As Amazon Gets Bigger, Sellers Feel the Squeeze

Published Apr 23, 2019, 9:00 AM

Jason Boyce built a successful business selling sports equipment on Amazon. As the platform has grown, Amazon has pushed sellers to lower prices, shorten delivery times and compete harder for every sale. This week on Decrypted, we explore whether entrepreneurs like Jason have reached a breaking point. They now face a competitor who's potentially unbeatable: Amazon itself. 

I wake up every morning thinking about that, should I sell on Amazon? But the reality is Amazon owns fifty of the online market share in the the United States. The customers are on Amazon. That's where they're at, And so was it a fantasy? Yeah? We just leave Amazon and be able to survive, But in reality we basically is a business. Jason Boys is an online retailer with nearly twenty years of experience. He runs a multimillion dollar business called Dasity, Inc. What he's describing here is the fundamental dilemma facing business owners who sell through Amazon. Most of us have used Amazon to buy something at some point, a book, a phone charger, a pair of socks, so we know it's fast and cheap and can be unbelievably convenient if you're the customer. What we don't realize is the extent to which Amazon uses access to its hundreds of millions of customers as leverage to raise the bar on people like Jason, pushing them to lower their prices, speed up delivery times, compete harder against other sellers for each and every sale. Amazon is projected to sell two eighty three billion dollars in merchandise this year. That's nearly half of all online spending in the US over the last few years. It took things a step further by launching its own line of Amazon branded products. Now, lawmakers like Senator Elizabeth Warren are calling out Amazon for this behavior, saying it's anti competitive. My view on this is it's a little like baseball. You can be an umpire a platform, or you can own teams. That's fine, but you can't be an umpire and own one of the teams that's in the game. So the principle here is break those apart and you can work for the platform part. You can work for one of the teams. That's a lot of fun. But if you work for one of the teams, you compete like every other team in America. By and large, businesses have scrambled to jump higher every time Amazon raised the are but privately, some sellers say they're being pushed to their limits. Not only is it insanely competitive to reach customers, but Jason and others like him are facing a competitor who's potentially unbeatable, and that's Amazon itself. That's a star. Contrast to what CEO Jeff Bezos wrote in an annual letter to shareholders just two weeks ago, where he boasted about how well these businesses are doing. Perhaps it's a sign that Amazon knows it might be seen as pushing the limits of its power. I'm brad Stone and I'm Spencer Soaper, and you're listening to decrypt it. Okay, Spencer, why don't you take it from here? A few weeks ago, I flew to Las Vegas for a convention called the prosper Show Time of Assistance Down. It's organized independently from Amazon, but the whole point of this event is about selling things on Amazon. It attracts about people. It's held at the Westgate Hotel, and even though these folks compete with each other on the platform, the vibe is really upbeaten friendly. Everyone's kind of sharing ideas and tricks of the trade. They want to know the best way to ship goods from China and what's the latest software to keep track of sales, tax obligations law. Just through I find this is a great place for talking to people in Amazon Land. It's where I connected with Jason Boyce, who you heard from at the start. He's a Marine Corps officer who turned an online entrepreneur. He recently moved to New Jersey. He's a pretty unassuming and relaxed guy. Kind of reminds me of a high school principle. We sat down at a table outside the hotel, which just happened to be right beneath the airport's white pages, right under the air airport. Yeah, should should be okay. Jason's in business with his brothers. They've been selling online since two thousand two. This is before Amazon was the big player it is today, so he's really seen this space evolved from its early days. They started out selling basketball hoops. This is a tough thing for online sales. You know, big heavy outdoor equipment. You see him backyards and driveways. Their website was called super Duper Hoops dot com and Jason's business was really starting to take off when he did a hundred thousand in the first year, a million the next year, two million. The next year of life was good. That was all basketballs, all basketball hoops, basketball hoops, and then we started selling home wreck equipment like foosball, billiard tables, air hockey tables, those kinds of products as well. In the early days, Jason would buy add space on search engines that directed people to his website. Then once someone made a purchase, he used a method called drop shipping. This means that he doesn't buy any inventory in advance. He waits for a customer order to come in, and then the manufacturer sends the basketball hoops straight