With Amazon’s impending entrance to the Australian retail market, it’s vital to understand what you’re dealing with if you sell physical products online or off, here in Australia.
It’s true that when Amazon started, it simply began with books and later DVD’s. But it was always Jeff Bezos’ plan to sell almost anything and everything on the platform. Just by looking at Amazon’s logo, you’ll notice the arrow points from the letter A to the letter Z. Bezos’ intention was signalled early!
In 2006 Amazon was a 17.5 Billion dollar business. Just 10 years later, it was turning over $160 billion dollars per year. While Amazon was growing, major competitive retailers were shrinking as they lost market share to Amazon’s lean online business model. And this growth trajectory is set to continue. The reality is Amazon’s just getting started.
It’s expanded into Europe, Canada, India, Japan, Mexico, China and now Australia. Its footprint is immense and growing. Germany is now Amazon’s second biggest marketplace behind the US.
Amazon’s growth has largely been driven by exceptional customer service backed by the Prime Membership model, where Amazon’s customers pay approximately $100 per household, per year to obtain free shipping on all orders over $35. Prime Membership has also expanded to include many other benefits to Amazon customers.
There are now estimated to be 80 Million Prime Members across the globe with an additional 380 million active buyer accounts.
FBA or “Fulfillment By Amazon” has also been a key driver of success. Amazon now has hundreds of Warehouses across the globe stocking millions of products. Running these fulfillment centers are a mixture of full-time and part time employees of approximately 140,000 workers in the US alone.
While that might seem like a lot of employees, Amazon’s main competitor in the United States, Walmart, employs 2,200,000 people and has 11,695 stores. Walmart essentially stocks the same products as Amazon, but faces crushing overheads.
Coupled with the fact that Amazon’s customers have a substantially higher household average income compared to Walmart customers means Amazon makes more revenue per household than Walmart.
In terms of demographic penetration, 82% of households earning more than $112,000 per year have Amazon Prime Memberships. Not only has Amazon infiltrated almost every household in America, they’ve also gained the loyalty and custom of the richest.
Putting it another way, at the end of 2016, there were a record of 10.8 million millionaires in the US. That’s almost half the population of Australia and Amazon has 82% of them as customers.
The biggest influence on Amazon’s success has been its fanatical customer service. That commitment has helped it now become the second most trusted brand in the United States behind Apple. Customers trust Amazon.
Not all people who buy products on Amazon are looking for a bargain like eBay’s customers tend to do.
Speaking of eBay, what is the difference between eBay and Amazon?
Australian’s are used to eBay. Ever since the Trading Post curled up its toes, it’s been a part of the family for years.
As we know, eBay is an online classifieds site. If you search for a new Logitech webcam for example, there are dozens of seemingly duplicated listings, often all looking the same, with the only difference being the price. There’s often a lot of scroll wheel action on eBay as you scan down the page looking at all the offers!
On Amazon, each product (in theory) has a single listing. If you want to sell a product, new or used, you need to compete with other sellers on that single listing. Amazon has a separate algorithm that decides, when a customer clicks the ‘Add to Cart” button (also known as the ‘Buy Box’) from all the other sellers with offers, who has the best offer for that product.
The Buy Box algorithm instantly assesses 3 things:
- Who’s offering the item at a competitive price?
- Who can reliably and speedily deliver the item to the customer the best?
- Seller feedback. Of all the sellers offering the product, who has great seller metrics?
The Buy Box is not always won on price; you might be offering the product cheaper than any other sellers, but if you take 3 weeks to deliver it to a customer, you probably won’t win. Likewise, if your seller rating is poor, even if you’re the cheapest and can deliver quickly, it’s unlikely you’ll win the Buy Box.
This is where Amazon kills competitors.
If Amazon offer the same products as you do and you’re fighting with Amazon for the Buy Box, you won’t stand a chance. Do not compete with Amazon for the Buy Box…
While we’re on the subject of sellers, who are they?
There are 4 main types of sellers on Amazon
- Amazon itself through its Vendor Programs & Amazon Private Label
- Wholesalers/Distributors
- Brands/Manufacturers
- Private Labellers
Amazon has a couple of types of Vendor Programs, Vendor Central and Vendor Express.
Vendor Central is the main one, which is an ‘invite only’ deal, where Amazon directly approaches Manufacturers and Brands to buy wholesale from them and Amazon takes care of the rest in terms of selling your products on its platform. Vendor Central is human powered, so a lot of your communication and negotiation is handled with an Amazon Specialist employee (yes, like any wholesale arrangement, you can negotiate terms with Amazon).
The other vendor program Amazon offers is Vendor Express. As a brand owner/manufacturer, you can apply to sell your products to Amazon wholesale. The difference is that with Vendor Express, you don’t get to negotiate with Amazon; its Vendor Algorithm (a computer program) will decide the price Amazon will pay to buy your goods wholesale. Take it or leave it.
Amazon has also set up its own Private Label brands, the main one being Amazon Basics. Amazon has access to a lot of sales data from other sellers so it knows what’s selling in high volumes and its team in China can quickly source, negotiate and privately brand products the sales intelligence/buying teams recommend.
