Amazon's World Domination Plan

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.

Fool contributor Mehran Mikailizadeh is a member of Motley Fool Stock Advisor and has owned Amazon shares since 1998. Amazon.com and eBay are Motley Fool Stock Advisor recommendations. Wal-Mart Stores is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers pick. Motley Fool Options has recommended a bull call spread position on eBay. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (98)

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  • Report this Comment On February 09, 2010, at 1:58 PM, TMFJoeInvestor wrote:

    Thanks for sharing these unique insights, Mehran. Very informative piece.

  • Report this Comment On February 10, 2010, at 7:11 AM, JohnShort0 wrote:

    A good sign that things are very bleak at eBay... the below Sellers are posting Contact Information (phone numbers, web sites, email addresses) in their feedback left for others, on their item listing/description page and/or within their "eBay My World" page. Ebay refers to these practices as fee circumvention. In other words, if I was interested in purchasing an item from one of the sellers below, I could just contact the seller and we could work out a deal and cut eBay out completely... so the question is... why does eBay allow the below sellers to do so? Also, note longevity, locations of sellers and what they are selling!

    csrtechnologie ( 61482 ) [eBay Store] - 7 years 0 months OH,United States

    thewarstoreonline ( 1033 ) [eBay Store] - 10 years 5 months NY,United States

    buyatool ( 33452 ) [eBay Store] - 7 years 7 months United Kingdom

    skyteam2009 ( 5189 ) - 7 months China

    delightful-uk ( 26517 ) [eBay Store] - 3 years 2 months United Kingdom

    friend_of_ours ( 762 ) [eBay Store] - 3 years 9 months IL,United States

    zkarlo ( 80107 ) [eBay Store] - 12 years 1 month MN,United States

    cellularstream ( 33879) - 1 year 9 months IL,United States

    templates-queen ( 707) - 1 year 6 months NJ,United States

    danna ( 9592) - 12 years 1 month FL,United States

    seller_traffic ( 105) 1 year 7 months MS,United States

    m-na ( 316) - 7 years 4 months Germany

    phantom1976 ( 672) - 10 years 5 months NJ,United States

    mickeyskins ( 3822) 7 years 2 months NE,United States

    read*enjoy ( 3945) 4 years 9 months Netherlands

    I brought read*enjoy (Netherlands) to eBay's attention prior to this report and below is how read*enjoy left "feedback left for others" and note how eBay has NOW changed the feedbacks to "This comment has been removed by eBay". But they missed this one! LOL!:

    Positive feedback rating www.readandenjoy.com would love to see you back again! Buyer: 0512phantasm ( 508 [Feedback score is 500 to 999] ) Oct-30-09 04:08-- (#200395412531)

    And the eBay feedback changes go back to Jul-14-09 and then you can see they resort back to the original feedbacks with contact information!

    This fee circumvention can only be bad news for eBay. And I have a feeling we are going to be seeing more and more of it!

  • Report this Comment On February 10, 2010, at 7:17 AM, JohnShort0 wrote:

    And to the list above, you can add the below Ids which are also giving contact information in their feedback left for others:

    yz4056 ( 22601) 6 years 3 months NJ,United States

    chaparral32 ( 1857) 5 years 11 months MI,United States

    hotmiamistyles ( 73239) 7 years 11 months FL,United States

    templates-queen ( 718) 1 year 6 months NJ,United States

    seller_traffic ( 105) 1 year 7 months MS,United States

    alpha1920 ( 4470) 7 years 6 months Germany

    h-s-l_auktionen ( 2266) 6 years 3 months Germany

    handwerker-online ( 43624) 7 years 9 months Germany

    thewarstoreonline ( 1074) 10 years 5 months NY,United States

    luxurytime ( 1136) 4 years 8 months CA,United States

    collectiveltd ( 5531) 6 years 8 months CA,United States

    Contact Information on Item Page, in the Seller's Logo or Seller's My Ebay Page:

