Well folks, I hope you're ready for it.
The downfall of Amazon has officially started according to
Reddit. There is a viral Reddit post on
the infamous Wall Street Bet subreddit that has the title.
The downfall of Amazon has started and this received nearly
4000 up votes, which is a lot. That's a lot for this subreddit
and this in depth write up. It's multi paragraph here.
It goes into great detail is from a seller on Amazon's third
party sales. As we know, Amazon's online
retail portion is divided into two parts.
You have the first party, which is Amazon selling their own
stuff. This is similar like Costco
selling Kirkland's signature. Amazon just lists their own
products and they sell their own stuff.
They're an online store. But then you have a whole other
section which is the third party sellers.
This is where people like you and I could list an item and
sell it ourself and then we can either choose to fulfill it our
self fulfillment by seller or we could choose to fulfill it by
Amazon and use their various services.
So Amazon selling is divided into these two groups, first
party and 3rd party. If we look at the numbers for
last quarter, the online sales last quarter were 70 billion for
first party, this was Amazon's stuff that they sold and then
the third party services were 43 billion.
So Amazon is making a lot of money with their third party
sellers. They're charging all of these
fees which is now amounting to around $120 billion per year.
Now I can also see from this the growth rates of these two
different segments. The first party, the stuff that
Amazon sells grew by 8% year over year, which is still strong
growth. It is growing far above GDP and
as fast as most other companies. But then you have the third
party seller services that grew by 19%.
So the fees that Amazon is charging and the growth of their
third party sales is 2 1/2 times faster than their first party.
And the reason, or at least part of the reason it's growing so
fast is because they're raising prices.
Amazon is raising prices on 3rd party sellers and the sellers
aren't happy about it. Not one bit.
The end of 2023, Amazon started to introduce these new fees that
they're charging to sellers and they did an entire write up and
breakdown of what these fees are and how they're going to evolve
over time. They first say that they're
introducing an inbound placement and service fee for standard and
large bulky sized products to reflect our cost of distributing
inventory to fulfilment centers close to our customers.
So basically this fee, which ranges from $0.27 per unit to
$1.50 per unit that are large and bulky, is the fee for Amazon
to take your product in one warehouse and distribute it
across the country so it's closer to the customers.
So far, Amazon has been taking the hit on that.
They've been paying for it. Now they're introducing a fee so
that the sellers pay for that if they use Amazon service.
If you ship your own product to multiple locations, you avoid
these fees. So they're basically saying you
can use us, you can have us do it for you and ship our product
to multiple locations so they're closer to customers.
Or you can do it yourself and you avoid this fee if you do it
yourself, but they're forcing customers to ship products to
multiple locations. And the reason being is because
Amazon wants fast shipping and if you only have your product on
the East Coast, it's going to take a long time for it to get
to the West Coast. So they want it everywhere
across the country. Now this fee is being introduced
March 1st, 2024, which is why you're hearing a lot of noise
from Amazon sellers right now. A lot of them are complaining
because they're now seeing the brunt of this fee or the work
that's required to do this fulfillment like Amazon has been
doing. Now they also mentioned that
they're introducing a low inventory level fee for standard
sized products. This fee applies if you
consistently carry low levels of inventory relative to your unit
sales as this inhibits our ability to distribute products
across our network, degrading delivery speeds and increasing
our shipping costs. Sellers can avoid this fee by
maintaining more than four weeks of inventory relative to sales.
These fees will apply starting April 1st, 2024.
So we not only have this distribution fee that was
implemented just this month, we also have a low inventory level
fee. You have to keep four weeks
worth of sales so that they can consistently ship it across
their distribution centers. And again, this all looks like
it's centered around the customer making sure that they
can get their product as quick as possible.
