Amazon Fights to Win, and Keep, SMBs
Most of Amazon’s sales come from a legion of millions of third-party sellers—and the marketplace is still pushing to attract more.
The e-commerce titan published its 2022 small business empowerment report this month, highlighting the importance of independent vendors. More than 60 percent of the site’s sales are driven by small-and-medium-sized businesses (SMBs), and Amazon reported that brand owners’ sales have grown by an average of 20 percent year over year to more than $230,000. Throughout 2022, U.S. sellers sold over 4.1 billion products, averaging 7,800 per minute. Their global reach is also growing, with more than 260 million products exported to other markets.
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Despite this upward trajectory, Amazon and the vendors that make up its platform have been met with roadblocks in recent months. “Running a small business has never been straightforward, and this past year brought new challenges that businesses of all sizes had to navigate,” Dharmesh Mehta, vice president of Worldwide Selling Partner Services at Amazon said. “The economy saw rising interest rates and inflation not seen in nearly 40 years, and many businesses continued to face supply chain issues as a result of the global pandemic and its after-effects.”
As the nation and the world grapple with economic uncertainty, the company is likely looking to “boost sales and make the platform more attractive for small businesses and sellers,” according to Shirish Nadkarni, entrepreneur and author of an upcoming novel called “Winner Takes All: How Online Marketplaces Are Creating Modern Monopolies.”
Calling Amazon the “8,000 pound gorilla” in the marketplace arena, he believes no competitor comes close to the e-tailer’s market dominance. Research shows that most shoppers begin their product discovery journey on Amazon, rather than search engines like Google, and therefore, sellers “don’t really have a choice” but to play ball. “Once you have millions of sellers on a marketplace, it’s a winner-take-all situation,” he said. “Network effects kick in; consumers come because there are millions of sellers, and sellers come because there are billions of customers.”
The company’s fulfillment infrastructure is a massive driver for SMBs, Nadkarni believes. Prime shipping is “conceptually free” in the eyes of consumers, who pay a flat fee just once per year and enjoy two-day or even same-day shipping. Fulfilled by Amazon (FBA) costs sellers 30 percent less per unit than standard shipping options offered by U.S. carriers, and 70 percent less per unit than premium options, the company’s reporting showed. “They have built their own distribution and shipping network,” providing “vertical integration across the stack,” which allows for greater control over fulfillment speeds, Nadkarni said. That’s lightyears more than a Shopify-run small business could do for itself, and a much greater value than other marketplaces could provide to a seller, he believes.
There are other players rising in the ranks, though they’re only collectively nibbling at Amazon’s share of the e-marketplace pie. Etsy and Walmart have developed their own unique audiences and value propositions, Nadkarni said. Meanwhile, Wish, which sources from sellers in China, has “done reasonably well” due to its low pricing, but can’t compete on shipping speed. China’s Alibaba is the only marketplace that the author believes has effectively dominated its own market with the same heavy hand as Amazon, but he does not believe the TaoBao and Tmall owner will make a serious play for U.S. shoppers.
There are some categorical weak spots for Amazon that have persisted since it branched out from selling books in the early 2000s, however. Today, third-party vendors’ top five sales drivers are health and personal care, home, beauty, grocery and apparel products. But as much as Amazon tries to break into the fashion space, its efforts have been limited by the very essence of its business model.
“The Amazon experience is all about the lowest price, not about brands or the experience a brand wants to communicate,” Nadkarni said. Because of this—and issues with illicitly sold or counterfeit products—a number of name brands like Nike and Birkenstock have pulled their products from the site. “There are a lot of brands that will not sell on Amazon because they feel that it would diminish them,” he explained.
Fashion shoppers are also increasingly craving personalization, not an endless scroll through inexpensive, no-name products. Amazon Fashion, the platform’s hub for apparel, footwear and accessories, showcases brand names alongside Amazon private labels and cheap basics from companies like “Reoria,” “Astylish” and “Shewin,” making for an experience that feels more like walking through a virtual warehouse than a curated digital boutique. “I think they’ll continue to have a hard time breaking into the space, unless they create a separate marketplace for brands and allow them to communicate a brand experience and share customer data,” like Alibaba has done with Tmall and its Luxury Pavillion, Nadkarni said.
Amazon’s recent report shows that the company is attempting to appeal to brands with tools that address these very issues. Amazon Stores allows brand owners to create multi-page “shops” on the site using pre-designed templates for customization. Brands can add “A+ content” like rich text, image carousels and videos to product detail pages, and run tests on the content using the Manage Your Experiments tool. Users of the platform have seen sales and interest increase by an average of 25 percent, it said.
Amazon keeps its sales insights notoriously “close to the vest”—another factor that stands to drive away market-leading brands, according to Nadkarni. The Silicon Valley giant recently settled two-year antitrust investigation in the E.U. related to its use of third-party data and its conflicting roles as a marketplace host and a competitor. Beginning in June, the firm must refrain from using non-public seller data to benefit its retail operations.
The U.S. has seen similar cases brought against Amazon, from a 2021 filing by Washington, D.C. Attorney General Karl A. Racine which alleged that the company stifled competition through agreements with certain sellers on its platform, resulting in artificially raised prices for shoppers that ultimately deprived them of choice. Last month, a Seattle, Wash. judge dismissed a case against the company brought by a Prime member that accused Amazon of steering consumers toward sellers who paid for the company’s FBA services, even if their prices were higher than non-FBA sellers.
While both cases failed in court, Amazon appears to be attempting to alleviate the concerns voiced by sellers about its monopolistic practices. The site’s Brand Analytics dashboard, which provides sellers with information about product performance, now features more insights on shopper searches using anonymous data. This allows them “to better understand customers’ interests and shopping choices while also providing directly actionable insights,” the company said.
Nadkarni believes the greatest threat to Amazon’s seemingly unshakeable influence on shoppers won’t come from another marketplace, but the rise of social shopping. Gen Z consumers and those even younger, making up a cohort known as Generation Alpha, shop differently than their millennial predecessors, turning to social media platforms for content that compels them to buy, like a product demonstration by a peer or influencer. “Now, a lot of kids are conducting their product searches on TikTok,” Nadkarni said. The platform has an integrated e-commerce solution that allows users to check out in the app. Instagram, too, allows users to buy tagged products using saved payment details without leaving the platform.
As these consumers age into greater purchasing power, Amazon will be forced to find ways to keep pace and deliver the experiences they prefer. “It’s possible that you could see some competitors come in completely from left field, capturing the minds of the younger generation,” he said.