    bookcircus ( 76763) 7 years 6 months AR,United States

    bookcircus.com in Logo

    bookbyte ( 141197) 10 years 11 months

    bookbyte.com in Logo

    skyteam2009 ( 5396) 7 months China

    Email:super0423@hotmail.com - MSN:super0423@hotmail.com

    buyatool ( 33515) 7 years 7 months United Kingdom

    Phone: 0800 3345566

    Fax: 0113 2777232

    Email: sales@buyatool.co.uk

    delightful-uk ( 26752) 3 years 3 months United Kingdom

    NEED HELP CALL 0871 288 3271

    friend_of_ours ( 784) 3 years 9 months IL,United States

    1-800-456-0627

    chicagofurniture05@yahoo.com

    xcceries ( 198866) 8 years 4 months CA,United States

    Please feel free to contact us at xcceries@yescomusa.com at bottom of item page. Well, if xcceries is

    xcceries@yescomusa.com, then the "Feedback as Buyer" below, left by yescomusa, proves SHILL-BIDDING between the two Ids!!!

    INSTANT PAYMENT~~Great Buyer! Excellent Transaction, Thanks! yescomusa ( 157515) Feb-10-06 16:21

    -- (#5864330937) --

    voitgolf ( 11308) 7 years 11 months CA,United States (NAMECHANGE - confidencegolf Sep-19-02 Jan-21-10) <--- FLAG!

    Looks to be positioning to start up biz again, M.I.A. since May-07-08! LOL!

    .... to be continued

  • Report this Comment On February 10, 2010, at 10:52 PM, azmfool wrote:

    JohnShort0 - Why go to this length for a purpose that is off topic from the article?

  • Report this Comment On February 12, 2010, at 12:22 PM, TMFBoiseKen wrote:

    Mehran,

    I wonder if the "check-mate" portion of your article is a bit off.

    If amazon runs all of its 3rd party merchants out of business it looses: A) Access to all of the wonderful data that they generate, B) the ability to collect fees from all of their sales, essentially acting as a e-commerce toll road. This fee collecting business is a big deal -- it allows amazon to make money without all of the risk of carrying loads of inventory (or collecting increasing fees from fba merchant inventory).

    If amazon runs 3p merchants into the ditch, then everybody loses.

    Nice article & analysis.

  • Report this Comment On February 12, 2010, at 9:13 PM, swapusa wrote:

    Remember that Amazon is first and foremost a retailer and its intention from day one has been to sell everything under the sun. Their initial plan was to have hge warehouses all over the country and carry everything themselves but that didn't pan out. Now 3rd party merchants are helping Amazon achieve that goal.

    You would think they should be happy with letting 3rd party merchants take the risks and they just collect the higher profit margin commissions that are as high as 20% depending on the catelgory of merchandise. But my day to day experience with Amazon is showing otherwise. Amazon Direct Retail is competing ruthlessly with their own 3rd party merchants, even if they loose money on the sale. It is as if the 2 divisions within Amazon are at war with each other and their orders are to win at any price and keep the buy box. Of course, Amazon Retail has the upper hand since they do not pay the commissions that 3P merchants do so they can keep dropping the price and keep the Buy box to themselves and that is what they are doing regularly.

    At first, this strategy may not make sense to everyone as you suggest. Why would they bite the hand that feeds them? But, if their long term strategy is to sell everything direct and keep all the profits to themselves, plus control all aspects of product quality and customer service, then the strategy makes more sense. If Amazon wants to grow volumes big enough to be able to become as big as Wal-Mart, then it has to grown its direct retail volume many folds so it can negotiate better deals with its suppliers and vendors.

    Is it the right strategy? I am not sure. The 3rd party merchants offer Amazon a tremendous wealth of information and product knowledge that Amazon managers can never learn by themselves. But I will never bet against Jeff Bezos.

  • Report this Comment On February 15, 2010, at 3:20 AM, militauro wrote:

    I enjoyed this article Mehran, it was pretty sadistic in a way and I like it.

    @BoiseKen, the day they run their opponent into the ground, they won't need anymore data. For example, if Amazon had never gone into the video game market, they might have generated that info from a third party. If they are now a video game selling powerhouse, they no longer need to know whether video games are hot, they already have them.

    I would agree with Mehran's point of view that it's an Amazon checkmate. However, Amazon's piece of the pie is so big, that the pieces leftover are more than enough for the 3P merchants. Also keep in mind that this only increases Amazon's edge, I think (correct me if I'm wrong) that even if Amazon sells the product, it still allows the user to purchase it from their third party sellers.