The main goal for Amazon is to have when you click a button for
that product to get on your doorstep the next day
consistently and reliably. So they're incentivizing sellers
to keep adequate amounts of inventory by this low inventory
fee. And then they mentioned that
finally we'll expand the return processing fee to apply to high
return rate products in all categories, excluding apparel
and shoes. So if you're selling something
on Amazon that's consistently returned, Amazon no longer wants
to take the brunt of those return processing.
So Amazon is introducing many of these fees to sellers and
they're implementing them over the course of the year.
Now sellers are trying to figure out these complex and nuanced
fees and how they impact their business.
Many of them say that it may actually save money in some
cases, but most of them, the majority of sellers are saying
that this is a big additional cost, it's going to be a price
hike. And of course they're not happy
about prices going up. We can look at the case here,
Chase, the capital allocator, is an Amazon seller that says I've
sold on Amazon Marketplace for 10 years and I've never seen
Amazon sellers more outraged than they've been in the last
week after the FBA, inventory placement fee increased 200 to
400% for most sellers. So this isn't validated data,
but in his case he believes that Amazon is increasing prices by
200 to 400% for most sellers. For me, the cost per item to
ship my average item on Amazon FBA went up 300% with the fee
changes. Folks are absolutely outraged,
especially low margin sellers. So we look at some emails that
he's received from different sellers and different people
working with his business. They go over the placement fees,
how it's increasing by $36 per item or per package.
We have other ones here where he's gone over different sellers
saying that there's are going to be $400.00 per 1000 units, which
is ludicrous. Ridiculous.
One of the Amazon sellers here say that this is a double
whammy. They've been browsing through
the forms, taking in the widespread frustration regarding
the new inbound placement fees, and the situation seems to be
reaching a boiling point. It's astounding to see shipment
costs skyrocketing 8 to $14.00 per box to an exorbitant 90 to
$140.00 per box. However, I've noticed a
significant piece of the puzzle that may seem to be missing.
It's not just about the increase in fees for placements.
There's an additional layer where we've been penalized for
failing to meet sufficient stock levels to meet demand.
That is the elastic demand price.
Amazon wants you to keep a certain level of inventory
depending on your sales. This essentially forces us to
increase the frequency of our shipments to ensure our
inventory levels are adequate. Failure to do so results in per
unit charges. Amazon strategy seems to be
pushing us into a corner where we're compelled to send more
units, all the while increasing the cost for replacement.
Now they say. As a potential workaround, I'm
considering sending a larger shipment to Amazon storage and
distribute. This would allow Amazon to
automatically pull inventory as needed, potentially helping
circumvent these fees. Or just switch to FBMFBM is an
abbreviation for the seller fulfilling it their sells, not
going through Amazon's fulfillment network.
And that's the case with all of these complaints.
You see, Amazon has a defense here.
Unlike a lot of other big tech companies with a controlling
marketplace, Amazon can say, if you don't want to use our
fulfillment network and all the services we offer, that's fine.
You can use FBM. That's fulfillment by yourself.
You're fulfilling it as a seller, so you can avoid all of
these fees and all the trouble of what we charge if you fulfill
it yourself. But the truth is, and what these
sellers don't want to say, is that FBM is expensive.
Fulfilling it by yourself is very, very expensive.
So even though they're complaining about Amazon raising
costs, the alternative is also very expensive.
And this highlights the amount of work that Amazon has been
doing at a subsidized cost. So we have many complaints like
this from Twitter, with sellers on Twitter saying that these
fees are sticking it to small businesses, but that's not it.
We also have from Reddit, the Wall Street Bet subreddit saying
the downfall of Amazon has started.
Investors and consumers need to know this very important fact
about Amazon. They just dug their own grave.
The third party sellers make up around 65% of the sales
generated on Amazon and recently they did a dirty move to 3rd
party sellers that will have many leaving the platform or
raising prices so high that Amazon becomes uncompetitive to
consumers. Amazon just announced and
implemented 2 new double dip fees that will crush third party
sellers and that's not even an exaggeration.
