Third-party sellers and Amazon - a double-edged sword in e-commerce

31 January 2016 | 17:13 | gardian

As the “everything store”, it was never going to stop at books. Founded by Jeff Bezos with the aim of being the one-stop shop for the world, Amazon now sells 120m different items.

Alongside the stacks of paperbacks in its warehouses are CDs, DVDs, TVs, iPads, iPods, toys, clothing – but also the less obvious: jewellery, washing machines, garden furniture, windscreen wipers, bonsai trees, doubles basses, boomerangs, pet headstones, inflatable walking sticks, a One Direction onesie.

Millions of these items are sold not by Amazon itself but by legions of independent sellers. For the e-tailer’s UK operation, these third-party sellers include well-known chains such as Debenhams and Clarks, but also small traders working from their own shop, warehouse, or kitchen table. 

The idea of inviting competitors on to Amazon.com provoked consternation at the company when Bezos launched Marketplace – an operation for third-party vendors – in 2000. Independents now sell 44% of all items on Amazon worldwide and their sales are growing faster than those of the host site.

But for the head of Amazon’s third-party operation in Britain, it is a necessary part of meeting Bezos’s vaulting ambition. “We want to be a place where customers can find and buy everything and our sellers are helping us get there,” says Chris Poad, director of seller services in the UK. As if reading from the Bezos playbook of sanctifying the customer, Poad says Amazon is “good for the entire population”, by enabling people to spend less on buying the things they need.

It is this overwhelming focus on the customer and the price that has given Amazon a reputation as a hard-nosed business – particularly over its tax affairs. It has been criticised for channeling almost all of its European sales, with the resulting profits, through Luxembourg. This practice ended last month as Amazon acted in anticipation of a raft of tax reforms from the UK, EU and G20 designed to stamp out aggressive tax planning. Meanwhile, arrangements that allow it to shift profits out of Luxembourg are under investigation separately by EU competition regulators who believe they could amount to illegal state aid. 

For Poad, nonetheless, the focus stays the same. “There is a universal fundamental truth that customers want low prices.”

Amazon does not reveal exactly how much its sellers make on the site but trumpets the fact that the number of UK sellers earning more than £1m in revenues increased by 33% last year. British sellers also earned more than £1bn from selling goods abroad.

Amazon’s giant internet footprint puts sellers in touch with millions of customers they could not hope to find alone – the online retailer is one of the world’s most-visited websites. But such exposure comes at a price: in seeking a foothold in the digital marketplace, independents find themselves competing with the biggest seller of all – Amazon itself.

“Amazon is a big beast that is trading on its own behalf as well as offering small and medium-sized retailers a shop in their store,” said James Dunford-Wood, from e-commerce data specialist Ometria.

“There is no guarantee they won’t take advantage, and in some cases they probably have. They can sell on their own account and they can see what is selling and what is not and that puts [Amazon] in a powerful position.”

Nevertheless, he added, Amazon has to tread carefully because it needs the support of retailers. “They do provide a new marketplace and provide access to a very big audience of shoppers, so maybe it is a quid pro quo.”

Independent retailers selling through Amazon gave a mixed view of the relationship. Mighty Oak Trading, an online pet-care business run by Geoffrey Hayne and his wife Helen, pays 10-15% commission on every sale via Amazon’s website. “I am not happy with it [the rate], but you do get a constant stream of millions of users, you are paying for those millions,” Hayne said.

Amazon is their shop window and a far bigger source of revenues than eBay, where they used to sell most of their goods. But Hayne thinks Amazon is “more difficult” than eBay, because “you are competing with sellers and Amazon”. “If we find a nice product that starts selling well, you can bet that within six months Amazon will start selling it and undercut us.”

He is phlegmatic about this. “It is just a fact of life. We don’t have to sell on Amazon, but we choose to.”

High street retailers also have mixed feelings about being part of Amazon’s empire. “In an ideal world every retailer would rather sell directly to the consumer themselves,” said Stephen Palmer, of TV Village – an electronics retailer in Aberfoyle, Stirling, which sells half its products via online platforms. “The Amazon platform gives us a chance of exposure to a wider audience so Amazon is a good thing in the main. But Amazon is a big beast and you could argue its commissions are high.”

