I want to share an insight from a fascinating recent analysis that sought to solve some of Amazon.com Inc.’s mysteries.
The analysis by James Lee and Wei Fang of Mizuho Securities crunched reams of data on the volume of products available for purchase on Amazon and came up with some surprises. The biggest was that Amazon relies on outside companies to provide 90 percent of the SKUs, or individual items, for sale in its virtual mega-mall. And those merchants may have a reason to think they’re getting the short end of the stick.
Before I go further, let me get into the weeds of how Amazon works. Many shoppers may not notice that when they click to buy bed sheets or running shoes from Amazon, those goods often aren’t sold directly by the e-commerce giant but rather by merchants using Amazon as a sales conduit.
What Amazon calls its “marketplace” operation is a complicated feat of branding and logistics. For example, these Ralph Lauren sheets are sold on Amazon.com by an entity called “Breathoffreshsale” that describes itself as a local business in California and is selling many dozens of items from Lego toys to Nike-branded golf gloves.
Adding to the complexity, Breathoffreshsale appears to participate in a program called Fulfillment by Amazon, which means when a customer orders those Ralph Lauren bed sheets, an Amazon worker plucks the product from the shelves of an Amazon warehouse, packs it in a box and sends it off for home delivery. Breathoffreshsale might never interact with the Amazon shopper.
These sellers are a linchpin of the e-commerce giant’s success. They give Amazon a huge array of merchandise options that it couldn’t provide on its own, and Amazon’s commission of at least 15 percent on those merchants’ sales adds up to a fast-growing and high-margin gold mine. Last year, Amazon’s revenue from commissions, fees and services provided to third-party sellers jumped 39 percent, much faster than the 18.5 percent revenue growth from goods Amazon sold itself.
Remember, the Mizuho analysis found that marketplace sellers account for about 90 percent of the items available to buy on the e-commerce site; Amazon says about half of unit sales come from these independent merchants. They’re supplying almost all the inventory and getting half the action. If I were one of those merchants, I would think that’s an unfair gap and wonder what more Amazon could do to drive my sales.
One answer lies in Amazon’s powerful logistics operations. The Mizuho analysis found that in the U.S., only about 6 percent of items from marketplace vendors are part of the Fulfillment by Amazon program. And merchants often need to have their inventory in Amazon warehouses to be eligible for Prime, the annual subscription that offers free fast shipping.
The company has been doing more to get third-party products into Prime, and that should help both sides. Amazon shoppers buy more stuff when they know they can get it in two days, so being eligible for Prime usually boost sales. Amazon also charges an additional commission on Fulfillment by Amazon merchants. That’s a potential win-win.
To keep up its remarkable pace of revenue growth, Amazon needs to keep its merchants happy and selling. Mizuho’s analysis shows the company can and likely will do more to spur higher sales from this diverse gaggle of Amazon sellers.
A version of this column originally appeared in Bloomberg’s Fully Charged technology newsletter. You can sign up here.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.
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