Wholesalers and distributors usually set up as 3rd Party Sellers so they can independently sell on the platform. They usually fight for a share of the Buy Box and if their seller metrics are strong and their prices are competitive, they can often win the Buy Box and make a good living.
If you’re interested in Wholesaling on Amazon, it’s also super-helpful to ship your products into Amazon’s warehouses so you can offer your products as ‘Prime eligible’ using Amazon’s FBA program. Again, this helps your chances of winning the Buy Box.
Brands can also set up independently as 3rd Party Sellers, rather than vendoring to Amazon directly. There are usually much better margins as you’re selling directly to customers, but you will need to have a team or an agency to help you maintain and monitor inventory levels, answer customer emails and manage Amazon Sponsored Advertising if you decide to advertise on Amazon’s platform to customers.
Finally, there’s an army of 3rd Party Sellers who Private Label. This is a very attractive model for anyone who wants to get into eCommerce, part-time or full. One of the main reasons Private Labelling has become so popular on Amazon is the fact that you no longer need to compete for the Buy Box as no-one else can offer the same product as you.
As a 3rd Party Seller, there are a couple of ways you can handle order fulfillment. The first is to ship customer orders yourself, also known as “Fulfillment By Merchant” or ‘FBM’. As a seller, FBM can be attractive, but it will mean your offer won’t be Prime Eligible which can be a big turn-off to Amazon’s Prime Members.
The 2nd and recommended option is to use Amazon’s own Fulfillment service, known as “Fulfillment By Amazon” or “FBA”. As mentioned earlier, this helps your chances of winning the Buy Box and also helps your products’ conversion rates. FBA enables your products to become Prime Eligible, meaning they’re eligible for 2-day Free Shipping for Prime Members.
In summary, as a 3rd Party Seller FBA means:
- You have much higher chance of winning the Buy Box
- You can scale your business exponentially from anywhere in the world
- You don’t need to have your own warehouse
- Your customer service is greatly reduced, Amazon handle all your returns and almost all of your customer service
- You can also Fulfil Orders from other channels like eBay using FBA as a 3PL.
At the time of writing, FBA for 3rd Party Sellers isn’t available in Australia just yet, but it’s just a matter of time.
Who will be the likely winners and losers when Amazon throws opens its doors here in Australia?
The winners will be:
- Australian Brands and Manufacturers
- Private Labellers
- Australian Wholesalers/Distributors with exclusive distribution rights from brands (both domestic & International)
The likely losers will be:
- Retailers who currently stock and compete with other retailers without exclusive brand agreements
The big question for Australian Retailers, Manufacturers is whether to Vendor to Amazon or to set up as an Independent 3rd Party Seller?
Remembering that Amazon Vendor Central is invitation only, it’s ok to decline Amazon’s offer if they ever enquire. If you decide to go 3rd Party, there are no penalties.
You can also consider a mixture of both, selling some of your products to Amazon through Vendor Central and also going 3rd Party on other products you offer. How you mix that up is up to you.
Here’s a table illustrating the basic pro’s and con’s of each:
| 3Rd Party Seller | Vendor Central |
| Typical 15% Referral Fee (depending on category) + FBA Fee if using FBA. | Est. 50% wholesale price to Amazon |
| Paid every 15 days | Approx 60 – 90 days to get paid |
| Need to have a team to manage inventory | Need a team to manage wholesale |
| Cost of prep and shipping products to FBA | Cost of shipping products to FBA |
| No Access to Amazon Vine | Access to Amazon Vine (Amazon review system) |
| (Almost) Guaranteed MAP (Manufacturer Agreed Pricing) | No guarantee Amazon will honour MAP |
| Can be tricky to learn platform and rank your inventory | Amazon almost guarantees sales of your products |
| Full control of your product listings | Amazon assumes control of your listings (they’re bad!) |
In terms of top tips for when Amazon does open its doors here, most products will have few or no product reviews so there’s a real opportunity to become early market leaders for products if you can secure some early reviews. It’s no secret that products with good reviews tend to convert and sell better. It’s ok to follow up with your customers and ask for an unbiased review post-purchase.
Be sure to check Amazon’s strict review guidelines for sellers. In a nutshell though, don’t buy reviews, don’t ask for favourable reviews and don’t offer something in exchange for a positive review. You will get caught and you will be permanently removed as a seller. If you’re building a long term business make sure you understand Amazon’s policies and guidelines. There are usually no second chances and taking short cuts will end up sending you the long way around.
If you are a Brand, Manufacturer or Wholesaler, it’s recommended to offer private label versions of your product range so you don’t have to compete for the Buy Box. You can also explore offering your products on Amazon’s other global marketplaces to massively increase your Brand’s reach.
In summary, it’s likely Amazon will take a while to get going here in Australia, but if it can adopt a large customer base as quickly as it has in other marketplaces around the world it will become a dominant retailer. Now is an excellent time to get to know how Amazon works and how you can work with it to grow your business and leverage Amazon’s marketplace to your advantage.
