(Bloomberg Opinion) -- One sign of a powerful company is that even small changes it makes set off wakes that can sink smaller companies. Facebook might tweak the computer system that prioritizes social network posts, and websites that rely on Facebook for traffic turn themselves inside out to compensate.
Amazon.com Inc. has this heft, too. Bloomberg News reported on Tuesday that the company is planning to shift how it sources products in a way that could drastically improve Amazon’s finances and inflict pain on some of the millions of companies that sell on its mega mall.
If Amazon follows through, the shift and its aftermath will underscore Amazon’s power and raise questions about whether the company is worried enough about its slowing sales growth to tinker with its successful business.
To understand the impact, it’s important to understand that Amazon is half Walmart and half eBay. Most shoppers don’t notice the difference, but when someone buys a dog bed on Amazon.com, she might be purchasing the bed directly from Amazon or from a company that set up a digital storefront there. In the first example, Amazon had already bought the dog bed from the pet company and resells it to the shopper at a markup — just as Walmart does.
If the purchase was made instead from the pet company’s merchant storefront on Amazon, the Seattle company is simply acting as a middleman. Amazon takes a commission and typically generates other fees if the pet product company used Amazon’s logistics operation or bought advertisements on Amazon to market its products. Just more than half of the items sold on Amazon are purchased through this approach in which Amazon acts like eBay.
The eBay approach is more profitable and less risky for Amazon. If Amazon had purchased 10,000 dog beds and they sold poorly, Amazon could be stuck with unsold inventory and a loss. But if it never bought those beds in the first place, it doesn’t take a hit and it generates revenue from the merchant. Amazon wins even if the dog bed company fails.
That’s the big deal behind Amazon’s apparent effort to push thousands of mostly smaller companies out of the Walmart model and into the eBay model.(4) If Amazon is conducting a great purge of smaller companies from which it buys products for resale, Amazon is changing its financial circumstance, ditching some of its risk and increasing its potential profit margins.(2)
Amazon can make merchants accommodate its changes because they want access to Amazon’s hundreds of millions of shoppers. The same is true for companies that rely on Google to ensure their businesses are visible in web search, for food companies that sell to Walmart or for app makers that rely on Apple’s app storefront. Particularly for the technology companies, this power is a growing focus for some lawmakers and regulators.
No matter the impact on the merchants, Amazon’s greater tilt toward the eBay model is logical for itself. One question, though, is why Amazon is pushing now to pressure more companies to sell directly on its digital storefront.
One possibility is Amazon is worried about slowing sales growth. Amazon figures show growth in the number of individual items it sells has slowed considerably, from a 27% gain year-over-year at this point in 2017 to 10% in the first quarter of this year. I’ve been perplexed about the slowdown, and Amazon executives have not shed light on the matter by telling investors not to fixate so much on its e-commerce sales. Those e-commerce sales directly or indirectly generate about 80% of Amazon’s revenue.
If shoppers purchase more products from merchant partners rather than Amazon itself, Amazon’s reported revenue goes down(3) but its profit margins go up, and investors will love it. It would be a balm for what appears to be slowing product sales.
I’m also going to ask a question that may be heresy: Should Amazon continue its half Walmart, half eBay business model at all? Jeff Bezos, Amazon’s chief executive, wrote recently that the merchants that sell on Amazon are kicking the butt of Amazon’s self-sold products. Why not go all the way and ditch the Walmart-like approach? China’s Alibaba does great with mostly a pure eBay model. EBay itself is fine.
Certainly ditching the self-sold products would reduce the noise coming from politicians and regulators that Amazon’s dual model advantages the company at the expense of smaller companies. It would also be far more profitable for Amazon. EBay in the first quarter generated profit from its operations of 23 cents for each dollar of net revenue. The equivalent for Amazon’s e-commerce operation in North America was 6.4 cents.
The most important question is why Amazon is tilting the scales toward the eBay-like side. The company will never give an honest answer. But Amazon most likely wouldn’t change something if its business didn’t need some remodeling.
(1) Amazon told Bloomberg News that "any speculation of a large scale reduction of vendors is incorrect.”
(2) Some merchants may prefer this approach as wellbecause in theory they have more control over prices and other aspects of sales than they do if Amazon buys their products for resale.
(3) IfAmazon bought a dog bed from the pet product merchant for $10 and resells it to a shopper for $15, Amazon books the full $15 purchase price as revenue. If Amazon takes $5 in commissions and fees to facilitate the sale, Amazon's booked revenue is only $5.
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Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.
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