Why is Amazon paying full-price for third-party inventory?

Discussion
Source: Amazon Fulfillment Services
Jul 24, 2017
Tom Ryan

Apparently sacrificing margin aspirations, Amazon.com is reportedly paying full price to third-party sellers to expand its inventory.

According to a CNBC report, Amazon has reached out to thousands of third-party sellers participating in its Fulfillment by Amazon (FBA) program to purchase their inventory at regular price. Under the fast-expanding FBA program, third-party sellers pay a fee to have their inventory stored and shipped by Amazon.

“For a limited time, there will be no additional fees, and we will purchase inventory from you at your local marketplace offer price,” Amazon stated in its e-mail to third-party sellers.

A spokesperson told CNBC, “When items are unavailable in a particular geography, we provide customers with selection from another marketplace. This offers customers a wider selection of great brands and helps sellers increase sales.”

Amazon last November rolled out a similar program called “Simplify Global Selling” in Europe.

Some reports noted that although Amazon may make no margin on the sale, it is earning a fee from the sellers in its FBA program and may make some money on shipping. Writing for Ars Technica, Valentina Palladino said gaining larger inventory access helps Amazon ship more efficiently. She wrote, “Even if Amazon doesn’t make a ton of money from sales coming from this program, easier shipping processes lead to faster shipping and delivery schedules, which keep customers happy and shopping on Amazon.”

The program may also provide access to brands that refuse to sell on Amazon’s platform. Many retailers of Birkenstock who are not authorized to resell on Amazon received the e-mail and the comfy shoe leader has vowed to crack down on any resultant unauthorized sales.

DISCUSSION QUESTIONS: Do you see Amazon’s third-party seller purchases as a short- or long-term solution to managing inventory shortages? Is it a “win-win” for Amazon and its third-party sellers?

Braintrust
"Amazon has always been about the long tail. Increasing that tail means they keep the juggernaut well-oiled even if they only make a margin on delivery"
"Anyone who still persists in believing that Amazon is about lowest price is way behind the times. Amazon is about convenience..."
"The answer to stealing share is breadth of choice. Margins will follow the brand. Not vice versa."

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16 Comments on "Why is Amazon paying full-price for third-party inventory?"


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Max Goldberg
BrainTrust

This program is a win for Amazon, which can draw from other sources when its own inventories run low. And it’s a win for sellers, who see product movement and profit, if only in the short term. Finally, it’s a win for consumers, who will find fewer out-of-stock situations at Amazon.

Sunny Kumar
BrainTrust

Amazon has always been about the long tail. Increasing that tail means they keep the juggernaut well-oiled even if they only make a margin on delivery. Expanding their reach and adding robustness (alternative sellers) to the supply of the tail should only help.

Doug Garnett
BrainTrust
Doug Garnett
President, Protonik
9 months 1 day ago

I’m guessing this is a stop-gap measure — especially as I’ve been hearing stories for a couple of years about Amazon pushing sellers out of Amazon fulfillment, trying to foist costs and storage back onto the manufacturer and even trying to beat down supplier prices.

We always need consider Amazon PR like a magician. Every time they tell us to look at the left hand, we should look at the right — in other words ask “what aren’t they saying here that is what we really should be paying attention to?” Unfortunately with this news the answer to that question isn’t clear … yet.

Ed Dunn
Guest
9 months 1 day ago

Amazon has a history of cannibalizing their third-party sellers. This is not a long-term win for third-party sellers as Amazon will look, long-term, to sell the popular product directly and work with the manufacturer/distributor to push the third-party seller out of the marketplace. With that said, third-party sellers should charge Amazon more to be used as a short-term resupply point.

Tom Dougherty
BrainTrust

Smart of Amazon. It is the direct route to monopolizing sales. Be willing to sacrifice margins to increase over-all sales. What is the definition of failure in the vocabulary of Amazon? Low margins or product availability? The answer to stealing share is breadth of choice. Margins will follow the brand. Not vice versa.

Nikki Baird
BrainTrust
Nikki Baird
VP of Retail Innovation, Aptos
9 months 1 day ago

Anyone who still persists in believing that Amazon is about lowest price is way behind the times. Amazon is about convenience — that’s what Dash buttons and Alexa voice ordering is all about. And Amazon is about ensuring that they remain, if not grow, their mindshare capture as the “Google of products.” If they have to buy products at full price from their marketplace sellers in order to ensure they’re meeting those two objectives, which ultimately translates into “guaranteed place to find what you’re looking for,” I would consider that merely a marketing investment on their part, and well worth the ROI.

