Amazon (NASDAQ:AMZN) turned around its losses in Q3 2012, which was its first quarterly loss in almost a decade, in Q4 2012. The primary factor behind the recovery was the growth in gross margins. Gross margins improved from 22.4% in 2011 to 24.8% in 2012, which is due to the success of third party sellers on Amazon Marketplace. As of Q4 2012, there were more than 2 million worldwide active seller accounts on Amazon and seller units represented about 40% of total paid units, which represents growth of around 3 percentage points. In contrast, the overall unit growth rate for the quarter was only 32%.
Amazon and its merchants have been involved in a conflict lately over fee hikes which could benefit rival eBay (NASDAQ:EBAY). Here we take a look at the details of the conflict and how the discontent among sellers could impact Amazon in the near future. The continued growth of Amazon Marketplace is important for the company’s margins given that its high margin web/cloud services business is under pressure due to rising competition.
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Hike In Logistics Expenses Are The Root Cause Of Discontent
Amazon Marketplace serves as a platform for small businesses to sell their products and services to a large user base with more traffic than what they would see on their own websites. Third-party sales boost Amazon’s margins as the company collects a commission on every item sold by an outside vendor and incurs almost negligible costs in the process. Recent reports point to growing discontent among the sellers after the company hiked the fees it charges third-party sellers several times in the last 18 months for using its logistics and customer service. The discontent arises from the hike in logistics-related charges which was driven by rising costs such as higher gas prices and hence transport expenses.
Amazon’s Fee On Items Sold Through Marketplaces Substantially Higher Than eBay
For electronics, Amazon currently charges 15% for the portion of the item price and any gift wrap charges paid by the buyer, up to $100 (with a minimum referral fee of $1.00*) and 8% for any portion of the item price and any gift wrap charges paid by the buyer, greater than $100.  In comparison, eBay follows the formula detailed here and summarized below.
|Category||Insertion fee||Final value fee (per item, based on the total amount of the sale)|
|Electronics||$0.50||7% of the total amount of the sale||$3.50 for the first $50 + 5% of the remaining balance up to $1,000||$51 for the first $1,000 + 2% of the remaining balance over $1,000|
Similar differences exist for items in other categories. However, we believe that other benefits like fulfillment services, free listing for pro sellers, exposure to a large user base and attractive free shipping for buyers in the form of Amazon Prime will keep Amazon Marketplace an attractive proposition for sellers.
Amazon Makes It Easy For Volume Sellers
Amazon offers multiple benefits for third party sellers to use its services. A majority of these are beneficial if the seller sells large volumes and uses Amazon’s Fulfillment service. For example, a monthly fee of $40 would save a “pro” seller the $0.99-per-sale fixed closing fee.  In contrast, eBay has a fixed listing fee of $0.50.  Also, users of Amazon Fulfillment pay negligible charges for Amazon storing and shipping their products.  These rates are particularly attractive to mid-level volume sellers who may find it expensive to maintain their own warehouses.
Similarly, Amazon makes it easy for sellers to ship by providing shipping services through the Amazon Fulfillment service. This is particularly useful for sellers with large volumes as they save on the hassle of wrapping/gift wrapping every item and shipping.  Instead, Amazon does it for them. In comparison, eBay provides discount deals for sellers for the services of shippers such as UPS and FedEx.   Thus, the onus of packing and delivery still lies with the seller. Also, with Amazon Prime offering free two day shipping, the interest of buyers is more compared to that on eBay where they have to pay for shipping unless the seller provides it for free.
We believe that Amazon’s fee hikes may prove unattractive to small merchants and that they might shift to eBay to keep their costs low. However, they will be sacrificing exposure to Amazon’s large user base. Larger volume sellers would instead find Amazon’s terms attractive and we expect them to stick around. Hence, the impact of the discontent over fees should be minimal in our opinion.
We have a $236 Trefis price estimate for Amazon which is 10% below the current market price.Notes:
- Amazon: Fee And Pricing, Amazon, March 2013 [↩]
- Experienced & Volume Selling, Amazon, March 2013 [↩]
- eBay: Standard Shipping Fees, eBay, March 2013 [↩]
- FBA Program Fees, Amazon, March 2013 [↩]
- Fulfillment By Amazon: How It Works, Amazon, March 2013 [↩]
- eBay: UPS Shipping Zone, eBay, March 2013 [↩]
- eBay Teams Up With FedEx on Shipping to Compete With Amazon, Bloomberg, October 2012 [↩]