Amazon's Latest Supplier Purge Is an Indicator of Price Predation

> In a recent article (and subsequent blog post), I argued that Amazon’s negative cash flow might ...

I stopped reading and started researching there. Amazon has positive cash flow, both overall and from operations specifically, which is what would would matter to this argument.

In the linked-to post, the author states

> In fact, if a careful observer overlooks the GAAP loopholes that allow Amazon to dress up its numbers, during 2017 the firm experienced a negative cash flow of $1.461 billion

This is very wrong. That calculation stems from the section of their 10-K titled _Free Cash Flow Less Finance Lease Principal Repayments and Assets Acquired Under Capital Leases_. As the section says "Free cash flow less finance lease principal repayments and assets acquired under capital leases is free cash flow reduced by “Principal repayments of finance lease obligations,” which is included in cash flow from financing activities, and property and equipment acquired under capital leases. In this measure, property and equipment acquired under capital leases is reflected as if these assets had been purchased with cash, which is not the case as these assets have been leased.", which is to say, it's including both a remix of items that already exist on the cash flow statement, and things that weren't paid in cash but are being treated as if they were.

If Amazon were truly selling below average cost, their operating cash flow would be negative. It's not; it's positive. As is their cash flow from across operating, investing, and financing activities.

The argument in this article doesn't really make any sense. It hinges on the idea that somehow Amazon is shifting fulfillment costs onto suppliers by discouraging them from using Amazon's fulfillment services (FBA) in favor of doing fulfillment in-house (FBM). But what is conspicuously omitted is that Amazon charges for fulfillment. And they cost about the same as other fulfillment providers. They offer some competitive advantages that you would expect given their tremendous scale, but they are basically on-par with other providers. Which totally undermines the thesis of this article, since Amazon isn't losing money on their fulfillment business. Sure, fulfillment isn't a high margin business or anything, but Amazon has shown lots of willingness to get into low-margin business that require operational excellence (like package delivery). And having such an excellent fulfillment offering is a major competitive advantage, because it makes it a lot easier for sellers to get started on Amazon's platform.

Source: my company brought new products to market recently, initially selling exclusively on Amazon.

As a medium sized FBA seller, 1.75M revenue last year, this is a ridiculous article. It conflicts with Amazon's and Bezo's core value of putting the customer first. If it's as suggested, Amazon would become no better than Ebay, and would cost them tons of customers.

FBA does shift a lot of costs onto Amazon but it also lets them completely manage the customer experience. You don't have to deal with some dumb shit seller who could give a crap about customer service. It conflicts with Amazon's plans of broadening their fulfillment network and logistics too. Why build all that capacity if your sellers are now responsible? And while Amazon does charge a single per unit fee, they also have monthly storage charges, long term storage charges, fees for handling refunds, etc, and combined, the fees have steadily increased each year to the tune of 5-10%. Oh, and you also get charged fees for Amazon to do any prep work on your products, etc.

FBA has been an unequivocal boon for Amazon, and I doubt will go away any time soon.

The shift to seller fulfillment is probably driven by sellers, not Amazon. FBA requires you to carefully manage inventory--you're penalized if you don't. It is infeasible for drop-shippers. You have to understand their reports, and reconcile them. You're giving up a large amount of control and introducing some risks, but for some incredible benefits.

I recently discovered some really bad effects from Amazon third party sellers. For a lot of item, 3rd party sellers are listing inventory they don't actually have. I think what is happening is that if they are out of an item the listed, they just order from another store, like Bed Bath and Beyond and ship it directly to the customer. It even arrives as ordered by a random person you have never heard of from BB&B. It might even be a slightly different product brand name but probably the same manufacturer. I believe there is another variant of this where you simply list inventory at a higher price and hope to pick up orders. For example, maybe BB&B lists an item at $30. The seller lists the item at $40 on Amazon and if someone orders, they just direct ship from BB&B and pocket the difference. This gets really bad for gift registries. You list an item when it was in stock at $30 on Amazon. That item goes out of stock but one of these 3rd parties lists it for $40 and someone buying you a gift decides to purchase that instead. Next think you know, a random BB&B order shows up at your door from some random person you don't know. Amazon has your package marked as shipped, but can't produce a shipping number, and everyone is very confused what this BB&B item is. It's such a mess and I can't believe Amazon is tolerating this crap. I just told Amazon the item didn't arrive because they can't produce a shipping number and the item is slightly different. I just cancelled the order and got my money back. I'm not going to do extra work because some person in North Dakota wants to play Amazon games.

