purge” of merchants from Amazon’s legacy wholesale system, to push these smaller merchants to the self-serve marketplace.

Amazon placed a high value on selection. They’ll achieve that goal through any means necessary: inventory sourced directly from brands, partnerships with retailers, and a bottomless supply of third-party merchants who essentially sell inventory on consignment.

Liz Adamson
BrainTrust

There have been indications for some time that Amazon would cut its smaller suppliers loose and migrate them to their direct-to-consumer platform. While it will be a shift for these small businesses, it does not spell disaster for them. Amazon’s Seller Central platform and FBA platform make it possible for small businesses to continue to ship in their inventory to Amazon’s fulfillment centers putting Amazon in charge of all order fulfillment. The largest shift will be having to take on inventory planning and forecasting for the channel. There is no reason for Amazon’s small vendors to panic, but they should start planning for the transition to Amazon’s 3P model.

Steve Montgomery
BrainTrust

Amazon and I assume to a lesser extent the small retailers, understood the relationship going in. Each party gained something. Amazon got a wider variety of products and the retailer access to more customers and a lower cost of getting their products to them. Amazon has realized that while its smaller retailers need it, it no longer needs all of them in the same way.

As Phil indicates, they can still do business through Amazon but have to assume a greater role in the sales process. This too may have benefits for both. Amazon reduces its inventory carry and shipping cost and the retailer established a direct relationship with its customers.

Lisa Goller
Guest

On its surface, this move by Amazon seems to disregard emerging consumer trends. For instance, the launch of Amazon Handmade ahead of Thanksgiving 2017 championed small businesses because “Small is Big,” and more consumers demand local, authentic, unique and artisan goods.

That said, Amazon has always been about efficiency.

In contrast to small suppliers, national brands offer higher sales volumes and sophisticated supply chains (and data), which can increase productivity and market insights, and decrease costs and the amount of inventory held by the e-commerce giant.

Going direct-to-consumer will create distribution issues for small suppliers; however, they may have already found it challenging to stand out in the crowded online marketplace of The Everything Store.

Amazon knows its numbers, so the data must point to collaborating with bigger brands to sustain a bigger payoff over the long term.

Michael Dudley
Guest
18 days 17 hours ago

Manufacturers, brands, their lawyers and agents barrage Amazon every day with TM, IP, copyright and patent claims. 99% of these are false or frivolous and filed to control pricing and distribution by 3p sellers. Amazon is now saying to them. “You don’t want to see 3rd party sellers selling your products on the platform?” “Ok, here you go, seller central, brand registry, transparency codes and project zero.” “Run it yourself because your supply chain leaks are at the core of the problem.”

Brands divert, then have sellers remorse and Amazon is tired of it. Plus a few other things mentioned are partially correct.

wpDiscuz
Braintrust
"Now the question is who will emerge as the new champion of the smallest sellers? Etsy? Pinterest? Facebook?"
"I don’t buy that Amazon will reduce their assortment. Part of their whole value proposition is the endless aisle."
"Brands should be taking advantage of the 3P marketplace and selling directly to the consumer. It gives them more control over their brand."

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