Amazon’s Shifting Retail Strategy

|

An interesting article from our colleagues at Music Trades magazine in the Unites States – is the online giant forcing smaller vendors to sell exclusively on its Marketplace to improve profits?

Amazon has stopped buying directly from thousands of small companies, pushing them instead to use third parties to sell on the Amazon Marketplace, according to a flurry of recent news reports. Vendors that generate less than $10 million in annual sales will supposedly no longer be receiving wholesale orders directly from Amazon. The new strategy could impact the dozens of music products suppliers that sell to Amazon, given that most would fail to make the $10 million cut.

Several financial analysts who follow Amazon say that cutting out smaller vendors reflects management’s push to improve profitability as sales growth begins to slow. Amazon’s Marketplace sales, which account for approximately 60% of the transactions on its website, contribute more to the bottom line than the sale of Amazon-owned inventory: a 10% to 15% commission, depending on the product, versus a 2% net margin. In addition, with Marketplace sales, Amazon avoids the risk of getting stuck with unsold inventory, and the overhead associated with forecasting and purchasing. Some analysts say that by focusing its retail efforts on major brands like Nike, Procter & Gamble, and Lego, while ramping up the Marketplace, Amazon could double its net.

Amazon management, which is notoriously tight-lipped, has pushed back against the reports. A formal statement said, “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.”

The experience of music products suppliers to date tends to confirm Amazon’s official position. Seven prominent industry suppliers, speaking off the record, said that as of June 1, they were continuing to receive routine purchase orders from the online giant, and had assurances that no terminations were imminent. However, one vendor reported that Amazon would not honour any price increases related to potential 25% tariffs on Chinese goods unless the supplier had a rigorously enforced MAP policy. He added, “If the tariffs go through and Amazon won’t let us raise prices, we’ll have no choice but to stop selling to them.”

Another vendor said being forced on to the Marketplace “wouldn’t necessarily be a bad thing, as long as your listing still qualifies for ‘Prime,’” Amazon’s free shipping service. He explained, “You have some control of pricing when you’re dealing with third party sellers. With Amazon you have no control. But having Prime is the difference between selling a lot and selling virtually nothing.”

There is an overriding concern that forcing suppliers on to the Marketplace could exacerbate problems with counterfeit merchandise. Although Amazon attempts to keep its site free of counterfeits, or products that infringe on trademarks or patents, their efforts are not entirely successful, and on any given day there are third-party sellers offering products of questionable legitimacy. “I don’t know how you police this, especially since their music division has such thin staffing,” said one vendor. “But it’s worrisome.”

www.musictrades.com