If You Want to Continue Selling on Amazon in Three Years, You Need to Change Your Strategy

Roman Filippov

Roman Filippov

October 2, 2018
Prime Air Boeing 767-300, now know as Amazon Air.
Prime Air Boeing 767-300, now know as Amazon Air.

Right now Amazon's only real competitor in online retail space is Walmart.

We know Walmart for aggressive cost-cutting and brutal negotiations. Some of the suppliers went out of business as they could not sustain the tiny margins demanded by juggernaut retailer. There was a slew of controversy, negative PR and even documentaries filmed about this subject back in 2005.

Today, Walmart has an established supply chain and years of experience in negotiating the cheapest possible product to be sold at their stores.

Amazon chose to hand over merchandise procurement to individuals and small businesses, who have minimal experience dealing with the supply chain and overheads that don't scale.

On top of that Bezos imposes all kinds of additional fees on each seller. Storage fees, sale commissions, long-term storage fees, inbound shipment fees and so on. Jeff is milking the sellers on every turn.

The products on Amazon are in many cases more expensive than in other stores. The reason Amazon took off is mainly that of convenience. Americans are busy working multiple jobs.

Like mice, in a medical experiment, working single moms and techie dudes quickly got used to hitting that buy box button. Also, middle and upper classes do not want to mingle with People Of Walmart.

As competition is heating up Amazon will be forced to cut costs to continue the customer acquisition and retention. The easiest, if not the only, way to reduce costs is to eliminate the middlemen. So who is the intermediary in this formula? That's right, it is you, the seller from a western world.

What value does an average American or European white-labeler provide? I see a few advantages that a local expert might have: better branding, understanding of the local market culture, and customer service experience. Chinese sellers are still weaker in these areas. However, they are catching up quickly.

Take a look at DJI. Shipped directly to the consumer, solid brand, bug-free product, heavy into content marketing with an in-house team.

More and more international students will graduate and move back home, bringing with them a chest full of knowledge about American values, good-enough English skills and familiar to us customer experience.

What advantages does a Chinese seller have? Lower overhead and better-negotiated deals than an English-native over Alibaba messenger can ever get. Many manufacturers are starting to ship direct and growing an online retail arm.

In late 2015, Amazon launched a cargo airline, now known as Amazon Air. They are only practicing this game on the home turf. Amazon eventually plans to have over 100 aircraft. Just for comparison - FedEx Express has 371 aircraft.

They might start to ship goods directly from China overnight to US warehouses and get them delivered. It might not be "same day" shipping like for many other products, but it will still be fast. It might even be available for non-prime members as an incentive to use it.

A good friend of mine, who works for The International Air Transport Association (IATA) has said:

"The profit margins of UPS and FedEx on cargo flights are a well-guarded commercial secret."

"I do know that freight forwarding companies have very high-profit margins and the highest return on investment in the entire aviation supply chain. So if Amazon cuts out the middleman (i.e., the freight forwarder) and deals directly with shippers/buyers, they will be able to compete effectively on the price."

One way to lower the cost of goods even further is to look at what the most popular products are and start sourcing their merchandises again, taking back the quality control. We can already observe this happening with Amazon store brand but might get even more aggressive.

Another way to lower costs is to hand off selling to a set of trusted partners directly in China. They will vet these businesses and hold them to a very high standard to ensure quality. These enterprises will sell on Amazon right from China and fulfill the orders via Prime Air for cheap.

An insider in China told me that Amazon already has a dedicated recruitment team with hundreds of employees that are actively working with factories to help them start selling directly.

I do not see Amazon surviving without making changes, because quality is going down, listing prices are going up, and shoppers are losing trust in the system.

If You Want to Continue Selling on Amazon in Three Years, You Need to Change Your Strategy
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Roman Filippov
Date Published
October 2, 2018