to the customer. This is a low cost way to start a business because you don't have to buy a lot of inventory upfront. Then a couple of years later, around two thousand four, one of Jason's brothers got a call from Amazon. People are always floored when I tell them, we actually got a phone call from Amazon asking us to sell our products on their website. And uh, we immediately jumped at the opportunity and we are hoops were selling on Amazon before Amazon themselves were selling basketball hoops, so it was right at their very early days of the sports and outdoors category. So Jason's brother didn't think much of the call from Amazon. He even waited until the end of the day to tell the others. But when Jason heard, he thought, what Amazon called, we have to do this, and so they did. Business was good. There was like no competition. We were making really good margins. We didn't have to carry any inventory. It was all being drop shipped, and uh, life was really good. It was great. We loved Amazon back then. Jason's laughing because selling on Amazon has changed a lot in the past fifteen years. We have to remember that he started the dot com boom when they were all kinds of generic domain names like drug store dot com, soap dot com, diapers dot com. At this time, Amazon was trying to expand beyond books and movies. It needed sellers like Jason too, lore more show operas because it wanted to be an online version of a big box store like Walmarter Target. But the honeymoon of those early years didn't last forever. We were lucky to be one of the first on there because we had a nice run of sales, But then because it was so easy, especially compared to eBay, folks from me By started coming over in droves and started listing, and really, at that time, their algorithm was very basic. One of the only ways you could get the sales if you had the lowest price. So what happens when there's ten sellers selling the same thing and the only way you can get the sales if you lower the price, the margins disappear. What Jason's describing here was a big learning curve for a lot of Amazon sellers. If you're selling a generic product that a lot of other people can also get, you're gonna face extreme price competition on Amazon. It's the point where your business could be unsustainable, especially because within a few years Amazon had millions of businesses selling on the platform. So in order to survive, Jason and a lot of other sellers they started designing their own unique products that no one else had. Folks in the business called this private label, and Jason's private label brand is called Harville. Is the brand all basketball hoops? Or do you have a variety of products? Actually, we don't even sell basketballs anymore because they have you become so commoditized. It's hard to make money. But we we sell mostly home fitness and home rec equipment. Now they started making bacchi ball sets, foosball tables, air hockey tables. The business continue to grow. Jason said his Marine Corps training actually came in pretty handy, since the Marines teach you to adapt and adjust and use resources wisely. Today they have about ten people who work from home in the US and another eighteen people in an office in Manila. Those people mostly do data entry graphic design. They work a lot with the images. Images are a really important part of selling on Amazon, since you know people aren't standing in front of the product before they buy it. Every year, Jason sells tens of millions of dollars in inventory on Amazon, but that success has a price. A big hazard of doing business on Amazon is that changes can come quickly without warning, meaning what worked yesterday suddenly doesn't work today. That gives sellers a lot of indigestion. What always makes me crazy about Amazon is I know that they're making these changes because they're doing what is best for their customer. This change made the customer experience for an Amazon customer better. I don't dispute that, but what would have been nice is an email six months earlier saying, Hey, we're gonna make this change you guys. Metrics are kind of in the gray area. You might want to change a business model. It's really there's no communication. They just make these changes, and it could it can put people out of business. I asked Jason to give me an example of what he meant by that. He said, several years ago, Amazon started pushing sellers to deliver their goods more quickly. So it was rewarding sellers who could manage two days shipment and punishing sellers for delays or mistakes on orders. And this at Jason really hard, mainly because he's selling basketball hoops, which are so large and heavy. It's not like, you know, you can just put in a mailbox like a phone charger. As a result, he ended up changing his entire business model. My life got infinitely more complicated when I had to start inventoring these things. Myself was like a big That was like the biggest change that affected us. We had to cut millions of dollars in revenue from our drop shippers at that moment. That was in that And so did you have to shift from a drop ship model to a different new model. We did. We had