There's never been a company like Amazon.com, Inc. (AMZN +3.47%) before. It has already become the second-biggest American retailer, with $136 billion in revenue last year. With a growth rate above 20%, that figure is likely to top $160 billion and shows no signs of slowing down, especially with its recent acquisition of Whole Foods Market, Inc., which will add $15 billion in revenue to Amazon's total and give it a platform of more than 400 stores with which to break into groceries.
Investors clearly recognize Amazon's market power. Even with slim profits, it's become one of the most valuable companies in the world. But the $136 billion in revenue does not adequately measure its impact on the global retail market. Instead, investors would be better off considering its gross merchandise volume, or the dollar value of all the items sold through Amazon, which include third-party sales on its website.
Image source: Amazon.
The power of the marketplace
Amazon does not provide its total gross merchandise volume, but it does share the fees it collects from third-party sellers. In 2016, revenue from that group, which includes commissions, fulfillment and shipping fees, and other seller services, was $23 billion, nearly double its 2014 total at $11.7 billion.
The marketplace, or the part of Amazon's website that's open to third-party retailers, has become one of the biggest reasons for the company's success. It's helped increase the breadth and depth of selection on Amazon, which reinforces its status as the first place online shoppers go when they need something.
As the growth rate of third-party revenue can attest, Amazon has by far the biggest marketplace, which acts as a competitive advantage. Sellers want to be where customers are and vice versa. As e-commerce continues to take share from physical retail, the importance of third-party sellers will grow.
The bottom-line effect
Not only does the marketplace add to Amazon's competitive advantage, increase sales, and make it more attractive to customers, it's also more profitable.
Amazon's commissions vary, but the company generally takes referral fees ranging from 8-20% of third-party sales depending on the category of goods being sold. As a result, third-party retail has become a high-margin business. Since it already has the infrastructure in place for e-commerce, the operating costs associated with each sale and the commission it generates are low.
According to estimates, sales generated from Amazon's Marketplace are now about double Amazon's direct sales, meaning the company's gross merchandise volume from e-commerce is set to top $300 billion this year.
The success of the marketplace was also elemental in bringing Nike to the table, which agreed to sell on Amazon for the first time ever this month in order to block third-party sellers, which were selling thousands of Nike products. The marketplace has also allowed Amazon to branch into new businesses like Home Services, providing things like cleaning, moving, and furniture assembly.
Amazon doesn't report marketplace profits, but the third-party channel has been key in driving North American e-commerce profits higher recently. Operating income in Amazon's home market has gone from $360 million in 2014 to $2.36 billion last year.
What it means for the future
With Amazon set to control $300 billion in global retail sales this year, the company's influence on the greater retail industry is much larger than its revenue figure represents. Its buying power will soon rival that of Wal-Mart Stores, Inc., long known for using its economies of scale to squeeze supplier margins so it can offer its customers the lowest prices.
Vendors will have to play ball with Amazon the same way, which will give the e-commerce giant even more market power. With sales still growing by more than 20% and the company about to dive into groceries, Amazon is only going to get that much stronger.
