This post is by James Thomson, Partner of Buybox Experts, a consultancy supporting brands selling on Amazon and other marketplaces. James is also president of PROSPER Show, a continuing education conference focused on developing training and best-practice materials for early-stage online sellers.
With Amazon’s recent announcement that it is recruiting sellers into the Seller Fulfilled Prime program, much of the discussion has been around how much simpler this may make the lives of Amazon sellers.
Yet, the key implications are likely far more extensive than that. I’d like to take a few moments and outline those issues here so as to spark discussion among sellers, investors and solution providers.
To recap, Amazon wants to award “Prime” shipping capabilities to Amazon sellers that have demonstrated the ability to ship merchant-fulfilled orders to the high performance levels that Amazon prides itself (through the existing Fulfillment by Amazon program – FBA).
Any Amazon seller that meets these requirements and gets approved into the program will now be able to apply the “Prime Eligible” tag to its products that are shipped from its own fulfillment center(s), rather than only those products that the seller ships into an Amazon fulfillment center.
At the surface, earning this will provide sellers with the ability to avoid having to split inventory so that some goes to Amazon fulfillment centers while the remainder is available for sale on all of the seller’s other channels, including its own website or other marketplaces.
Furthermore, as the seller is now handling returns on Prime purchases, it will be easier for the seller to identify exactly which orders tie to which returned products. This is compared to the current situation where FBA sellers may receive a box of returned products from Amazon, and it is often not possible to tell which units tie to which product returns (making customer fraud very hard to tie to specific orders).
I’d like to look at what I believe is really going on with this new program.
The cost of an Amazon fulfillment center can approach a billion dollars a pop
When Amazon builds a new fulfillment center, the cost of the building and surrounding infrastructure can approach a billion dollars a pop. With Amazon adding several of these each year in the US, the total cost to Amazon is staggering – and yet, Amazon can’t build these fast enough to support the continuing growth of Prime (both through Amazon Retail and FBA).
If extra Prime capacity can be built through existing sellers’ warehouse space, the need for Amazon to build fulfillment centers as fast can be somewhat tempered.
Early testing of Prime Now suggests that Amazon believes customers are prepared to pay for the accelerated 1-hour shipping through an added “tip” program. If this approach is accepted by Amazon customers, even Prime customers used to getting shipping for “free” will be prepared to take on most of these 1-hour shipping costs over and above their current Prime membership.
The vast majority of Amazon’s existing US fulfillment centers are in rural areas, at least 2-4 hours from large urban locations that they typically serve. Amazon is expanding its Prime Now program, through which thousands of products are being made available to Amazon buyers seeking one to two hour delivery windows.
Amazon’s existing fulfillment center network is not well positioned for Prime Now
In essence, the vast majority of Amazon’s existing fulfillment center network is not well positioned to provide Amazon with Prime Now delivery windows. So if Amazon wants more Prime Now capacity, it needs more warehouse space in urban or suburban locations – something that most Amazon sellers already have. By expanding its overall warehouse capacity in these non-rural locations, Amazon is able to leverage more expensive warehouse space without having to own the space.
It would not surprise me at all if Amazon started renting out approved urban-based Seller Fulfilled Prime warehouse space in order to house its own Amazon Retail inventory that it makes available in the Prime Now program.
If Amazon also lets qualified urban 3PLs (third-party logistics warehouses) into the program, then the capacity for Prime Now grows in leaps and bounds, as these warehouses will have considerably more warehouse space than the typical Amazon seller.
The Future State
Imagine 2-3 years from now, that thousands of Amazon sellers with urban warehouse spaces have been approved for and enrolled into the Seller Fulfilled Prime program.
Even Walmart, Best Buy and Target won’t be able to compete with anything vaguely close to this
It becomes much more apparent that Amazon will be able to turn the Prime Now program into an overwhelming juggernaut against all brick and mortar retailers: broad, deep inventory located near 95% of US shoppers, coordinated for inexpensive, 1-hour delivery to customers’ homes.
Even companies like Walmart, Best Buy and Target won’t be able to compete with anything vaguely close to this. Customers will forego stopping at their regular brick and mortar stores, instead choosing to place an order before heading home from work, knowing that what they’ve ordered will be waiting for them when they get home. And with the advancement of Amazon’s Fresh program, groceries for tonight’s dinner can easily be added to that order, too, making local grocery stores a lot more irrelevant to customers’ daily shopping checklist.
Factor in Amazon’s delivery initiatives, enrolling excess delivery capacity from personal car owners who have forgone delivering passengers through Uber or Lift, but instead delivering Amazon orders to customer homes throughout urban locations (an initiative already well in the works in Prime Now test markets).
Compound that with Amazon already actively buying hundreds of delivery trucks across the country, and now UPS, Fedex and USPS become less relevant as last-mile delivery options for Amazon.
Essentially, Amazon is owning more and more of the value chain, from building its own private label products, adding to its existing 300 million SKU catalog, making that selection available within an hour to the vast majority of US shoppers, delivered using inexpensive shipping options that Amazon can control better than today’s large carriers.
Now are you seeing how the Seller Fulfilled Prime program fits into Amazon’s master plan of controlling not just online markets, but also overwhelming local brick and mortar retailers?
In previous roles, James was the former head of Amazon Services (a division of Amazon that recruits 100,000 new sellers to the Amazon marketplace each year), the first FBA account manager, a banker and management consultant. He earned a Ph.D. in Marketing from the Kellogg School at Northwestern University.