to ship to an all inventory model. Up to this point, every time Amazon made a change, sellers like Jason would race to adjust. Sellers understood that even though it's tough for them to meet the new standards, the changes were good for customers, which is good for Amazon and in turn good for their businesses. But some of Amazon's more recent changes have made sellers doubt that idea, since the costs primarily fall to them and the gains go to Amazon. One change that Jason still struggles with is Amazon's decision to introduce advertising. The day that they launched sponsored ads, I cried in my pillow that night, I should explain here. Jason so upset because he's seen this movie before. Google changed its system before Amazon did and started charging for results to appear at the top of the results page. What this means is this, if you go to Google and works for something like weather or traffic conditions, you'll get mostly what's called organic results, sites like weather dot com that are visited frequently and provide the information you want. But if you search for a product like black dress socks, the top of the page will be sponsored results businesses that paid to be there rather than business is known to have what you're looking for. Then when people see your ads and click to your site, that improves your organic ranking, So the two are intertwined. When Google did this, the price for keyword searches got bit up higher and higher, because, let's face it, nobody looks at page seven of the search results, so it is essential to have high search placement to get noticed. And that's what started happening on Amazon too. Initially, the costs were cheap, and we're like, we're not doing that. We're not going to pay them expercent for every sale, and on top of that drive traffic because we've got these great organic listings. But then they started to move the top two thirds the above the fold section. When you go on a desktop or your mobile, the whole top of the page is all ads now, so you're organic rank is you have to scroll to get to the organic rank product. And so that's something I have a real problem with. Now paying for ads can significantly eat into a seller's margins. All this, Jason says, means it's now a lot more expensive to be a seller on Amazon. So I think that there's one of the side effects of this sponsored ads program is the prices eventually will have to increase on Amazon. And if there's one thing that keeps Mr Bezos up at night is that he wakes up one day and he's not the lowest price anymore. That's that's gonna be a problem for them. I think it's because of that bidding process, because of the way that it works. I think that prices are going to have to go up to accommodate those extra fees. Have you had to raise prices on anything we have, We've had to. We've had to. The big thing about the AD program is it means Amazon makes more money from every sale. But this isn't the only change Amazon has made like that. It's also been developing hundreds of its own Amazon branded products. You can get Amazon batteries, Amazon baby wipes, Amazon genes, Amazon dining room tables, and even an Amazon Basics Botchy ball set that costs fifteen dollars less than the one Jason sells. Amazon can see all the data about what's popular, what sells, which kinds of listings do best. The company gathers an incredible amount of detailed information about customer behavior, and it uses that data when making decisions about how it designs and prices its products. Sellers like Jason can see some, but definitely not all, of that data, and that's why this change is what frustrates Jason the most. Look, I understand that they're a retailer, but I've always had sort of problem with them having a marketplace with all that data that that I'm dependent on for my business to sell, and that they can then take that data and launch their own products. I have kind of have kind of an issue with that. This question is at the heart of the debate over regulating big tech platforms. Is it fair for companies like Amazon to own and control the marketplace where merchants like Jason sell products and then turn around and sell the very same things, oftentimes giving the Amazon brands more visibility. Here's what Jason said, Do I think they should be broken up? I don't know. That's that's a question for the lawyers, But I sure makes a lot of common sense for me that if you're going to have a marketplace, that your purpose is to help your sellers and your customers, and you shouldn't be able to piggyback off the hard work and labor of your sellers to beat them. I think just a general part of fairness in my mind. Maybe that's unrealistic, but they just have so much control of power and data and or or I got another alternative, share with me all the data you have so that I can also use that to my advantage so that I can compete better with you. UM So, if you're gonna use my data, I want to see it, all of it. After almost twenty years and online retail, Jason is in the process of selling his Amazon business. It still makes tens of millions of dollars each year in sales, but he's decided he'd rather are a consulting