Amazon economy: Best hope for small stores?

The online giant has gone from being small businesses' worst enemy to their best friend.

By TheStreet Staff Aug 9, 2012 10:38AM

By Dana Blankenhorn


Small merchants have long called Amazon.com (AMZN) a bogeyman. That's so 20th century.


Today, Amazon could be their only hope for competing with big box retailers like Wal-Mart (WMT). Small merchants also represent Amazon's "secret sauce" in justifying a PE of nearly 300 to skeptical analysts like Forbes' Martin Sosnoff.


Third-party merchants are now the biggest Amazon profit center. They can take advantage of the full range of Amazon commerce, cloud and logistics services. They can get their sales taxes tacked on and paid, and since Amazon has turned this into a profit center it's no longer fighting the move to tax online commerce.

 

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Amazon charges merchants roughly 15% of sales to sell through its marketplace, Quora estimates. Upload your inventory, ship it yourself or have Amazon do it. Amazon brings customers to your page with its search algorithms, they handle the transaction and send you money. Amazon even has an application program interface to help with pricing, as it explained to re-sellers in February.


Amazon now has over two million such re-sellers, representing 37% of its retail volume, and it's the fastest-growing, most profitable segment of the business, as Seeking Alpha's Scot Wingo found on analyzing their numbers from last Christmas.


Notice how many times the cash box rings here. A commission on sales, a commission on sales taxes, a profit on shipping, all through a system Amazon has already built. But notice how it does the same thing for small merchants. No more fighting to find customers, no more worrying about order fulfillment, bad credit card charges or even advertising. Amazon does it all.


It's not a perfect system, as the Financial Times recently explained behind its paywall and the Columbia Journalism Review excerpted. You can lose your brand identity. Amazon may start stocking your best sellers. When Amazon makes changes, merchants have to jump, as eCommerce Bytes explained last month.


Small merchants spend most of their time becoming geeks, rather than dealing with customers individually. But they're selling things and making money, and they can, if they choose, also have a real storefront as well. Several do in my part of Atlanta, and they say online sales through Amazon make their stores possible.


Complaints can work both ways, as 90Everything explained in a story about Amazon's difficulty in policing its third-party sellers.


But what choice do small merchants have? Running a Web site is tricky business. The logistics can be daunting. Amazon can handle all that for you.


Small wonder that so many of its third-party merchants don't even bother with separate Web sites, like Bags-n-More, an Irvine, Calif., importer that MarketWatch profiled this week. (Do a search on the company if you don't believe me. The store exists only within Amazon's web site, and it's not even a separate online store, just a collection of products.)


NPR's OnPoint calls this The Amazon Economy. When you're going up against Wal-Mart and Costco (COST), it may be a small business' only hope.


At the time of publication, the author was long COST.


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