
Amazon's Latest Supplier Purge Is an Indicator of Price Predation - chmaynard
https://promarket.org/amazons-latest-supplier-purge-is-a-classic-indicator-of-price-predation/
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tvladeck
> In a recent article (and subsequent blog post), I argued that Amazon’s
> negative cash flow might ...

I stopped reading and started researching there. Amazon has positive cash
flow, both overall and from operations specifically, which is what would would
matter to this argument.

In the linked-to post, the author states

> In fact, if a careful observer overlooks the GAAP loopholes that allow
> Amazon to dress up its numbers, during 2017 the firm experienced a negative
> cash flow of $1.461 billion

This is very wrong. That calculation stems from the section of their 10-K
titled _Free Cash Flow Less Finance Lease Principal Repayments and Assets
Acquired Under Capital Leases_. As the section says "Free cash flow less
finance lease principal repayments and assets acquired under capital leases is
free cash flow reduced by “Principal repayments of finance lease obligations,”
which is included in cash flow from financing activities, and property and
equipment acquired under capital leases. In this measure, property and
equipment acquired under capital leases is reflected as if these assets had
been purchased with cash, which is not the case as these assets have been
leased.", which is to say, it's including both a remix of items that already
exist on the cash flow statement, and things that weren't paid in cash but are
being treated as if they were.

If Amazon were truly selling below average cost, their operating cash flow
would be negative. It's not; it's positive. As is their cash flow from across
operating, investing, and financing activities.

~~~
ganeshkrishnan
I think they got the whole article wrong. Amazon is ditching neither FBA nor
FBM. They are moving sellers off Vendor Central and Vendor (Two kinds of
vendor platforms on which amazon buys wholesale. These products are listed as
"Sold and Fulfilled by Amazon" on the amazon site )

Vendor people are being kicked off into FBA and FBM. The article missed this
whole important distinction.

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toasterlovin
The argument in this article doesn't really make any sense. It hinges on the
idea that somehow Amazon is shifting fulfillment costs onto suppliers by
discouraging them from using Amazon's fulfillment services (FBA) in favor of
doing fulfillment in-house (FBM). But what is conspicuously omitted is that
Amazon charges for fulfillment. And they cost about the same as other
fulfillment providers. They offer some competitive advantages that you would
expect given their tremendous scale, but they are basically on-par with other
providers. Which totally undermines the thesis of this article, since Amazon
isn't losing money on their fulfillment business. Sure, fulfillment isn't a
high margin business or anything, but Amazon has shown lots of willingness to
get into low-margin business that require operational excellence (like package
delivery). And having such an excellent fulfillment offering is a major
competitive advantage, because it makes it a lot easier for sellers to get
started on Amazon's platform.

Source: my company brought new products to market recently, initially selling
exclusively on Amazon.

~~~
excitom
It makes perfect sense, distilled down to "shift variable costs to suppliers
while slowly extricating from the costly business of acquiring, storing, and
shipping merchandise".

~~~
toasterlovin
Whether a cost is variable or fixed doesn't really matter if it's either A)
something you can do cheaper than competitors and, thus, an area of cost
savings, or B) part of a profitable service offering (for items you're
fulfilling for merchants). For the author's thesis to make sense, Amazon would
have to be either worse at warehousing and logistics than other providers or
they would have to be losing money on fulfilling for 3rd party sellers. Both
of those seem exceedingly unlikely to me.

The other reason none of this makes sense is that Amazon is moving
aggressively into same and next day delivery. For that to work, they need
scale. Having more products in their fulfillment network helps them achieve
scale. It's not really possible for them to offer same day delivery on items
that are fulfilled by merchants.

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tucros
As a medium sized FBA seller, 1.75M revenue last year, this is a ridiculous
article. It conflicts with Amazon's and Bezo's core value of putting the
customer first. If it's as suggested, Amazon would become no better than Ebay,
and would cost them tons of customers.

FBA does shift a lot of costs onto Amazon but it also lets them completely
manage the customer experience. You don't have to deal with some dumb shit
seller who could give a crap about customer service. It conflicts with
Amazon's plans of broadening their fulfillment network and logistics too. Why
build all that capacity if your sellers are now responsible? And while Amazon
does charge a single per unit fee, they also have monthly storage charges,
long term storage charges, fees for handling refunds, etc, and combined, the
fees have steadily increased each year to the tune of 5-10%. Oh, and you also
get charged fees for Amazon to do any prep work on your products, etc.

FBA has been an unequivocal boon for Amazon, and I doubt will go away any time
soon.

The shift to seller fulfillment is probably driven by sellers, not Amazon. FBA
requires you to carefully manage inventory--you're penalized if you don't. It
is infeasible for drop-shippers. You have to understand their reports, and
reconcile them. You're giving up a large amount of control and introducing
some risks, but for some incredible benefits.

