From the University of Chicago's ProMarket:
Regulators in Washington should immediately launch an investigation into Amazon’s e-commerce business.
In a recent article (and subsequent blog post), I argued that Amazon’s negative cash flow might result from the company’s decision to devote its revenue and raised capital to subsidize engagement in short, medium or even long-term price predation instead of (or in addition to) making legitimate investments. In addition, I demonstrated that losses sustained during this predatory campaign could be recouped without a rise in consumer prices.
In the last month, Amazon has involuntarily disclosed vital information regarding its corporate strategy that enables us to apply these theoretical insights to Amazon’s business model and assess the possible predatoriness of certain practices for the first time.
Amazon Plans to Exit the Fulfillment Business
...MUCH MOREIn early March, news broke that Amazon had abruptly stopped buying products from many of its wholesalers. Bloomberg’s Spencer Soper explained that the move allows Amazon to offload the costs of purchasing, storing, and shipping products to its suppliers. In a boilerplate statement published in Bloomberg, Amazon responded: “We regularly review our selling partner relationships and may make changes when we see an opportunity to provide customers with improved selection, value, and convenience.”
This prosaic comment inadequately describes the magnitude of Amazon’s move. Amazon’s noisy purge has finally revealed a crucial part of its recoupment strategy: leveraging its growing monopoly power to offload variable costs associated with storage and shipping onto its wholesalers and suppliers.
First, it is necessary to take a step back and explain the difference between Fulfillment by Amazon (FBA) and Fulfilled by Merchant (FBM), the two ways in which Amazon orders are fulfilled.
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.
On the other hand, when an item is FBM, fulfillment is done by the wholesalers. Customers will purchase through Amazon Prime as usual, but the wholesaler will ship the items to them directly, with no intervention from Amazon. The wholesaler can use the Amazon Prime brand name but must also comply with the shipping rules. The wholesaler must pick, pack and ship the item to the customers. In order to participate in the FBM program, the wholesaler must own its own warehouse to control inventory and fulfillment—which can be costly to acquire—and incur all the variable costs associated with its operation. In addition, wholesalers must ship Prime orders on the same day. Amazon also required FBM suppliers to sell their goods on the platform for the same price those goods were offered on other websites until last week.
The differences between the two types of fulfillment are obvious. In FBA orders, Amazon must incur all the variable costs associated with storage and shipping in exchange for a low per-item fixed fee. This model is similar to the one employed by Uber (also a notorious negative cash flow firm): Uber charges its customers a fixed fee prior to the beginning of their ride and pays its drivers a variable fee determined by the length and time of the journey....
We also happened to catch the February ProMarket post referenced in the first sentence:
"A new paper suggests that Amazon’s negative cash flow rapid expansion story may in fact conceal a long-term predatory pricing strategy that violates existing antitrust laws" (AMZN)
