It was midday on Thursday, April 13, when Amazon made an announcement that shook their selling community to the core. For the first time in the company’s history, Amazon announced they will start imposing a 5% fuel and inflation surcharge to most sellers.
Immediately, Linkedin and Amazon-focused Slack channels were aflutter with commentary. Everyone everywhere was pontificating about what this announcement meant, who would hurt and how to benefit from it.
Then, just this past Thursday, at roughly the same time, Amazon dropped another bomb…
They will now be allowing sellers to leverage Amazon’s logistics, warehouse and delivery services to fulfill orders on their own websites. Called “Buy With Prime,” the program extends their famous Prime benefits to anyone, anywhere.
On the surface, these look to be independent decisions. But if you look just a little deeper, a bigger story emerges — one that might provide a glimpse into Amazon’s ultimate goal and can help brands and retailers make informed decisions.
Let’s dig into Buy With Prime first.
The Amazon Buy With Prime Program
Clearly, Buy With Prime is a huge win for retailers who have been struggling with logistics and want to offload those headaches to the company who does it the best. Yes, most sellers hate managing their Amazon inventory — but not as much as they hate their own logistical processes.
With delays, hidden fees and lack of control so common in online shipping, small and mid-sized retailers will quickly realize that leveraging Prime’s network makes great fiscal sense.
Retailers who struggle with returns will also benefit immediately because Buy With Prime includes Amazon’s famously inclusive return policy. Although, on the flip side, retailers who struggle with the economics of the Amazon return policy might be less in love with the program.
Another big winner of Buy With Prime is the consumer.
Recent data has shown that consumers are increasingly hesitant to purchase from small and mid-sized retailers due to stocking issues and not-so-easy returns. Buying from Amazon is just so easy, and being easy is what wins consumer dollars, and with Buy With Prime, Amazon makes it just as easy to buy from smaller retailers as it is from their own website.
Finally, to the surprise of absolutely no one, the biggest winner here is Amazon themselves. They get to collect customer info, collect market data and collect increased fees, all the while continuing to fuel their own growth.
All that being said, it’s hard to envision a scenario where big box stores or larger retailers are first to market with Buy With Prime. Realistically, this is going to empower smaller brands and mid-tier retailers. They are the ones who know they need to invest in their website traffic, their customer experience and their own operations. Amazon, instead of being the company that’s constantly chipping away at their business, is now the company that’s enabling them to improve and expand.
So, actually, I was wrong earlier. The biggest winner here is actually the small brands and mid-sized retailers. Even with increased fees and decreased autonomy, Buy With Prime is a phenomenal opportunity.
The Amazon Fuel and Inflation Surcharge
Now, let’s talk about that 5% fuel and inflation surcharge that I mentioned at the beginning. Amazon can call this surcharge whatever they want, but we all know what it truly is. Just another 5% taken right out of our pocket and put into theirs.
And the worst part is that there’s nothing anyone can do about it.
No one likes a 5% rate increase (and the associated margin rate decrease). However, there’s still a play to be made by investing more into Amazon and driving more volume, thereby maintaining margin dollars.
Wait, am I actually saying that the response to a rate increase is to invest more at a worse margin? For some companies, yes. That’s precisely what I’m saying.
If you can stem the tide of a margin dollar decline and ultimately provide more revenue to your bottom line, then it makes sense to increase ad spend.
Unfortunately, most companies simply can’t afford to think that way. But for those who can — the bigger players in the retail space — there’s plenty of opportunity to spend their way to profitability and increase their share of shelf metrics.
And who benefits from that? You guessed it, Amazon does.
Got it. So What Does All Of This Mean?
Looking at the broader Amazon ecosystem, the macro environment has a couple of challenges for Amazon’s retail business.
- Customers are sick and tired of buying highly rated but crappy products from Amazon. In fact, they’re rapidly losing market share specifically because of this issue.
- As such, customers are looking for name brands they can actually trust. Those name brands are hesitant to sell on Amazon for reasons we don’t need to go into here, but Amazon’s response has been to aggressively target bigger brands they can sell.
- Average CPC and ACoS have risen to the point where both profitability and scalability are suffering.
So, what’s the picture we’re painting here?
How These Changes Allow Amazon to Improve and Expand
To me, it’s clear that Amazon’s strategy is to go after the bigger retail brands. They can’t blatantly kick out those who sell crappy products (well, they can, but you know…), but they can provide a better path forward for profitability (carrot) and disincentivize their participation on Amazon.com (stick).
At the same time, they are making it easier for bigger brands to spend more money in the Amazon advertising ecosystem and increase their ability to profit from it.
I can easily foresee a future, just 6 months to 2 years from now, where the merchandise we see for sale on Amazon is completely different from what we see today — far fewer crappy products, more established and trusted brands and a better experience for customers across the board.
There are other recent moves that can help paint a clearer picture. The move to a more user-friendly DSP environment, as well as the rollout of new tools, KPI’s, data and API connections for Vendor Central clients all contribute to this story.
I, for one, love change, and it seems like we’re in the midst of a big one for the world’s biggest retailer. Whatever happens next, it will be interesting to see how this all plays out.