~~~
oneshot908
How do sponsored products now topping organic search results, comingled
fulfillment centers mixing real with counterfeit items, and dropping keywords
to add inaccurate results to spearfishing queries serve to put the customer
first, especially those who paid for prime membership? Shopping on Amazon used
to be nearly effortless, now I have to make sure I'm really getting what I
searched for, and my return rate in 2018 went from close to 0% to about 10%.

~~~
petra
It's hard to ship a million SKU's, in 1-2 days, accross the US, affordably,
without commingling.

So they compensate using customer service.

And they are actively trying to solve this and reduce the number of SKU's.

"Amazon's choice" tag is one example of that.

~~~
oneshot908
In my experience so far, "Amazon's Choice" is rarely what I'd choose. So I'd
guess by now that its value (probably calculated using some sort of ML model
trained on sales data) has been gamed to death by motivated substandard
sellers (so it probably needs a refresh like Google refreshes its scoring
function for web pages in response to SEO).

I've also noticed that sponsored products (which I don't want ever) are better
targeted towards my queries by EBay. The difference seems to be that Amazon
deletes keywords until it has something both sponsored and irrelevant to show
and hopes for the best. That must have survived A/B testing, yuck.

What I think it comes down to is I'm an oddball that wants organic search
results. I understand why Google messes with that to deliver ads, but for the
life of me, I'm trying to help Amazon take my money and they're getting in my
way and my larger purchases (>$100) are migrating away now because it's
becoming impossible to find what I want, occasionally worked around by
searching the Amazon catalog, ironically, from Google.

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aero142
I recently discovered some really bad effects from Amazon third party sellers.
For a lot of item, 3rd party sellers are listing inventory they don't actually
have. I think what is happening is that if they are out of an item the listed,
they just order from another store, like Bed Bath and Beyond and ship it
directly to the customer. It even arrives as ordered by a random person you
have never heard of from BB&B. It might even be a slightly different product
brand name but probably the same manufacturer. I believe there is another
variant of this where you simply list inventory at a higher price and hope to
pick up orders. For example, maybe BB&B lists an item at $30. The seller lists
the item at $40 on Amazon and if someone orders, they just direct ship from
BB&B and pocket the difference. This gets really bad for gift registries. You
list an item when it was in stock at $30 on Amazon. That item goes out of
stock but one of these 3rd parties lists it for $40 and someone buying you a
gift decides to purchase that instead. Next think you know, a random BB&B
order shows up at your door from some random person you don't know. Amazon has
your package marked as shipped, but can't produce a shipping number, and
everyone is very confused what this BB&B item is. It's such a mess and I can't
believe Amazon is tolerating this crap. I just told Amazon the item didn't
arrive because they can't produce a shipping number and the item is slightly
different. I just cancelled the order and got my money back. I'm not going to
do extra work because some person in North Dakota wants to play Amazon games.

~~~
sithadmin
I strangely had the exact opposite happen recently: ordered an item directly
from an OEM (Creative) via their site, but had an Amazon Prime package show up
to deliver it. Even weirder, as far as I can tell, the item has never even
been listed as available for sale on Amazon.

~~~
toasterlovin
The manufacturer is probably using Amazon to fulfill their non-Amazon orders.
I do just that. The difference being, though, that my products are also listed
for sale on Amazon. But listing them on Amazon is not a requirement.

~~~
sithadmin
Didn't realize Amazon was also doing pure dropship type distribution for items
not listed on Amazon as well. Thanks!

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zebrafish
IMO, this is only applicable to smaller players. Amazon still wants to play in
the private label space and they're not going to delist Tide or Bounty or
Crest. They're in true supplier relationships with those brands and will
continue to fulfill those orders while negotiating co-op and pricing with the
supplier.

The smaller players will get squeezed for a little while but I don't think it
will take long for them to leave the platform. If they can't get subsidized
fulfillment, they will simply move to a D2C model where they don't have to pay
Amazon 15% plus $1200/year and can control pricing.

The most obvious way they will lose out, to me at least, is in advertising.
They still have to pay for CPC on Amazon, but it is much more effective at
generating sales than AdWords or Facebook on a brand-owned site.

