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Amazon's Latest Supplier Purge Is an Indicator of Price Predation (promarket.org)
68 points by chmaynard 11 days ago | hide | past | web | favorite | 35 comments

> 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.

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.

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.

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".

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.

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.

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%.

Same issue here - relatively high volume purchaser for a long time (since amazon was tiny - they actually let you get an incredible amount of your order history).

Returns are up, and some thing if they are cheap I don't even bother returning. I've gotten used items marked as new, totally counterfeit apple products more times than I could count (stopped using Amazon for that) etc.

Your first and third points have nothing to do with FBA or FBM so I won't comment on those. Commingling is a cluster fuck though for sure and you won't find really anyone who disagrees, and any seller worth a damn has turned it off and never used it. Commingling can have severe repercussions for sellers besides, like being suspended.

Regardless, if there is an issue with a commingled product, Amazon's customer service will take care of it instantly, which is putting the customer first. I imagine there are a hundred variations, besides commingling, where sellers do shady shit, and regardless, Amazon will take care of you as a customer quickly, without question, and usually with additional compensation above what is expected.

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.

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.

I think they probably wanted to talk about "Vendor platform" but equated it with FBM or FBA. I agree it's an off tangent article.

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.

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.

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.

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

There are merchants that use Amazon to ship on their behalf without listing on Amazon, it's weird, but it does happen.

I buy a lot of random computer hardware from Europe, most recently a Louqe Ghost small form factor case. All us orders for it are first sent freight to Amazon, then amazon dispatches out the cases. As of current, they do not sell on Amazon.

This is really bad because I've stopped ordering from Amazon because of the counterfeit problem. I would be so mad if I paid extra to order direct from the manufacturer and have Amazon bring it to me. Now I have the counterfeit problem again but paid full price.

I am almost certain that companies using Amazon for fulfillment can only ship out products that they, themselves, have shipped to Amazon. Otherwise Amazon would be shipping out other sellers' merchandise. I am not sure what this means with regard to Amazon co-mingling inventory from multiple sellers for the same product, however.

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.

> 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.

amazon ad network is useless if you are not selling trhu amanzon itself. unless you can compete on price, then since your ad will be show to someone who just bought a product in most of the case, maybe you can hope they will cancel the amazon order and buy on your d2c site.

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

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.

Manufacturers have large minimum order quantities, are slow to integrate with, and have business policies like chargebacks, business rules, fees, etc. that the retailer will have to negotiate around.

The little guys have none of that and will bring in tons of traffic to the site, making it a more attractive option for manufacturers who will bend their rules to get a piece of the pie.

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.

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

"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.

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.

Exactly. And it makes perfect sense honestly. Brands get to control their pricing, Amazon gets probably better margins than they otherwise would (up to 15%), and Amazon no longer has the risks associated with owning the inventory.

> 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!

Amazon used to do a bunch of POs from super high to super low volume - which meant a lot of sloppy purchasing (typically buying too much and having excess).

Basically their strategy is now 80-20, do the big ticket items direct and let the wholesalers fight for scraps. This makes a lot more sense to be honest than them trying to run every single little thing that competes against one-another.

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...

>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.

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?

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.

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?

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