The first fee which has been implemented already is an
inbound placement fee, which is a shipping fee Amazon tracks on
sending inventory to Amazon Prime and Amazon FBA.
Fulfilled by Amazon, this fee has increased the shipping cost
for 3rd party sellers by 6 to 10 times.
Now how does he know it's increase the cost by that much?
We don't really know, but that's just what he's saying here.
For example, a seller sending a truckload of inventory prior to
this inbound placement fee to Amazon traditionally spent
around 600 to $800, sometimes way more.
Now on top of this, they are charged with an inbound
placement fee of around 3000 to $5000.
This essentially wipes out a huge chunk, if not most, of the
profit margin from sellers on Amazon.
Add in the additional fee. Amazon's charging 15% referral
fee just to list the one on their site, or 8 to 15%
fulfillment fee. FBA picking, packaging and
delivery, storage fees around $0.78 per cubic foot, and
advertising costs around 2 to 15%.
I wouldn't call that really a fee, that's an optional thing to
advertise, but he's grouping it in with the fees here.
The second fee, which will take place in about a month is a low
inventory fee, which is a fee imposed by Amazon algorithm when
inventory is starting to run low at Amazon fulfillment centers.
This fee can be anywhere from $0.32 to $1.11 per item.
Now it continues on. Why is this important for
investors and consumers? The only solution for 3rd party
sellers to barely keep their head above water and to maintain
remote semblance of their razor thin margins prior to the new
fees is to raise prices. I'm talking 20 to 30% price
increases are required at a minimum just to keep back to
par. You want to talk about all the
issues with inflation? Well now you know corporate
greed is being shown at its finest.
Amazon reported $30.4 billion net income for 2023, but with
Penny pitching third party sellers even more at the expense
of driving prices up for consumers like never before seen
on the platform. This will cause consumers to
look elsewhere to shop other than Amazon because Amazon will
now be highly uncompetitive. It's just a matter of time
Amazon shot themselves in the foot and needs to reverse course
on these absurd fees. Now of course after Twitter
started to blow up with complaints, Reddit started to
blow up with complaints. We also had the mainstream media
jump in with Fortune doing a huge write up on Amazon and
these exorbitant fees they're charging.
We have many quotes here from customers and I won't go over
the entire article, but I just want to highlight some of the
things that they they are saying here.
It's becoming increasingly difficult to sell on Amazon.
You're getting squeezed from all sides.
It's a very high fee. It doesn't make sense how much
money they're charging. I'm very experienced on Amazon
and I've spent so much time on this, but for many items I still
don't have clarity on how exactly I'm going to sell
profitably. Yet it's crazy.
You got to precisely thread the needle to not get completely
killed. This article was published March
1st when Amazon charged that distribution fee, and then only
a week later, March 8th, we have an article that the FTC is now
probing Amazon on its new controversial fees around its
$140 billion seller business. Now why is that important?
Because the FTC chair is Lina Khan.
Lina Khan, who has made it her life's ambition, her life's
goal, to go after Amazon. That's what she really wants to
do. In fact, in 2017, she authored
Amazon Antitrust Paradox. This is while she was still in
school, the Yale Law Journal. This was back in 2017, before
she was ever part of the FTC. She even had it then that Amazon
was a big bad company. Lena Khan views herself as some
Obi Wan Kenobi going after the bad empire, the empire which is
Amazon. She wants to take Amazon down a
pig. And it's clear to see that in
her long term ambition and taking down Amazon, these
complaints have added fuel to her fire.
She wants to take down Amazon and now she has the complaints
from sellers on Twitter, on Reddit and highlighted by the
mainstream media. Top sellers are upset that they
have to pay more and Lina Con is going to use that as fuel to
take down Amazon. I would not be surprised.
In fact, I think it should be expected that in the coming
months Lina Con and the FTC will launch a new lawsuit against
Amazon over these fees. So where does that leave us?