business called Avenue seven Media. He's going to focus on helping other people selling Amazon. So Spencer, it sounds like there's at least to one Amazon merchant out there that's ready to donate to the Elizabeth Warren presidential campaign. On the other hand, a couple of weeks ago, after Elizabeth warren't unveiled her plans to break up Big Tech, Jeff Bezos wrote a letter to shareholders in which he essentially gave us his rebuttal to her plan. According to Bezos, he said that third party businesses who sell in the platform are doing really well. Do you think he's taking into account some of the grievances of folks like Jason. Yeah. And I don't think that any of the merchants are disagreeing with anything that he said in that shareholder letter. They freely acknowledge that, you know, many of them have been able to build multimillion dollar businesses, you know, virtually overnight thanks to access to Amazon and its customers. The main point they're making is at over the years, as Amazon has grown and its power has grown, it can really exercise its leverage over them, and that when we look at that, you know, fifty eight percent of all the sales coming from these merchants, Amazon is taking a bigger and bigger bite out of each and every one of those sales. You know. What Amazon will always say, though, of course, is that it's very customer focused. And your profile of Jason I thought was interesting. You know, the business that he and his brothers run started almost as retail arbitrage right there, drop shipping from a factory probably in China. Eventually they're slapping their brand on it. Um they're basically inserting a margin between the factory and the customer and the Amazon private label business. I mean, in some ways you can look at it as a sort of you know, increasing the efficiency of the supply chain. They're going to the factories in China, maybe even the same factories that Jason and his brothers used, and saying you could basically sell directly to the customer and we're just going to put an Amazon brand on it. And of course Amazon would call that being customer focused and helping to to lower the price, and so I guess you know, in some of these changes to its business model, some of the things that have made Jason and his brother's lives really hard. I mean, can we honestly say that that is in the service of a better customer experience? Yeah, the private label is a good point, and it's something that other retailers have been doing for decades. Right. You see private label products in Walmart, you see them in Target, you see them in supermarkets. And probably the most recent change that the sellers have a beef with is the advertising, because that's the one where Okay, it's costing me more to sell on Amazon. Amazon is getting more of the money from each sale. But where is the consumer benefit in having the prominence go to the highest bidder as opposed to the best product at the best price. Amazon did give us a statement responding to that point. It said the company's first priority with advertising is for the experience to be useful and relevant to the customer. It also said advertiser and customer interests are inherently aligned. Now, Spencer, you talked to a lot of sellers of that conference, in addition to Jason. What was the general feel and did they agree with Jason, and did it seem like sellers were reaching a turning point as it relates to Amazon. You know, sellers are still very devoted to Amazon. They kind of have an attitude of you know that which does not kill us, makes us stronger. But the frustration is real that Amazon is taking more and more of their money on every sale. So let's talk about that. Did you get into it with any sellers about how their costs have gone up? Like? How much does Amazon take out of every sale? I asked one seller to break that down for me. His name is Chad Ruben. He does about twelve million dollars in sales a year, mostly vacuum cleaner parts and accessories, and he does most of his business on Amazon. Can you can you tell us at all or even roughly what the erosion was in in your in your margins, or even like a percentage you used to give Amazon, you know, when you first got started in what you give them now? Yeah, I mean if you look at FBA in itself, that you're looking at seven percent, then you tack on the fifteen percent commission fee, and then you tack on uh let cost back in the envelope. Math that a purchase through Amazon, and that's not even including the cost of the good soul. So that clip is full of acronyms, So let's try to translate it to English. If you sell something simply on Amazon's site, and you know that's all that Amazon does is put your product on their site, you pay them a fifteen percent commission. The seven percent for f B A is what's called fulfillment by Amazon. That's where you're actually sending inventory to Amazon warehouses. They store it for you, they pack it and ship it when an order comes in. In the headline number Chad spends on advertising, so that all adds up to to Amazon, and then you have to consider the cost of the product itself, which the merchant bears along with the cost of