Updated 12:52 pm, 1/13/2014
Online retailer Amazon has built arguably the most sophisticated logistics network in the world – and that was before it hinted at drone delivery. Selling an incredibly diverse array of products in more than 20 categories and 10 markets worldwide, Amazon has fundamentally changed the way people shop online, setting new expectations for delivery speed and pricing, and the ecommerce giant has agilely changed its business model in response to evolving market demand.
In addition to acquiring and selling merchandise of its own, Amazon offers a service called Fulfillment By Amazon (FBA), where it handles third-party sellers’ back-end operations, including storage, fulfillment, and customer service. Third-party sellers simply ship their inventory to Amazon, which then manages the entire back-end fulfillment of an item once it’s purchased. Third-party sellers who move goods through Amazon typically differentiate their products from competitors with faster delivery time and gain access to a much wider customer base.
Third-party sellers accounted for approximately 40% of Amazon’s unit sales in the third quarter of 2013, generating more than $17 billion of Amazon’s $32+ billion gross merchandise value for that period. Given Amazon’s expertise in logistics, it’s easy to see why third-party sellers are attracted to the service: Amazon makes it easy, picking, packing and shipping orders using its vast logistics infrastructure. When sellers use FBA, their products are eligible for the popular Amazon Prime program’s free two-day shipping for orders over $35 as well as other benefits, and customers are confident in making purchases backed by Amazon’s customer service and returns policies.
On the Amazon FBA program site, the company notes that 73% of participants in a 2013 survey reported unit sales increases of 20% or more on the Amazon site after becoming FBA sellers. But while third-party sellers who have recently joined the FBA program are understandably focused on creating effective listings to drive higher sales, many aren’t fully prepared to address the issues their new fulfillment partnership raises, and Amazon could do a better job of preparing them. Here are a few issues FBA sellers encounter that Amazon doesn’t tell them about:
Comingling merchandise: Amazon has fulfillment centers nationwide, and using a barcode system, it ships products from the facility that can get them to the buyer the quickest. If a buyer in Nevada selects a product from a third-party seller in Florida and Amazon’s system finds an identical product offered by a California seller whose merchandise is located nearby, the Florida seller will get credit for the sale, but the buyer will receive the California seller’s merchandise. Since the products are identical, theoretically that shouldn’t be a problem.
But this makes it difficult for sellers to control product quality. One seller claims his account was unjustly closed and he faced a ruinous lawsuit after pirated DVDs he didn’t supply were sent in lieu of the genuine article. A beauty product manufacturer ordered an item directly from Amazon and received a knockoff instead, raising additional quality control questions. While this is an opt-in program, for sellers, issues like this can result in negative reviews – or even worse, legal liability – through no fault of their own.
Sales tax compliance: Another point where third-party sellers report issues is in sales tax compliance. When Amazon receives merchandise to sell from third-party providers, the company ships goods to various facilities. It doesn’t tell sellers where their goods are going or publish a list of warehouses where items might be located, which means that sellers don’t necessarily know where they should register for sales tax compliance. Sellers don’t know where items are stored and are unaware of which states their customers reside in until the transaction is complete. The US Supreme Court recently declined to take up a case on state ecommerce sales tax collection, clearing the way for states to begin more aggressive collection attempts. This could expose third-party sellers to liability issues.
(By the way, in an effort to help sellers figure out where to report their taxes, my team is asking people to upload images of the return addresses from Amazon boxes. We’re hoping to get a list of all of the FBA fulfillment centers as a result and put it on Facebook. So the next time you order something through Amazon, send us a pic: https://www.facebook.com/taxjar.)
Competitive pressures: Amazon carries a huge variety of items, and it closely tracks sales and adjusts its Amazon-sourced merchandise accordingly.
Sellers have reported that Amazon competes with them directly, cutting into their revenue. Some other ecommerce companies, such as eBay, avoid direct competition with sellers, but Amazon’s role as both a merchandising giant in its own right and a fulfillment specialist creates this potential conflict of interest.
Despite these possible drawbacks, third-party sellers continue to flock to the Fulfillment By Amazon program, and it’s easy to understand why: Amazon’s logistics are unparalleled, and the ecommerce leader’s massive customer base gives mom-and-pop online sellers exposure to more prospective buyers than they could ever hope to attract on their own. But working with Amazon can pose a steep learning curve for third-party sellers, and it pays to enter the FBA relationship knowing all the facts.
[This story was update to correct the number of markets Amazon has worldwide, clarify a few points, and delete the statement that Amazon’s sales tracking of third-party products can lead the company to source the same product directly, which the author hasn’t been able to confirm.]
Mark Faggiano is the founder and CEO of TaxJar, a service built to make post-transaction sales tax compliance easier for multi-channel ecommerce sellers. Mark’s passion is solving complex problems for small businesses. He previously cofounded and led FileLater to become the web’s leading tax extension service for both businesses and individual taxpayers before being acquired in 2010.