~~~
petra
So in the past, why did Amazon purchase from the smaller guys, and didn't go
straight to the manufacturer ?

~~~
binarysolo
For prospecting purposes - it's only worth it to engage with manufacturers if
you do X million of dollars on their product, so why not have a smaller vendor
do all the legwork to grow the listing, prove the product, then cut them out.

Source: mid-sized Amazon 1P/3P vendor, mid-millions rev.

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ChuckMcM
Hah, should have read the comments here first :-) I agree that the author is
missing both context and understanding in this article.

A lot of speculation around this move by Amazon (removing FBA type businesses)
has rattled around, and rattled some suppliers. But my sense of it is that
Amazon has realized that a noticeable portion of their FBA business involves
counterfeits and frauds. What is worse, the 'A' part of FBA makes Amazon a
liable party to the fraud. I'm going to further guess that Amazon has been
looking at ways to try to police people who submit counterfeit goods as
'legit' and get Amazon to sell them, and finding that this is a game of whack-
a-mole that costs more than the margins they are getting on this business. The
"easy" solution is to dump FBA (or at least strictly curtail it with new
language/contract work that allows Amazon to recover costs from the bad
actors).

It gives me hope that they recognize how crappy their offerings have become,
especially in normally 'high margin' products like Apple accessories.

~~~
shostack
And let's not forget the harder-to-quantify but very important negative impact
that has had on trust in the Amazon brand.

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endorphone
"In light of this comparison, it becomes obvious that Amazon’s goal should be
to constantly increase the ratio of FBMs."

Amazon's edge is that they've managed the logistics of this at a scale that no
one else could -- before Amazon shipping was expensive, and often terribly
slow.

So if these big vendors are just shipping direct, and Amazon is nothing more
than an order submission agent, I would argue that is exactly contrary to what
Amazon wants. Those vendors could do the same thing for any front end
(Walmart, Target, whatever) equally.

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j-c-hewitt
This article fundamentally misunderstands what Amazon recently did (describing
it as a "supplier purge"), misunderstands what the fulfillment business is,
and incorrectly defines Amazon as a monopoly because it is a trendy thing to
say more than it is an accurate thing to say.

>If an item sold on Amazon is FBA, that means that the wholesaler’s inventory
is completely fulfilled by Amazon. The wholesaler sends a large portion of
their inventory in bulk to Amazon’s fulfillment centers, where it is stored
until a customer decides to buy it. Amazon then packs and ships the items to
customers. It also incurs all the costs associated with these activities, many
of which are variable costs. In exchange, wholesalers pay a per-unit fixed
fee. The introduction of same and next-day delivery into the FBA scheme seems
to further increase the cost of this service. Amazon’s shipping costs, which
include sortation and delivery centers and transportation costs, amounted to
$27.7 billion as of 2018.

This is generally wrong, and mixes up what vendors enrolled in Vendor Central
do. Amazon sends vendors POs and then sells the products. The end. Some
vendors also have some additional fees but it is not the same as a "Seller"
who is not a wholesaler at all, but a business that owns the products being
sold FBA and FBM the entire time. Amazon collects fees on each of those sales
and never owns the inventory in question.

>On the other hand, when an item is FBM, fulfillment is done by the
wholesalers.

No, they are not wholesalers. This may seem like a dorky nitpick but it isn't.
A wholesaler sells the products to Amazon. The 'purge' complaint was from
wholesalers, called Vendors or Vendor Central users in Amazon parlance.

>Thus, it appears that Amazon’s market share is closely tied to its ability to
accomplish its “fulfillment network optimization” goals by bullying
wholesalers to move from FBA to FBM.

No, they are just not issuing purchase orders. No purchase order, no wholesale
relationship. They explicitly communicated to Vendors who are not receiving
anymore POs to tell them to consider selling their products on Amazon as
Sellers, which again means not being a wholesaler anymore but becoming a
retailer. They can sell FBM or FBA but Amazon collects fees either way. That
is entirely up to the seller.

The pressure is just Amazon saying "we won't buy your stuff anymore, but you
can still sell on Amazon running your presence yourself or selling it to
another Amazon seller."