their own business. So we can compare that to other tech platforms. Apple of course takes a thirty percent commission for all sales made through the app store, and companies like Spotify have complained about that because they think it's too high. Uber takes around twenty sent to be tried, and we know how rocky that their relationship is with drivers. These, of course are an apples to Apples comparisons, but it does show that Amazon's fort take great is really high. As the spencer, how does that compare to other relationships between retailers and their suppliers. Yet, it's hard to compare, like you said, the the apples to apples, because if you think of a site like eBay where they're more hands off in terms of their you know, logistics, where Amazon will actually store the products for you. But the main thing is that there's really no alternative that these sellers have to pay what Amazon charges because there's there's really nowhere else to go. They already sell on these sites like eBay and Walmart and you know Jet before Walmart purchased it. They thought this would be helpful initially and make them less rely ont on Amazon, but they're they're learning the opposite is happening right and in large parts of the world, Amazon is the best option for selling online. So is Amazon reaching the limit of how far they can push sellers? It's a good question. I talked to another a seller named Brat Howard. He's also been selling on Amazon for about twenty years. He told me about a time when sellers revolted against Amazon. So Amazon invited a bunch of brands to Seattle and Apple and Disney were there, and there were hundreds of them gathered in a in a big conference room, and what was meant to be kind of a make nice meeting turned out to this big venting session with all of these brands complaining about fake things on Amazon with their names on it. And when Amazon tried to talk to the sellers about the problem, things really escalated. I mean, I've never seen anything like it. Everyone in the room was raising their hands, screaming at the guy and saying, are listening to the hijacked brands are getting crushed? Your marketplace is destroying major labels. You guys have no control this, What the hell is going on? And in that exact moment in time, the world change and Amazon pu steak down and launched the brand program a few months later. That's fascinating, Spencer. I mean, we've seen news here and there about brands reacting with frustration to Amazon, but I think this is the first I've heard of a sort of revolt in person that set some change in motion. How did Amazon react? This revolt was supposedly back in or fourteen, and we can think of things that came since, like brand registry, and I think Project Zero is the new tool that Amazon is trying to give brands more control and power to report counterfeits on the site. Right Amazon told us they also have a team of people dedicated to anti counterfeiting. They said they have software engineers, applied scientists, and investigators working on the issue. But it still remains an issue. And let's not forget. Donald Trump even called for an investigation a couple of weeks ago into the proliferation of counterfeits on online marketplaces, including sites like Amazon. So, getting back to this broader question and proposal raised by Elizabeth Warren around an Amazon breakup, do you have any sense for whether Amazon sellers would actually benefit from that? You know, I spoke with one veteran seller, Alon Guestwalter. He's been selling home products on Amazon for nearly twenty years as well, and he started in the mail order business, so he kind of transitioned from a direct mail business to selling online. He's really benefited from the fulfillment by Amazon model. That's where they Amazon stores your goods and packs them and delivers them. And he even has benefited from advertising new products. So he really worries about government influence. So it's a devil you know is better than the one you don't kind of think. I think that, you know, the government should run the government and the business run the business. The fact that Amazon was able to grow and bring value to the customers and really grow and take over while other people stayed behind is not something that the government should break up or anything or hurt their business model because the effect of hurting Amazon's business today is going to affect all of us, and you're talking about tens of millions of jobs. The model works. I think the governments will stay out of it. And that's it for this week's episode of Decrypted. Thanks for listening. If you have a story to share, I'd love to hear it. You can write to us at Decrypted at Bloomberg dot net. But I'm on Twitter at Spencer Soaper and I'm at brad Stone And please help us spread the word about our new season by leaving us a rating or review in your favorite podcast app. This episode was produced by Piagod Cary and Lindsay Cratterwell. Our story editor was Emily Busso. Thank you also to Ann vander May and aki Ito. Francesco. Levi is head of Bloomberg Podcasts. We'll see you next week.

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