IMO, this is only applicable to smaller players. Amazon still wants to play in the private label space and they're not going to delist Tide or Bounty or Crest. They're in true supplier relationships with those brands and will continue to fulfill those orders while negotiating co-op and pricing with the supplier.

The smaller players will get squeezed for a little while but I don't think it will take long for them to leave the platform. If they can't get subsidized fulfillment, they will simply move to a D2C model where they don't have to pay Amazon 15% plus $1200/year and can control pricing.

The most obvious way they will lose out, to me at least, is in advertising. They still have to pay for CPC on Amazon, but it is much more effective at generating sales than AdWords or Facebook on a brand-owned site.

Hah, should have read the comments here first :-) I agree that the author is missing both context and understanding in this article.

A lot of speculation around this move by Amazon (removing FBA type businesses) has rattled around, and rattled some suppliers. But my sense of it is that Amazon has realized that a noticeable portion of their FBA business involves counterfeits and frauds. What is worse, the 'A' part of FBA makes Amazon a liable party to the fraud. I'm going to further guess that Amazon has been looking at ways to try to police people who submit counterfeit goods as 'legit' and get Amazon to sell them, and finding that this is a game of whack-a-mole that costs more than the margins they are getting on this business. The "easy" solution is to dump FBA (or at least strictly curtail it with new language/contract work that allows Amazon to recover costs from the bad actors).

It gives me hope that they recognize how crappy their offerings have become, especially in normally 'high margin' products like Apple accessories.

"In light of this comparison, it becomes obvious that Amazon’s goal should be to constantly increase the ratio of FBMs."

Amazon's edge is that they've managed the logistics of this at a scale that no one else could -- before Amazon shipping was expensive, and often terribly slow.

So if these big vendors are just shipping direct, and Amazon is nothing more than an order submission agent, I would argue that is exactly contrary to what Amazon wants. Those vendors could do the same thing for any front end (Walmart, Target, whatever) equally.

This article fundamentally misunderstands what Amazon recently did (describing it as a "supplier purge"), misunderstands what the fulfillment business is, and incorrectly defines Amazon as a monopoly because it is a trendy thing to say more than it is an accurate thing to say.

>If an item sold on Amazon is FBA, that means that the wholesaler’s inventory is completely fulfilled by Amazon. The wholesaler sends a large portion of their inventory in bulk to Amazon’s fulfillment centers, where it is stored until a customer decides to buy it. Amazon then packs and ships the items to customers. It also incurs all the costs associated with these activities, many of which are variable costs. In exchange, wholesalers pay a per-unit fixed fee. The introduction of same and next-day delivery into the FBA scheme seems to further increase the cost of this service. Amazon’s shipping costs, which include sortation and delivery centers and transportation costs, amounted to $27.7 billion as of 2018.

This is generally wrong, and mixes up what vendors enrolled in Vendor Central do. Amazon sends vendors POs and then sells the products. The end. Some vendors also have some additional fees but it is not the same as a "Seller" who is not a wholesaler at all, but a business that owns the products being sold FBA and FBM the entire time. Amazon collects fees on each of those sales and never owns the inventory in question.

>On the other hand, when an item is FBM, fulfillment is done by the wholesalers.

No, they are not wholesalers. This may seem like a dorky nitpick but it isn't. A wholesaler sells the products to Amazon. The 'purge' complaint was from wholesalers, called Vendors or Vendor Central users in Amazon parlance.

>Thus, it appears that Amazon’s market share is closely tied to its ability to accomplish its “fulfillment network optimization” goals by bullying wholesalers to move from FBA to FBM.

No, they are just not issuing purchase orders. No purchase order, no wholesale relationship. They explicitly communicated to Vendors who are not receiving anymore POs to tell them to consider selling their products on Amazon as Sellers, which again means not being a wholesaler anymore but becoming a retailer. They can sell FBM or FBA but Amazon collects fees either way. That is entirely up to the seller.

The pressure is just Amazon saying "we won't buy your stuff anymore, but you can still sell on Amazon running your presence yourself or selling it to another Amazon seller."

I could just keep going but it is really obvious that this author only knows about how the Amazon marketplace works from financial reports and has zero experience in how the Amazon marketplace actually works.

Reading other comments it seems OP may have a bad analysis.

Even if the analysis is correct, the consumer benefits by this arrangement. Why should we worry?