In Suzhou, China Online toy store owner Cameron Walker relies on Amazon, which sends almost a million packages every year for his business. The 42-year-old’s toy business, which designs and manufactures toys and craft supplies in China and then sells them to English-speaking markets including the UK, US and Canada, operates on Amazon’s third-party service, Fulfilled by Amazon. (FBA), since 2016. (Walker asked WIRED not to reveal the name of his business because successful businesses on the site are often attacked by competitors who report bogus issues to Amazon to try to lower their online reputation.)
“We’re almost exclusively through Amazon, about 90+ percent,” he says. The business is one of the top three kids-focused arts and crafts brands on Amazon in the UK and among the best in the US and Canada.
“It’s an amazing scaling program,” he says. “For a minimal amount of money, you can scale a business with little or no infrastructure.”
Walker is almost entirely dependent on Amazon’s warehouses and shipping capabilities, allowing him to handle product design, manufacturing and marketing. He did not consider any alternatives or competitors. “That was the plan from the beginning,” he says, “because it’s the easiest.”
But easy is not cheap. When Amazon announced that it had built or bought too much $2 billion in warehouse space, Walker and other third-party FBA clients received a letter. In the UK it was said that their FBA fees would be growth 4.3 percent in connection with the “fuel and inflation levy”. In the US, where price increases had occurred somewhat earlier, it was deemed necessary to “partially offset the higher fixed operating costs that we will face in the future.”
The FBA service allows third-party sellers to store their items at Amazon fulfillment centers and offload picking, packaging, shipping, and customer service to the online retail giant, while also enjoying the speed benefits of Amazon Prime’s shipping service. Many companies use it.
“With all the warehouse space that Amazon has, it’s easier for them to fulfill orders because they already have groceries everywhere,” says Ben Graham, marketing manager at a nutritional supplement company called Toniiq. “They already move these trucks back and forth, so it’s easy for them to say, ‘We’ll just ship this. Everything is good”. But Toniiq is hoping to reduce its reliance on Amazon, in part because it has been attacked by a competitor, temporarily removing its Amazon and FBA facility and impacting its sales. The company could not even fulfill orders made through its own website because it used FBA to do so.
“You are completely at the mercy of Amazon,” says Graham. “It makes it harder to offer any value. You end up with significantly lower margins on Amazon than if you were offering products on your own website.” The e-commerce giant is cheaper than many competitors, Graham admits, but its dominance means that when prices rise, it’s either the Amazon way or the highway.
“We expected a return to normal in 2022 as Covid-19 restrictions eased around the world, but fuel prices and inflation created additional challenges,” said Amazon spokesman Dagmar Wickham. “It is still unclear whether these inflationary costs will rise or fall, and how long they will persist. Starting May 12, we will be introducing a fuel and inflation surcharge of 4.3% on top of our current FBA rates per unit in the UK, Germany, France, Italy and Spain.” Wickham denied there was a connection between the increase in fees and Amazon’s free storage space.
The alternative for sellers is to build their own or rented space in independent warehouses, which is quite difficult at any given moment, not to mention that the market is tight. According to Kevin Mofid, head of industrial and logistics research in Europe, the Middle East and Africa at real estate company Savills, and a warehouse specialist, the share of vacant warehouse space in the UK is 2.8% – the lowest in the whole world. history. According to him, in the US, the vacancy rate is 4.4%, with variations depending on the market. (On the coasts, vacancy rates are not uncommon.) “The market is so tight right now that everyone, not just Amazon, has to think strategically about how much space they need and how much they can use. will be needed in the future,” says Mofid.
These conditions discourage most companies from trying their luck alone or with a competitor, and instead swallow price spikes. “I totally understand how people say it’s like a frog in boiling water,” Walker says. “Costs only go in one direction.” At the same time, the business of FBA sellers is becoming increasingly complex.
Walker points to Amazon’s business model, which requires more new sellers to continually come into the space, lowering prices for customers at the same time that fees are rising. “The gap is narrowing,” Walker says. “Many people are selling their businesses or quit altogether. And for the rest of us, you just need to be more and more efficient. You really have to steer a dense ship.”
In the low-margin sector, the decline in sellers during the pandemic has also affected Amazon. Amazon has allotted too much warehouse space during the pandemic, anticipating further strong growth for its online retail platform, but it hasn’t happened. Now it remains to pay for the empty shelves. In 2019, shipping and fulfillment costs accounted for 28 percent of Amazon’s operating expenses. Now they are 35 percent.
In the midst of the pandemic, the e-commerce giant “literally went above and beyond to handle the volume we’ve seen,” Amazon CFO Brian Olsawski said in a company report. first quarter income statement. “We came out of a very tumultuous two years,” he added. “We are glad that we have accepted the decisions made over the past two years. And now we have a chance to bring our capacities into line with a more normalized demand structure.”
According to Mofid, it is impossible to know where the unused storage space is located. “I don’t think you’re going to say, ‘This warehouse is empty and that one isn’t,'” he says. “It’s more likely that they just won’t run at full capacity.”
It’s also impossible to know how much of Amazon’s warehouse portfolio is currently empty. The company has about 500 million square feet of warehouse space in the US and UK, with 90% of that in the US, according to Mofid. This number more than double during the pandemic, when physical stores closed and online shopping became prevalent. Much of Amazon’s warehouse space is dedicated to its own listings, but the company has ramped up its FBA in recent years as well. Since 2017, third-party sales account for half or more of all sales. By the end of 2021, third-party products accounted for 56 percent all sales through Amazon. The company says 7400 products are shipped every minute in the US for third parties.
However, Mofid warns against thinking Amazon’s empty warehouses are a serious problem that could lead to prices rising again. “I don’t think it’s as extreme as people say,” he says. “They said they expect to use any spare capacity by the time Amazon Prime Day arrives in the third quarter and then Christmas in the fourth quarter.”
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