The Goldman Sachs of online retail

The FT with a good look at Amazon's Marketplace platform

The Financial Times is running a good series this week on Amazon, one of the country’s most fascinating and frustrating companies. This piece on how Amazon has transformed itself from an online book retailer into a retail and outsourcing giant is particularly interesting.

The Wall Street Journal reported a couple of weeks ago that some of Amazon’s third-party Marketplace vendors are complaining that the company is unfairly using its inside knowledge of their sales to compete against them.

The FT’s piece delves deeper into how Amazon is turning itself into a third-party logistics company that lets other companies outsource much of their operations to it. You can start up a business now and pay Amazon to handle your shipping, warehousing, payments, Web hosting—basically everything but figuring out what to sell. And its Marketplace has grown so fast that it’s become something lots of online vendors can’t afford to ignore.

The paper gets a good anecdote in a Virginia retailer called GoVacuum (which gets about half its sales through Amazon) that shows the upside and downside of having Amazon effectively run most of your operations:

The deliveries are done by Fulfillment by Amazon, a distribution service, which is why the hoovers on the storehouse pallet are just passing through GoVacuum’s drab facility en route to an Amazon warehouse. They will be stored and shipped to customers for fees equal to roughly 10 per cent of each sale, depending on size and weight - a rate that is cheaper than any of the alternatives.

Amazon processes the payments of GoVacuum customers, keeps their email addresses to itself, and handles after-sales support. GoVacuum even uses the databases of Amazon Web Services to store information.

Basically, Amazon is an enormous digital consignment store. You find the stuff to sell and pay Amazon a cut to retail it for you. The problem with that is Amazon knows what you’re selling before you do and can use its inside knowledge and its heft to undercut you when you find a big seller.

This, after all, isn’t a company that has shown much scruples about playing fair, whether about sales taxes, book sales, or working conditions.

So it’s not surprising that its third-party retailers say the company works against them:

Diane Buzzeo, the founder of Ability Commerce, a software group that retailers use to manage their presence on Amazon, says: “They do look at your product mix and then go to the manufacturer and say: ‘Hey, why don’t we sell this direct?’ It’s amazing they haven’t been hit with some kind of non-competition lawsuit.”

One toy seller who did not want to be named says: “The work we and others have done has paved the way for Amazon to understand what sells and what doesn’t.” He tries to stay ahead by finding new designs and new manufacturers. “We have to protect ourselves against Amazon, which has perfect knowledge of everything.”

The FT quotes an investment banker comparing the company’s conflicts here to Goldman Sachs’s on Wall Street:

“People complain about conflicts of interest. But you still have to do business with them.”

Which is why it’s good to raise questions about Amazon’s strategy for becoming the critical infrastructure—the platform—that underlies much of online retailing.

An RBC analyst estimated three years ago that one-third of all U.S. online shopping dollars flowed through Amazon, either directly or through its Marketplace third parties.

That’s an enormous concentration of power in the hands of one company. We think of Walmart as a huge bricks-and-mortar retailer—and it is—but it accounts for 11 percent of U.S. retail sales.

This is yet another reason to keep a close eye on Amazon.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,