Craig Shuff also sounds ambivalent. He is the manager of Swinnerton Cycles, a family-owned bike shop that has been in Stoke-on-Trent for 100 years. Swinnertons does not make any money on Amazon: it sells on the site at cost, as a form of advertising.

“[Amazon] is good in that it enables you to compete with the big boys. We haven’t got thousands to put into advertising every week or month whereas Amazon do a lot of that for you,” he said.

But he has seen retailers go under in a doomed effort to compete. “The problem is when you start trying to compete on price. You are suddenly running around like headless chickens and you don’t make any money. We have seen businesses that have tried [to compete] go under.”

 

Ajay Bhalla, a professor at Cass business school, says selling on Amazon can be “a race to the bottom, unless you have a very unique product”. He views many Amazon sellers as the heirs to flea-market traders, who would struggle to create a bricks-and-mortar business.

Judith Blackford, the founder of online toy retailer Kiddymania, agrees that sellers face fierce competition. “You have Amazon Prime [unlimited ‘free’ one-day-delivery for an annual fee]; you have Amazon One Click [instant ordering]. You can’t compete with all of that. There can be half a dozen [sellers] and everybody is trying to get into the buy box.”

Some Amazon executives once feared this relentless pressure, as one former executive told Brad Stone, the author of The Everything Store: “Imagine you are the guy on the hook for a zillion dollars worth of inventory. And this lunatic comes over putting low-price crap on your page. You can bet that leads to some squabbles.”

These days, Amazon argues that price competition is good for everyone. “I would never apologise for the fact that part of Amazon competes with our sellers,” Poad says. “I think competition raises standards, it forces both Amazon and sellers to raise their game. Amazon is just a seller; it happens to be the biggest seller.”

But not everyone is convinced. Dunford-Wood points out that Amazon has the advantage of “a lot of interesting and powerful data”, such as customers’ email addresses and their pre-purchase browsing history. The data is not available to its Marketplace sellers.

“The big challenge for retailers is not just to win a first-time customer, but to turn that person into a loyal customer. If you don’t have a means to communicate with them – bar the absolute minimum – it handicaps you in creating a relationship.”

Poad insists Amazon is “overwhelmingly a good thing for the British economy and society” and has created “tens of thousands of jobs”.

“I am very confident we have helped [create] tens of thousands of new jobs, maybe more, because we have helped those small businesses grow by allowing them access to customers they wouldn’t have had otherwise.”

Geraint Johnes, an associate of the Work Foundation and an economics professor at Lancaster University, says it is inaccurate to say Amazon has been responsible for creating all the businesses using Marketplace.

He said: “Many of the small businesses that trade on Marketplace are using the facility as an additional form of exposure – and they would have been in business anyway without Amazon.

“Of the other businesses using Marketplace, many represent part-time employment for a sole trader, often taking the form of a second job. Depending on your perspective, this might represent a valuable enabler for people wishing to pursue portfolio careers, or it may reflect a socially damaging increase in job insecurity.”

As in any market, sellers have ups and downs. Blackford is winding down her Kiddymania business, a decision brought about by changing personal circumstances, the recession and a software glitch that caused some goods advertised on Amazon to be sold for pennies after a price crash.

Blackford stressed she does not hold Amazon responsible for the error, which was caused by another company’s software. But the problem cost her thousands of pounds and was “the last nail in the coffin” for her business.

Meanwhile, Swinnerton Cycles is thriving: the shop has grown from a single-terraced house to occupy five properties and it recently extended its bike showroom and clothing shop. It aims to stay ahead of the competition by offering products and services that “the big internet boys haven’t got”, such as interest-free finance on GPS devices. But Shuff said he would not like to be a new retailer starting from scratch.

“We have got a lot of experience, we have got a lot of history behind us, but I certainly wouldn’t want to be a modern retailer starting today.”