I’ve been mulling over a question, along with many retailers: “where is Amazon heading?” Amazon has been the top online retailer in the US for a number of years now, and just like a good mystery novel, figuring out the next steps requires some sleuthing.
New marketplaces are emerging, seemingly more and more often now. Thinking about this trend, I mentioned that Amazon should have a very large number of Amazon Prime Members now, which I incorrectly guessed at 50-60 million. On the tenth anniversary of the Prime program, Amazon recently confirmed they have 40M current Amazon Prime members, which is still incredibly huge, and a big jump from the tens of thousands that signed up initially. Impressively, 80% are still numbers showing a low attrition rate. Digging deeper, one of the details that stood out is that Amazon “boosted its worldwide paid membership 53 percent last year — “50 percent in the U.S. and even a bit faster outside the U.S.”
Amazon said they added +10M prime subscribers in Q4 2014, a big holiday boost, but then indicates a slower growth rate the other 9 months of the year (+10M). So Amazon Prime member purchases should rise in the first 9 months of the year, but then really shoot up in Q4. Also, with an apparently low attrition rate, if Amazon holds their momentum, that gives Amazon a solid shot at 60M happy and purchasing Prime members by the end of 2015.
60M is a lot of customers. Ultimately Amazon Prime members buy more goods more often, so in turn helps CommerceHub Third Party (3P) sellers. Those Prime members are also more likely to purchase FBA.
There’s another recent article, Amazon’s Third-Party Sellers Ship Record-Breaking 2 Billion Items In 2014, But Merchant Numbers Stay Flat, where Amazon released some third party seller (3P) stats earlier in January.
I’ve assembled this into a bullet point mash up, because it can be difficult to tease the information from the metrics Amazon chooses to disclose:
3P Seller Stats:
- 40% of all Amazon units sold, that’s a lot (but then Amazon is selling 60% of units directly)
- Seller Count: Hovering around 2 Million 3P sellers for the past year: that’s a small increase indicating only a few new sign ups, or at least balanced against merchants who may be leaving
- Units sold up 40% (this doesn’t say specifically net sales, it’s possible AOV could be lower since FBA is up, thus free shipping is enticing purchases on lower priced goods)
International 3P Seller Stats:
- China and Hong Kong-based sellers with international sales grew 80 percent year-over-year ( this is apparently number of sellers, not units or sales)
- India FBA product count up 300%
So from these points, it sounds like the market for new merchants coming on-board on Amazon is reaching saturation in the US. However, international sellers are joining in greater numbers now, so that’s where the growth is. In at least some locations like India, those sellers are pushing more products to Fulfillment by Amazon (FBA).
As a side note in that article discussing 3P sellers, there’s a reference to a recent Forbes article that indicates Amazon is aggressively selling products directly, competing against 3P sellers using pricing adjustments. If you’ve been paying attention to recent stories, the thought of Amazon selling directly or the idea of price wars shouldn’t be surprising. However, competing with 3P sellers may not be the prevailing direction for Amazon, and that’s important because many times merchants are worried about Amazon learning their business and selling products directly.
Let’s Look Closer at FBA
Some Telling Numbers:
- 65% increase in number of merchants using FBA
- 50% increase in number of units sold via FBA
- Higher growth rate in number of FBA sellers, than increase in FBA units sold: sounds like increasingly tougher competition for FBA sellers
- Also, 50% increase in FBA units sold, compared to 40% increase in 3P units says FBA is growing faster than self-fulfilled
- So more FBA merchants, more FBA products, faster growth rate in FBA sales, means even more pressure on self-fulfilled, validating CommerceHub’s direction on driving FBA
Let’s next take a look at the most recent report on earnings from Amazon, using the Forbes article Amazon Earnings Came in Above Expectations, But Are They Sustainable. Bottom line is, Amazon needs a better bottom line, especially after the Fire phone debacle. This quote sticks out:
“Jason Helfstein, an Oppenheimer & Co. analyst, said Amazon’s moves to stock more inventory from third-party sellers, rather than buying merchandise directly from manufacturers, may help explain the uptick in profit. ‘They don’t buy those goods, and when they sell them, the commission is pure profit,’ Mr. Helfstein said.”
