Retailers Talk Pros and Cons of Selling on Amazon

Mar 8, 2012

Topic: Retail

If many worry that third-party retail sites are a threat to specialty retail, why do so many of the industry’s best specialty retailers sell on Amazon.com?

The bottom line is that Amazon.com has emerged as a way for specialty retailers to make incremental sales that generate good profits that retailers can then reinvest in their core operations.

“We consider it another wheel on our bus,” said Mike Massey, owner of Massey’s Outfitters, a New Orleans retailer that was among the first outdoor specialty dealers to sell on Amazon.com. “We recognize that people shop in different ways, and we want to be available for people to buy product wherever they want to.”

Succeeding on Amazon.com, however, is no slam dunk. Both vendors and retailers should be informed about the benefits and risks of doing business on Amazon to determine how it fits into their business model. To help with this process, CEO Brief has compiled the following list of pros and cons of selling on Amazon.com.

PROS

  • Reach. Amazon is the most popular e-commerce site on earth, with more than 164 million active customer accounts. In 2011 alone, it spent $1.6 billion on marketing to draw customers to its site and another $2.9 billion on technology and content to convert them once they get there, according to the company’s annual 10K filing with the Securities and Exchange Commission.
  • Cost. The 15-percent cut Amazon takes of each sale on its site compares favorably to the costs a retailer incurs selling the product on its own e-commerce site and may be cheaper than costs incurred selling the product in a brick-and-mortar store.
  • Credibility. Amazon is among the most trusted brands in the world because of its high customer satisfaction requirements. Retailers note that Amazon’s UPC matching system minimizes the chances that third-party sellers will try to pass off carry-over as in-line product. “You have to have a very high customer satisfaction rating to stay on Amazon, or they will kick you off,” said Massey.
  • Inventory turn. Amazon turns inventory about 12 times a year, or more than six times the average for a high-profit outdoor specialty retailer. One retailer noted that when he prices an item right, it will sell 10 times faster on Amazon than on his own website. “The power of Amazon is inventory turn and margin,” said Dustin Robertson, chief marketing officer for Backcountry.com, which is one of three featured sellers on Amazon’s Outdoor Recreation store. “It’s a very profitable way to move inventory. You pay the commission and the shipping, and the incremental sales drop to your bottom line, which you can use to invest in your core business.”

CONS

  • Direct competition. Amazon views third-party merchants as a source of expanded selection and buying options for customers. Yet — if the products sell well — there is always the chance that Amazon will start buying them directly from the vendor and essentially start competing directly with specialty retailers.
  • Customer ownership. Amazon reserves the right to up-sell and cross-sell customers to which you sell on its site, while retailers are limited to sending transactional emails, shipment confirmation, thank you emails, etc., to customers through Amazon’s encrypted buyer-seller messaging system. The end result is that all transactions are contained entirely on the Amazon site, which builds Amazon’s brand equity. Amazon retains all data from the transaction and owns the customer relationship.
  • Commodization. The diversity of sellers using Amazon, eBay, Sears.com and other online retail marketplaces greatly raises the chances that many items will effectively be on sale perpetually as one seller or another lowers price to clean out their garage, raise cash or fulfill some other objective. This can quickly tarnish a specialty brand’s image with consumers, as well as spark a race to the bottom price. This lowers profits across the entire industry and diminishes the ability of vendors and retailers to reinvest in the industry.
  • Costs. While competitive on full-margin, lower-priced products, Amazon’s fees can devour gross margin dollars on items priced higher than $400. “If you’re trying to run Amazon off a high-cost urban store, you will be upside down real fast,” said one retailer. Retailers also note that integrating with Amazon requires robust data management tools with real-time, highly accurate inventory management that can report inventory levels, supply product style data, and transmit data in a variety of formats very frequently (i.e., hourly). Unless fulfilling through Amazon, retailers need an order management system that can integrate picking, reporting and shipping. POS systems generally are not set up to do all of these things. Bottom line: poor integration with Amazon will yield horrible results, but great integration can be extremely expensive. Horrible results can include having to choose between filling dozens of orders at a loss because an item was priced incorrectly, or suffering a downgrade in your customer satisfaction rating that hurts your long-term sales.
  • Accountability. Amazon almost always sides with consumers when disputes with a seller arise, and too many consumer complaints can result in Amazon pulling or restricting a seller’s listing. Retailers complain that it is very difficult to get Amazon to reconsider such decisions in a timely manner.