This is the latest installment of the Amazon Briefing, a weekly Modern Retail column about the ever-changing Amazon ecosystem. To receive it in your inbox every week, sign up here.
Every U.S. business is hurting from inflation right now. Even the largest companies aren’t immune: Walmart, for example, cut its estimates for quarterly and annual profits this week. Amazon will post second-quarter results on Thursday and is expected to confront similar hurdles.
Small businesses, which account for roughly 60% of sales in Amazon stores are also having a hard time keeping up in a hyper-inflationary environment. The MetLife and U.S. Chamber of Commerce Small Business Index shows that 88% of small business owners in America are concerned about the impact of inflation on their businesses. But Amazon has chosen to deal with inflation by passing on further costs, such as a fuel surcharge, to sellers.
Increased fees have been piling up for months for Amazon sellers. In January, Amazon increased FBA [Fulfillment by Amazon] fulfillment fees by 5.2% in order to partially cover future increases in its operating expenses. Then in April, Amazon began charging online retailers who use its shipping services a 5% fuel and inflation fee. And that’s not the only price hike Amazon merchants have had to contend with. They’ve also had to ward off rising costs in areas like freight, shipping and raw materials that have put more strain on the supply chain.
“Cost increases from manufacturers and shipping carriers are impacting sellers big time. It’s becoming more difficult for 3P [third-party] sellers to continue to absorb those rising costs,” said Chris Palmer, CEO of SupplyKick, a firm that optimizes sellers’ sales on Amazon in an emailed response to Modern Retail. Hugh Hinkson, vice president of e-commerce at Pattern, said sellers are monitoring the rising costs of materials, labor, and shipping. Pattern is among the largest selling entities on Amazon by revenue.
In turn, many sellers and Amazon service providers are trying out new strategies to save money, while also calling for a variety of ways that Amazon could assist third-party sellers in this time of need — though it’s not immediately clear that the e-commerce giant will adopt any of them. Some of the suggested changes put forth by agencies include improving its operational services, reducing the cost of long-term storage in its warehouses and stepping up internal and external support for merchants.
In Amazon’s first-quarter earnings, net sales from third-party seller services were $25.33 billion, up 7% year-over-year. But that represented a sequential drop of 16.4% from the fourth quarter of 2021.
Cut commission rates
Amazon’s relationship with its marketplace sellers has been rocky as of late, but the Seattle-based retail giant can help its sellers right now in a few ways.
“If businesses are forced to increase prices then I’d like to see Amazon reduce their commission rates,” said Tom Baker who runs an Amazon marketing agency Fordebaker. “Amazon should want to increase the pie for everyone. Helping businesses to maintain existing prices or recoup margin that’s been lost to ever-increasing advertising and supply chain costs is mutually beneficial.”
In 2021, Amazon received a 34% share of every sale made by a merchant on its marketplace website, up from a 19% commission in 2014, Bloomberg reported.
Figure out the best inventory management system
Agencies suggested that Amazon, at the very least, reduce technical headaches for sellers at a time when financial woes are piling up. Palmer, for example, said that Amazon is switching over its shipping portal soon. “Extending this deadline for sellers, and/or waiving costs for those who want to delay the switchover, would be extremely helpful right now,” he added.
Amazon will replace its inventory workflow with Send to Amazon on September 1. Send to Amazon is a shipment creation software to help make the process of creating packages easier and more flexible. In the past, delays in checking shipments or stocking them, once they arrived at a company-owned warehouse, has been an issue for sellers who rely primarily on Amazon’s fulfillment service. But, switching over to any new technological system can create new and unforeseen headaches.
Meanwhile, sellers should also figure out the most efficient services for their needs. To save costs, companies that sell to Amazon through Vendor Central are giving up on trying to negotiate cost rates and are instead switching to Seller Central, Baker said. Third-party sellers have access to demographic data on Seller Central that they would have to pay for if they used Vendor Central. “We have assisted several firms in weighing the benefits and drawbacks of such adjustments and in making the switch,” he said.
On Seller Central, Palmer added that Amazon could simplify and streamline reports in the backend, “allowing sellers to spend less time reviewing inventory reports and more time pivoting where and when they need to during a time of uncertainty.”
Offset increasing costs
But those aren’t the only woes sellers face. Baker, who works with companies like tech accessories brand UnoSounds and petcare company Sniffe & Likkitt said, “the recent fuel surcharge, whilst relatively small, was a kick in the teeth. Amazon could easily absorb the cost but chose to pass it on.”
While sellers continue to use Amazon’s expansive warehouse network despite the addition of a 5% fuel and inflation surcharge in April, it could lower the cost of storage, one expert recommended.
“One major opportunity could come through reducing the cost of long-term storage fees in Amazon’s warehouses, since the company now has more warehouse space than ever,” said Pattern’s Hinkson. “They could also do more to help sellers increase sales velocity by giving them more control over responding to reviews,” said Hinkson.
Still, with no assistance from Amazon in sight, the most straightforward way for brands to offset the costs from inflation is to raise prices.
“I don’t think brands should be scared to increase prices. At the very least, test. Make incremental changes and measure the impact on sales velocity and organic rankings,” said Baker.
Amazon news to know
- Amazon is preparing for a second Prime Day-like sales frenzy in October called the Prime Early Access Sale, Business Insider reported.
- Amazon is hiking costs for its Prime membership program in key European markets.
- United Parcel Service on Tuesday said that it will not increase the amount of parcels it delivers for Amazon as it concentrates on shipments with the best financial returns.
What we’ve covered
- Water bottles continue to record rising sales even as customers’ budgets become more constrained.
- Parade, a DTC underwear brand, announced its first distribution agreement with third-party retailer Urban Outfitters.
- Merrell is refocusing on trail running and lightweight shoes as the popularity of outdoor recreation and related gear rises.