The report suggests Amazon is taking 34% of third-party sellers' revenue.
This sounds like a lot, but "revenue" in this case is the retail sales price of the goods.
Traditionally, in a wholesaler-retailer model, the retailer "keystones" their cost on the good, meaning they arrive at the selling price by doubling their cost. This is of course a somewhat antiquated idea now (markups are generally lower now) but it gives you an idea of typical gross margins before selling costs (doubling the cost would give you 50% margins).
34% means that Amazon is keeping 34% of the retail price of the product as profit. That doesn't actually strike me as particularly high. It's not low (Costco is much lower, with 15% selling margins) but it's not particularly high either.
The article goes on to complain about advertising costs. Welcome to retail! Are you ready to play slotting fees? End-cap fees? Promotional and coop fees? Most big retailers do this. I know of not-huge companies that pay millions per year, in advance, to a home improvement retailer to secure exclusivity over an entire shelf.
It's one reason why selling to retail is annoying (versus selling to businesses), because almost all big retailers are extractive and prioritize their profits over great prices to consumers. But this article comes across as if they don't know anything about retail.
There's a good argument that this kind of behavior is perhaps Day 2 behavior - the conversion into a big company that pushes for margins above all else. But it's not different from traditional retail.
That is why it is annoying to read Silicon Valley / tech or mainstream media's take on Retail.( As well as supply chain... or pretty much everything other than their own tech.) Not to mention that 34% is gross profits. There are huge amount of operation cost involves.
I understand some press, or parties want to take down Amazon or whatever it is. But they need to do a better job at it.
I must be misunderstanding this. Are you saying that if I have a product that sells for $1, my costs would be:
$0.50 actual cost
$0.34 Amazon fees
So Amazon gets $0.34 and I get $0.16? I don't know anything about retail, but that doesn't seem like a very good deal. Amazon is taking virtually no risk. Why should they get 2x what the seller does?
Let's keep it simple and comparable, and say the traditional retailer also has 34% gross margins.
In the wholesaler-retailer model, the process looks like this:
Wholesalers buys item from manufacturer for, say, $0.25. They sell item to retailer for $0.50, and keep $0.25 in gross profit. Retailer sells for $0.76, for a selling margin of 34%. The $0.26 of profit the retailer gets pays for the store, staff, logistics, net profit etc.
In Amazon's third party model, it looks like this:
Wholesaler buys item from manufacturer for $0.25. They sell item to end-customer for $0.76. They get $0.51 of profit! But now they pay Amazon a litany of fees amounting to 34% of the price the item sold at: 34% of $0.76, or about $.26. That leaves the wholesaler with the same $0.25 of profit.
The main difference in these two processes is that in the third party model, the wholesaler keeps the inventory on their books for longer, because they ship it to Amazon and then the inventory sits at Amazon (but is still owned by the wholesaler) until it sells. That means that even if they get the same profit in the end, they've employed more capital, and it gooses Amazon's return on invested capital (they don't have to own that inventory) while reducing the wholesaler's.
Wouldn’t it be significantly cheaper for a wholesaler to have a small number of B2B relationships selling to retailers than to have a ton of B2C relationships selling directly via the Amazon marketplace?
The immediate post sales support could be pretty huge and typically the retailer would handle most of that, wouldn’t they?
Have always thought of Amazon as "providing services / platform" to seller.
But from the reverse perspective, Amazon is outsourcing to sellers. Amazon is handling so much of the transaction, the seller may never actually see the product. Sellers are getting paid, primarily, for managing inventory risk.
The Amazon marketplace thing is genius because it hacks the metrics that Wall St likes. By converting inventory to a service, they transmute a liability into an asset. Amazon is a retailer without stock.
The liability (from an accounting perspective) of the inventory lives with the mostly small business sellers who don’t care as much.
Valid points. But to me, this just raises the question of whether comparing business practices of Amazon (ecommerce) to someone like Bed Bath & Beyond (brick and mortar) is a fair comparison to begin with.
Is it really apples to apples, or more of an apples to oranges type of comparison? I'm not convinced we should be using brick & mortar retail business practices to justify/rationalize business practices of Amazon.
If we were talking about Amazon as just a retailer, yes, everything you've said would be true.
If we were talking about independent 3rd parties being retailers on their own web sites, then yes, everything you've said would be true.
But we're actually talking about independent 3rd parties selling through Amazon's marketplace. Amazon hasn't really promoted its store as if it was a department store, but rather as a mall owner (and perhaps operator of the keystone store in that mall). In that context, the usual arrangement is that the 3rd party sellers just rent space from the mall owner, but the mall owner gets no cut of their sales (nor any information about their sales).
Most 3rd parties selling on Amazon do not consider themselves as "selling retail" the way they would if they put their products in Nordstrom or Target or Neiman Marcus or Dillards. They (imagine) are using Amazon as a way to sell direct to customers, but instead, Amazon's arrangement is indeed more like the traditional retail model that you've described.
Amazon is barely a vertically integrated business (now that it actually has its own branded products, it is inching its way there). It is a retailer and operator of what it like to call a retail "marketplace".
I think it is somewhere in between. All the things you listed are true, but Amazon will still say things like "Sold by ...", and there is still the option for drop shipping (or something very close to it).
I am fairly sure that if Amazon had started the marketplace by promoting it just as an online department store, with all the "selling to retail" elements in the GP, it would have been much less successful than it was given their actual promotion of it as a marketplace.
Costco is not traditional retail. If you compare Amazon's margins to Costco it will look bad, if you compare it to a cosmetics store, it will probably look good. The (now old fashioned) rule of thumb was 50% margins, but as GP pointed out margins are lower now. 34% is within the ballpark of a brick-and-mortar store.
This sounds like a lot, but "revenue" in this case is the retail sales price of the goods.
Traditionally, in a wholesaler-retailer model, the retailer "keystones" their cost on the good, meaning they arrive at the selling price by doubling their cost. This is of course a somewhat antiquated idea now (markups are generally lower now) but it gives you an idea of typical gross margins before selling costs (doubling the cost would give you 50% margins).
34% means that Amazon is keeping 34% of the retail price of the product as profit. That doesn't actually strike me as particularly high. It's not low (Costco is much lower, with 15% selling margins) but it's not particularly high either.
The article goes on to complain about advertising costs. Welcome to retail! Are you ready to play slotting fees? End-cap fees? Promotional and coop fees? Most big retailers do this. I know of not-huge companies that pay millions per year, in advance, to a home improvement retailer to secure exclusivity over an entire shelf.
It's one reason why selling to retail is annoying (versus selling to businesses), because almost all big retailers are extractive and prioritize their profits over great prices to consumers. But this article comes across as if they don't know anything about retail.
There's a good argument that this kind of behavior is perhaps Day 2 behavior - the conversion into a big company that pushes for margins above all else. But it's not different from traditional retail.