We have lots of sellers complaining, and we have the
FTC, the likely suing Amazon in the coming months.
The first thing I want to mention is that raising prices
is not illegal. The FTC is going to have a very
difficult case if they sue Amazon on the basis that they're
raising prices unfairly on sellers.
Defining what's unfair to sellers is legally dubious and
Amazon can always go back to the excuse.
They can go back to the, I believe, very rationable,
reasonable excuse that sellers don't have to use their
fulfillment network. Sellers can sell by FBM
Fulfillment by Merchant, where they simply do the work
themselves. They ship it out to the
locations themselves, They do all the manual labor themselves.
The reason that they don't want to do that, even though they
would avoid most of Amazon's fees, is because they would take
on the cost of the shipping and doing it themselves.
So most of them are admitting that even though Amazon is
raising prices dramatically, it's still cheaper than doing it
yourself. It's still easier, more cost
effective, than doing it yourself.
This also proves how valuable Amazon's fulfilment network is.
Even though these sellers are griping and complaining about
these new fees, most of them will still choose to pay it
because it's still easier than doing it yourself, and still
cheaper. Many of them are complaining
that they already have a razor thin profit margins, and if the
fees go up, they're going to have to raise prices or they're
going to be unprofitable. That may be a problem for some
businesses, but look at the case of Amazon.
The people complaining about profit margins should look at
Amazon's profit margins over the past decade.
We can look at it right here on the ratios chart.
If we look at this over the past 10 years, Amazon in 2014 had
negative margins. The FTC didn't jump in and
defend Amazon there. They were fine with Amazon
losing money profit margins of half a percent in 2015.
Now if we look at the amount of revenue Amazon was doing in
2015, we can see that right here.
Amazon did $107 billion in revenue and made half a percent
profit margin. The government didn't care.
The Amazon was basically running a giant charity, building out
all of this infrastructure, investing in the US economy,
providing 10s of thousands of jobs, hundreds of thousands of
jobs. They didn't care all.
Then third party sellers were happy to sell on Amazon when
they were subsidizing the cost of their logistics network.
In 2016 it bumped up to 1.74 and then for a couple years it
stayed at that .2018. The profit margins were 4%.
This is still below Walmart now. An important thing to keep in
mind here is that during this time period of profit margins
being 4 and 5%. This is for the entire company,
Amazon the whole thing. But AWS has profit margins of
30%. So all of this profit right here
presumably is being generated by AWS.
The only reason the company had positive profit margins at all
was because of this unaffiliated business with retail.
In reality, Amazon has been losing money on their retail
business for the better part of a decade.
The most recent year, 2023, Amazon had 5.29% profit margins,
5% profit margins for the entire company when AWS had around 30%
profit margins. So most of this again is being
driven by AWS. So as Amazon raises prices on
3rd party sellers, there's going to be a battlefield of opinions
based on different incentives. As a shareholder of the company,
I see this is a positive thing even though there's going to be
a lot of complaints and a lot of noise.
Ultimately, what Amazon offers to sellers is an incredible
value and many of them will still continue to fulfil their
products by Amazon because they know the value of all of this
type of logistics being taken care of for them.
They also know that the customer of Amazon is unlike most
customer bases, they're higher income and they're very sticky.
Amazon customers are not going to go to some third party
website to save a couple dollars.
They prioritize the trust with Amazon and they prioritize the
consistent fast shipping. So even if prices go up
slightly, I don't see Amazon customers leaving.
So when I look at the stock, there's going to be a lot of
opinions this year, but I still remain with my prediction.
The Amazon this year in 2024 will generate record high
amounts of cash flow. My prediction is somewhere
around $70 billion, which puts the valuation of the company
right around a 4% free cash flow yield, which I think is still
good value. So I'm bullish on it.
I don't think it's a downturn of Amazon.
Maybe you agree more with the people on Reddit or the people
on Twitter. Let me know what you think.
That's all for now.