    The only way this is a bad idea is if the margins between receiving these fees from 3P merchants is greater than what they receive by selling on their own.

    Liked this read today, I was just ranting on Twitter about how much I love Amazon. They're good.

  • Report this Comment On February 15, 2010, at 8:53 AM, peopleknievel wrote:

    Interesting insight.

    Does this signal a move towards making a "commodity" of logistics? If so - then this is a model of 2 distinct parts:

    1. Fulfillment - taking said order, billing, shipping

    2. Eyeballs / marketing - driven by what consumers want/search for

    If Amazon dominates part 1, if that is there business, then they will be forever under a shrinking margin.

    Theory #1: The margins for fulfillment will shrink as operating a warehouse and cash register do not have inherent buffer/moat. the model of opening warehouse, tagging product, servicing and selling can be easily repeated. their dominance will be challenged (like googles algorithms) eventually.

    Theory #2: we get back to eyeballs/marketing / product development / Content. This is what drives searches and online "consumer" vs "social" activities... These are the players who can control their own margins and chase products that can be protected...

    thoughts, responses?

    cheers-

  • Report this Comment On February 15, 2010, at 9:32 PM, swapusa wrote:

    TyrantBone,

    I agree that Amazon's piece of the pie is very large and the 3P merchants like us can feed off the crums and leftovers for years, but as we keep loosing our best selling products to Amazon Retail, our margins shrink and we constantly have to scramble and find new products to sell, feeding more new data to Amazon. It will take years but eventually we are all out. Of course, something else may come along for us merchants like when Google advertising came along and cut us all loose from eBay.

    And yes, even if Amazon sells the products and owns the Buy Box due to lower price, it still allows buyers to buy the same item from 3P merchants. But the merchant who owns the Buy Box gets over 99% sales with an occasional sale going to the 3P merchants who do not own the Buy Box. If Amazon is competing for the Buy Box with other 3P merhcants, chances are they own it.

    Mehran

  • Report this Comment On February 15, 2010, at 9:47 PM, swapusa wrote:

    TyrantBone,

    One more thing. You wrote: "The only way this is a bad idea is if the margins between receiving these fees from 3P merchants is greater than what they receive by selling on their own. "

    It is a bad idea for me and you and the analysts who are covering the stock and want to see higher margins. But is it really a bad idea for Amazon in the long term? Amazon wants to grow its customer base at any cost to gain more and more market share faster than others. To achieve this, Amazon has shown to be more than willing to sacrifice short term margins and gain as clearly seen in their previous marketing campaings like Free Super Saver Shipping for orders of $25 or more, or Amaozn Prime, or even losing $2 on every Kindle best seller eBook sold at $9.99. Most retailers do not operate like that but Amazon has been operating in such fashion from day one. In my selling experience and going head to head with Amazon Retail on more than a few occassions, I have clearly seen their willingness to drop prices to ridiculous levels where their own margins were clearly below the margin that they get if they let me sell the same item. On very rare occassions they have given up but not before they forced a much lower price on me to the direct benefit of their customers.

  • Report this Comment On February 16, 2010, at 2:55 PM, InfinityKDollars wrote:

    In a nutshell, eBay took on Amazon, and Amazon ate eBay's lunch. According to internet retail market studies, Amazon experienced a growth in sales last year, while eBay showed a decline in sales and traffic compared to the year before. So, if you are an eBay seller who is barely hanging on by your fingernails, take heart! There are other websites out there that are not only seller friendly but much cheaper than eBay, and your buyers will follow you.

    Amazon is a great alternative to eBay for many sellers! Basically, it depends on the type of thing you sell. If you are a seller of vintage and collectible clothing and/or textiles, then Amazon won't be a good fit for you because they don't have a category for these types of items.

    But, if you are drop shipping or reselling books, electronics, music or any one of a number of other products, you can leave eBay and find a new and happier home on Amazon! Since Amazon grew in traffic and sales last year while eBay declined, you will have more traffic and potential buyers on Amazon than eBay.

    Plus, you'll find the fee structure and policies for sellers on Amazon a breath of fresh air! Besides being considerably cheaper on fees, which means more profitable for you, Amazon is extremely seller friendly.

    ----------------------

    www.intelligentinvestingtips.com

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