I could just keep going but it is really obvious that this author only knows
about how the Amazon marketplace works from financial reports and has ___zero_
__experience in how the Amazon marketplace actually works.

~~~
cissou
> No, they are just not issuing purchase orders. No purchase order, no
> wholesale relationship. They explicitly communicated to Vendors who are not
> receiving anymore POs to tell them to consider selling their products on
> Amazon as Sellers, which again means not being a wholesaler anymore but
> becoming a retailer. They can sell FBM or FBA but Amazon collects fees
> either way. That is entirely up to the seller.

I'm not sure I understand. Does this not describe the bullying the OP
mentions? Amazon went from issuing POs to no longer doing it, effectively
forcing wholesalers to move to FBM. I have no horse in this race, I'm just
trying to understand the argument. Thanks for shedding some light!

~~~
j-c-hewitt
It's misleading because you do not need to be a wholesaler to use FBA, and in
fact the majority of FBA users have never been wholesalers and never will be.
This is one of the reasons why this article is so misleading, because it gives
off a fundamentally incorrect reading of what happened and what is happening
at the company.

It is not "bullying" for a company to just stop buying your brand's products.
Vendors almost universally receive less per unit when they sell to Amazon as
wholesalers than when they sell as retailers. The article makes it seem like
all FBA users are wholesalers when the reality is nearly opposite: most FBA
users are retailers, called "Sellers" in Amazon parlance. Some fraction are
wholesalers who sell directly to Amazon, but it is not nearly even 20-30% of
the marketplace volume.

The whole thing about FBA vs. FBM as it relates to vendors is another
misleading red herring int the article which confuses more than it
illuminates. There was nothing in the recent mass halt of POs to many vendors
about encouraging vendors to go FBM. FBM just means you yourself ship the
orders to customers versus you ship the products to Amazon warehouses for
Amazon to ship orders to customers as they come in.

Sellers can do either FBM or FBA as it suits them and their business model. In
Amazon's communication to vendors impacted by the cancellation it just said
"go give being a seller a try." There was zero in that about "you should try
merchant fulfillment" and it's not even relevant.

The worst part about this article is that there were non-specialist articles
that correctly interpreted the event and correctly described what was going
on, like this one from the Arkansas Democrat-Gazette:
[https://www.arkansasonline.com/news/2019/mar/08/amazon-
abrup...](https://www.arkansasonline.com/news/2019/mar/08/amazon-abruptly-
cuts-off-vendors-201903/)

>Pushing suppliers onto the marketplace -- rather than selling products itself
-- lets Amazon offload the risk and cost of purchasing, storing and shipping
the merchandise. Instead, the company can charge suppliers for these services
and take a commission on each transaction, which is much more profitable. The
strategy is part of a larger effort to reduce overhead by getting more
suppliers to use an automated self-service system that requires no input from
Amazon managers.

^-- That quote right there is 100% accurate. It is a full and correct
description of Who/What/Where/When/Why of the event along with some useful
context. The article in the OP gets most of those Ws incorrect.

You can certainly point out that this kind of erratic behavior on Amazon's
part is not that pleasant for vendors, but you would have a hard time finding
a vendor of any scale to Amazon who would not say that they are erratic,
unfair, and unprofessional as it relates to business dealings with vendors
which is probably one of the reasons why they are paring back the program.
There are some vendors who love their rep at Amazon and have had great
experiences, but that wouldn't be the majority. This sudden pivot was a rude
surprise for many vendors, but dealing with Amazon directly as a wholesaler is
generally a series of rude surprises anyway.

~~~
cissou
OK understood, thanks a lot. In short, is it fair to say that the OP
overlooked the difference between Wholesalers and Sellers, made it look like
Amazon was mainly doing business with Wholesalers, whereas the nuance is
actually important and most of Amazon's business is done with Sellers who are
just as welcome as they used to be to use FBA. Correct?

~~~
j-c-hewitt
Yes, that is really the issue and because it is a common misunderstanding
about the marketplace articles like this can be misleading.

There was no change to sellers and certainly Amazon wants more people to sell
FBA rather than FBM because you obviously have to pay more to Amazon for each
unit you sell if you use their warehouses plus storage fees besides than if
you use your own warehouses and handle the shipping yourself. Amazon still
wants these brands to sell their products on Amazon, but they don't want to be
responsible for buying the goods from them if that makes sense.

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Jordanpomeroy
Reading other comments it seems OP may have a bad analysis.

Even if the analysis is correct, the consumer benefits by this arrangement.
Why should we worry?

