Amazon recently began a new program through its Fulfillment by Amazon (FBA) service, whereby it will buy products from third party retailers in order to resell them through its marketplace platform. As originally reported by CNBC, Amazon has confirmed the program after sending emails to thousands of retailers offering to buy their products at the full retail price.
The apparent aim of this program is to greatly expand Amazon’s inventory by acquiring products that either are not currently sold on its platform, or at least not through the standard FBA program.
With FBA, third-party retailers pay a fee to Amazon in order to have their inventory stored in Amazon’s fulfillment centers. Holding inventory in Amazon’s fulfillment centers greatly reduces logistical costs, like storage and handling, and allows for much quicker shipping.
Amazon is looking to greatly expand the number of products it holds in stock and makes available through its fulfillment centers. This has led to the new program, where, for a limited time, for no additional fee, Amazon will purchase products directly from retailers for later resale.
An Amazon spokesperson told CNBC, “When items are unavailable in a particular geography, we provide customers with selection from another marketplace. This offers customers a wider selection of great brands and helps sellers increase sales.”
It is noted that because Amazon will be buying at an unreduced price, it generally won’t make money through this program — and indeed will likely lose money in the process. However, for Amazon the main driver is to bring consumers to their site and make the shopping experience more enjoyable, hopefully making them more likely to return. There is also likely a desire to push Amazon Prime service, through which subscribers can enjoy additional perks, including free two-day shipping. As such, this new program acts very much like a loss leader for Amazon.
Pros and Cons For Retailers
As retailers are contacted by Amazon regarding this program, there are a few things to take into consideration before deciding whether to participate.
There could be benefits from engaging Amazon. A retailer would have effectively made a sale for full retail price. By having Amazon take on the inventory itself, a retailer could remove the logistical hassle of storing and distributing its inventory widely.
By selling as a resale to Amazon, the retailer would avoid issues surrounding sales tax. Normally, when a retailer subscribes to FBA, it acquires inventory nexus in any state where Amazon holds its products in a fulfillment center. This establishes a sales tax liability, including a duty to collect, remit, and report on all sales the FBA retailer makes in that state. With Amazon acting as the owner and holder of the stock, though, the retailer wouldn’t have this responsibility. (The retailer should still confirm that the sales it makes to Amazon are for resale in order to be able to exempt these sales from their home state tax returns.)
There are a few reasons why a retailer might not want to accept Amazon’s offer. By having Amazon become the ultimate seller, they may dilute their brands and lose valuable contact with customers. Further, some manufacturers prohibit their authorized dealers from selling their products to other resellers, like Amazon. So, it could end up being a violation of a retailer’s distribution agreement with their suppliers to sell to Amazon.
Amazon has become the $200-billion gorilla in the e-commerce jungle by taking on losses in order to generate future sales. This offer makes it clear that its plans to continue dominating the future of retail sales is undiminished.