This analysis is in sync with the previous stats mentioned on FBA growth. Amazon may be ratcheting up FBA growth, even if it comprises direct selling opportunities, although clearly that is still a key strategy.
What are total sales looking like on Amazon? (Keep in mind this factors in things like streaming media or Kindle Fire sales which aren’t relevant to 3P sellers.)
“In the fourth quarter, Amazon said, sales in its core North American market jumped 22% to $18.7 billion, while overseas they rose just 3.2%”
That 22% number correlates better with what 3P merchants saw over the past year in terms of YoY sales on average. It helps balance the expectation if a merchant asks why they are not seeing 40% YOY sales growth on Amazon, reading one of the articles mentioned earlier. In other words, units sold are up 40% for 3P sellers, but that’s different than 40% sales growth for an average merchant. A 40% sales uptick is not what the average merchant is seeing, especially not being self-fulfilled.
In terms of that international 3.2%, let’s look a bit closer again using the Forbes article as a reference:
“Excluding the impact of currency headwinds, sales grew by 12%. This represented a slowdown compared to currency-neutral growth rates of 18%, 14% and 13% seen during Q1, Q2 and Q3. These results came on top of a seasonally strong quarter, and hence, this indicates all may not be well for Amazon in the international geography (as per our view).”
From that detail, it doesn’t sound like international consumers are or should be the focus, instead it’s getting international merchants to sell to a US audience. Factor in a stronger US dollar, and that should just strengthen the push (since it’s better for international sellers to sell to US consumers who pay using increasingly valuable US dollars).
To be thorough, it is worth noting that Amazon called out specifically their push into Canada via Amazon.ca, so at least one international destination look like a priority and perhaps Amazon has figured out the Canadian market better than Target has. Also, we know international prime membership is growing faster than US prime, so there are international buyers, it just sounds like they are either in Canada or using Prime, not that all international sales are just jumping shooting through the roof.
It’s been said before, but this reinforces that idea, that Amazon has been pushing, and will continue to push on their FBA business due to profitability, and because it appeals to Prime members who are increasingly a bigger part of the puzzle. Being a 3P merchant on Amazon who is strictly self-fulfilled is becoming a much tougher proposition. The good side is at least self-fulfilled 3P sellers may not have to worry about Amazon selling products direct as aggressively as before (maybe).
Also, Amazon sees growth in international sellers, and my personal understanding is Amazon is putting more effort into figuring out how to get international product data to square with US requirements and thus into the Amazon eco-system (think pants in the US vs. trousers in UK). I’d expect to see more international stores showing up in US search results and competing on listings. Reversing this, international consumers are out there, but likely the best way to reach them is either going to Amazon.ca, or hoping their Prime membership gets access to US FBA inventory (that is a future topic).
In general, Amazon is still seeing growth, but the environment is changing. Amazon gets help from the continued move to online shopping, providing a tail wind of 10-15% annual growth in the US on top of Amazon’s further strengthening as the #1 online retail destination. However, Amazon is under more pressure to create profits, being more mature, and having to pay for other projects and investments (if not perhaps even spinning off services such as the cash machine of AWS). A more saturated US market, means the best growth will be from international business, but not international consumers in the short term, rather international sellers looking to integrate with Amazon US. China is still there, since Chinese online sales have surpassed the US, but Chinese online business isn’t owned by Amazon like it is stateside, and Chinese consumers are just starting to get a taste of US produced goods.
Lastly, FBA and Prime are going to be increasingly important and a more influential part of Amazon business, becoming synonymous with the Amazon buying experience. Not tapping into FBA and Prime members will leave self-fulfilled US sellers marginalized and increasingly squeezed for growth.