Jan Rogers Kniffen
Guest
9 months 1 day ago

Amazon is reacting to inroads by Walmart with third-party sellers. So if you are Amazon you cut your third-party sellers (who generally hate you but feel like they have to use you) a better deal to keep them away from your number one competitor.

Mohamed Amer
BrainTrust

Key words for Amazon are speed and convenience. Inventory availability translates to happier customers and elevates the trust factor for the Amazon brand. It’s not an on/off button, but a continuum of options for the business. Quite simply, I view the move as just another arrow in the Amazon quiver.

Dan Raftery
BrainTrust

The set-up and question here makes it sound like Amazon sent this email to all 3P sellers, which would be very surprising. It does make sense, however, for Amazon to increase control over more inventory. My guess is the targeted suppliers have products that have reached “the fly-wheel” level of sales and may not be fulfilling quickly enough.

gordon arnold
Guest
The sales opportunities resulting from geographic limitations and/or production availability can produce profits at acceptable levels simply by shipping FOB shipping origin. The problem was and remains for consumers and vendors to find one another when the need is at hand. Amazon’s ability to bring consumers a platform to find rate and select for their needs is of great value to 21st century retail. They are and may remain as the most recognized search site for product and service. Amazon’s willingness to profit from the shipping charges will need to be selective and monitored closely to keep away from more red ink. The amazing deal they have with USPS and other carriers might be the reason we are seeing expansion into this opportunity. Owning the generous shipping discounts they are getting must have several strings attached, like volume and package configuration. So now they must sell shipping to meet the demands that Amazon Prime has most likely placed on the business with the short sells against forecast. The imaginative demands for their crusade to find… Read more »
Jett McCandless
BrainTrust

Amazon is very aware of the customer reaction to things like stock outs and increased shipping times. They would much rather pay a little extra for inventory and keep customers coming back for more than wait for lower bulk costs and lose customers to other sellers. Obviously, third-parties love this since they’re making more money, but it’s good for Amazon as well. Amazon has always been a company that looks further down the road than quarterly financials, and it’s working out incredibly well for them.

Min-Jee Hwang
BrainTrust

When inventory shortages occur, customer satisfaction and loyalty can be hindered. Although Amazon may make no margin on the sale, the program is a win for Amazon to avoid inventory shortages while maintaining high customer satisfaction. It is also a win for third-party sellers who will be compensated at full price.

Shep Hyken
BrainTrust

This is an interesting concept. I’ve preached to my retail clients for years that if you are out of stock and can help the customer find the merch elsewhere, even from a competitor, do it. The customer will realize you are more interested in helping them than making the sale, which will pay off in the future.

Amazon appears to be doing the same — making an effort to take care of a customers request, even if it means they don’t make money on that particular transaction. Someone once said, “Don’t chase the sale. Chase the customer.”

Anurag Rohatgi
Guest
9 months 15 hours ago

Amazon will do anything to maintain their leadership position and to not lose even a single customer to its competitor. There is a reason bigger than two day free shipping why customers are signing up for Prime membership in droves. Amazon.com has become synonymous to everything in store and stock outs don’t happen in this magical place.

Kiri Masters
BrainTrust

Amazon is aggressively expanding to international markets (Australia and South Korea recently having been put on the map), and needs to shore up its product assortment in order to launch and thrive in these markets. Purchasing inventory at full price is a guaranteed way of delivering on their brand value of selection.

Jackie Breen
BrainTrust

It’s very important to understand that Amazon focuses on customer satisfaction, not on being a low price leader. Paying full price for this inventory will allow them to provide a better customer experience. As of now, this is a win for Amazon, the customer and third party sellers. However, I imagine this will be a short-term “win” for third-party sellers, which will just force retailers to up their game in their overarching digital strategy when it comes to selling online across their own channels.

wpDiscuz
Braintrust
"Amazon has always been about the long tail. Increasing that tail means they keep the juggernaut well-oiled even if they only make a margin on delivery"
"Anyone who still persists in believing that Amazon is about lowest price is way behind the times. Amazon is about convenience..."
"The answer to stealing share is breadth of choice. Margins will follow the brand. Not vice versa."

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