Is Amazon Playing Fair With Small Retailers?

Is Amazon Playing Fair With Small Retailers?

When something starts selling like hotcakes in the marketplace, we all wish we could get a piece of the action somehow.

Think: Elmo, a few Christmases ago. Snuggies, was it just last year? Wouldn't it be nice to get a slice of those profits?

Retail giant Amazon seems to think so.

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And the company may even be acting on it.

The Wall Street Journal reports that small retailers who sell their products in the Amazon Marketplace, a site that facilitates sales from independent retailers, suspect that Amazon is using them to test what sells well, then offering those same products at a lower price to divert customers.

For customers, it isn't a problem--after all, we're paying less in the end for the products we want. But in our quest to seek out the lowest price at all times, might we be stiffing the original sellers?

How Amazon Marketplace Works

Amazon Marketplace is a hub for independent retailers to offer products ranging from flip-flops to stuffed-animal pillows to baby products. The site takes a percentage of every sale, ranging from 6% for computers all the way up to 15% for mobile phones and musical instruments. It also charges sellers a monthly membership fee to list their products on the site.

Largely, it's worth it for sellers to pay these fees, as according to Amazon's records, they report an average 50% increase in sales after joining the site and taking advantage of its merchandise storing and shipping service. Amazon credits the quality of their customer service, as well as their low delivery costs, for the sellers' boost in profits. It's no wonder that the small retailers see such an improvement--Amazon gets 85 million separate sets of eyes each month.

And it looks like sellers aren't the only ones benefitting from the arrangement. Their sales currently make up about 39% of Amazon's total sales and are responsible for about a tenth of the $48.1 billion Amazon makes annually. The company estimates that five years from now, these sellers could contribute 55% of the website's total sales.

The Problem

Some of the small retailers listing their wares in Marketplace suspect that they're being used as internet guinea pigs: They surmise that Amazon is watching how their products sell, then offering the most successful items at a lower price directly through the site.

One retailer featured in The Journal, Jeff Peterson, had been successfully selling $30 Pillow Pets--stuffed animals that convert to pillows--on Amazon, sometimes moving as many as 100 pets per day. After a few months of robust sales, he noticed that Amazon started offering the pets for the same price, but giving their listing featured placement on the site. Peterson's sales dropped sharply. ""I tried lowering the prices, but Amazon would always match my price or go lower until I eventually gave up," he says. Now, he lists the pets for the manufacturer's suggested price, $29.99, as opposed to the $12 Amazon was recently charging for them.

altOne of the tactics under suspicion is the "buy box," (pictured at right) a featured, automated box that draws the customer's attention to listings of the same product, offered by other sellers for similar or lower prices.

For instance, searching for Wayfarer sunglasses gives you a list of items, one of which costs $20. In the buy box on that product page, you'll see three more retailers who sell Wayfarers for the same price or lower.

Amazon estimates that 90% of shoppers just buy whatever turns up in the buy box, rather than continuing to search. But when one of those cheapest offerings is listed by Amazon, it takes the place of an independent retailer who might have been featured.

Because Amazon buys products in larger quantities than their small retailers, and is willing to lose a little money, the company is able to offer these goods for less than the original seller, thereby forcing the seller to lower its own prices to stay in competition.

So some do—and others choose not to compete. The Journal spoke to Melissa Van Flandern, co-founder of Seattle-based baby goods store Tottini, which used to sell on Amazon a popular giraffe-shaped teething toy named Sophie. Flandern pulled the item after noticing that Amazon started selling it.

"We used to sell a ton of Sophies on Amazon," she told The Journal. "Not anymore."

If Amazon Is Doing This, Is It Really Wrong?

Amazon would only say to The Journal, "All of our focus is on helping making sellers successful. If we can identify hot products and make suggestions to them, we do that," so it's impossible to know whether poaching customers from small retailers is an actual practice in the company.

But let's say it is. Let's say Amazon is now taking advantage of the smaller retailers on their site. Is that a bad thing? After all, we consumers are getting the low prices we want, Amazon is bolstering its bottom line and the sellers are showing their (albeit comparatively expensive) wares to a much bigger audience than they might otherwise.

Amongst brick-and-mortar stores, it's long been common practice for a retailer to offer products at lower prices than its nearby competitors. Even drugstores and groceries compete against popular brands by offering less expensive store brands of their products. But there are key differences: First, one of the competitors (Amazon) owns the entire marketplace. Second, cheaper store brands aren't the same product; Amazon is offering the exact same products, not just similar ones.

So tell us: What do you think? Is Amazon, once a startup itself, now so powerful that it is threatening small mom and pop sites? Or is Amazon doing a service to small internet shops by giving them the opportunity to find new customers?

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