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Amazon.com (Nasdaq: AMZN ) recently reported fourth-quarter financials, and its numbers were nothing short of spectacular. Net income was up a whopping 71%. Year-over-year sales rose 42%, compared to expectations for 25% growth. Media sales grew 29%, while sales in other departments grew as quickly as 60%. Clearly, non-media sales are Amazon's real growth driver, not only from the site's direct retail efforts, but also more and more from its third-party merchants.
I am one of Amazon's third-party (or 3P) merchants, selling products primarily in Amazon's Sports, Toys & Games, and Home stores. Based on Amazon's emails, we're probably one of the largest 3P merchants in its Sports store.
We started on Amazon back in 2004, after a phone call from an Amazon Sports store manager. Back then, we primarily sold our products through our own websites, and by driving traffic to our shops with Google (Nasdaq: GOOG ) ads. We were also an eBay (Nasdaq: EBAY ) PowerSeller going back to 1998. But like thousands of other unhappy sellers who left eBay for other channels, our eBay sales were close to zero when we joined Amazon -- and we haven't looked back since.
The Amazon difference
Unlike eBay, Amazon not only goes to great lengths to keep its customers happy, but also treats its 3P merchants as partners. It provides all the necessary tools and support to make us successful -- since our fortunes are clearly tied together.
Six years later, our sales on Amazon have been on a steady rise, with the fastest growth coming in 2009. Looking at our own data, I can clearly attribute our accelerated 2009 growth to Fulfillment by Amazon, or FBA. With FBA, we ship our merchandise in bulk to Amazon's warehouses, and Amazon sells, packs, and ships the orders, and pays us after deducting its cut, shipping costs, and small warehousing fees.
We set prices, but Amazon handles customer service and returns. So far, that's not much different than if we fulfilled the orders directly. But with FBA, most of our products become eligible for Amazon's free shipping or its Prime service. That's the real differentiator that helps sell FBA items faster than non-FBA offerings. In my experience, sales of an item in FBA can be higher by 1,000% or more, compared to the sales of the same item fulfilled by us.
The power of the brand
Surely, FBA's free shipping is the biggest factor in increased sales. But with FBA, Amazon takes away control of customer service from its 3P merchants -- and that is probably another important factor in the long term. Customers simply trust Amazon more than us, and they look for items that are fulfilled by Amazon, even if they cost a bit more. This is difficult to duplicate for Amazon's competitors -- like eBay, with its hands-off approach, and other mass merchants who are trying to go head-to-head with Amazon. Wal-Mart (NYSE: WMT ) and Sears (NYSE: SHLD ) started 3P merchant programs last summer, but unless they put in place Amazonian-like fulfillment services with free shipping and generous customer service policies, they have no hope of competing with Amazon.
Amazon's brand is so powerful that even companies that were once big competitors to Amazon have thrown in the towel and joined it. A good example is Buy.com, the large online retailer from the dot-com bubble period that was once considered a threat to Amazon's dominance. As recently as one year ago, Buy.com was engaging in price wars with Amazon, and heavily pushing its own third-party merchant program. But Buy.com is now a 3P Amazon merchant, and looking at its seller feedback, it appears that it joined Amazon just about three months ago (almost all of its 38,000 reviews were posted in the last 90 days).
Too little, too late
From my experience, only about 4% of buyers leave feedback, so I estimate that Buy.com has received more than 900,000 orders in the last 90 days on Amazon. No wonder Buy.com had the best Black Friday and Cyber Monday in its history this past holiday season! And Buy.com has also added Checkout by Amazon on its own site. When even competitors as large as Buy.com join Amazon, it's easy to understand why giants like Wal-Mart and Sears are scrambling to offer me-too versions of its third-party merchant offering. I wonder when other large competitors like Overstock.com (Nasdaq: OSTK ) will accept the inevitable and join the ranks of Amazon 3P merchants. It shouldn't be long!
Of course, the genius of Amazon's 3P merchant program doesn't end there. The grandmaster of this online retail chess game has bigger plans that are quite dangerous to small 3P merchants like us, and even larger sites like Buy.com. Amazon Retail (the division responsible for all items owned and sold directly by Amazon) and FBA (the division that deals with 3P merchants) are separate and competing divisions, and it is not a fair competition.
How they compete
The FBA division and all its stores and department managers are responsible for signing up as many 3P merchants as they can, and getting them to ship as much inventory as they can to Amazon FBA warehouses. Then they have to ensure that everything runs smoothly, ensure that these third-party merchants preserve the shopping experience that customers of Amazon are accustomed to, and weed out the bad apples -- sellers that do not meet Amazon's stringent customer satisfaction requirements.
Amazon Retail managers and buyers have full access to all the data generated by 3P merchants. They know what we sell, who the manufacturers are, for how much and how fast we sell them, and what products consumers are happy with. Armed with all this data, Amazon Retail can cherry-pick the best-selling items and procure them directly from the manufacturers to compete with its own 3P merchants. I've seen this happening in store after store and category after category, where top-selling products once sold by others are now taken over by Amazon Retail.
World (retail) domination
I'm sure other retailers would kill for this kind of information. Do sellers like us have a choice? Can we simply leave Amazon when more than 50% of our revenue depends on it? For me, it's like playing a chess game in which I can see many moves ahead ... and the game ends in my checkmate. There's no way out, and all I can do is to continue playing until the end. Amazon's retail world domination game is in full swing, and the third-party merchants are simply small pawns in the battlefield.