Why Amazon Needs Others To Keep Selling (#GotBitcoin?)
CEO letter shows why third-party sales have become key to retail giant’s business.
If nothing else, Jeff Bezos clarified Thursday why Amazon.com ’s third-party business is worth the trouble.
In his annual missive to shareholders, Amazon’s chief executive provided a more detailed look at how sales by other merchants have impacted the company’s massive retail business. Third-party sales constituted 58% of Amazon’s gross merchandise sales last year compared with 30% a decade ago. Mr. Bezos added that third-party sales have expanded at a compound annual growth rate of 52% since 1999—more than twice the pace of the first-party business through which Amazon sells goods itself.
This makes for an important contribution to Amazon’s bottom line. Recognized revenue from third-party transactions actually is much smaller than that of traditional sales since the company only recognizes the commission it earns on each sale. Gross merchandise sales includes the entire value.
But the profitability impact is much larger, as Amazon also isn’t taking on inventory risk with those sales. Analysts generally estimate operating margins in the 20% range for third-party sales compared with low single digits for first-party transactions. So while Amazon’s AWS cloud segment is significantly boosting the company’s overall profitability, third-party sales are also improving the bottom line of the retail side that still generates nearly 80% of the company’s total revenue.
Of course, the third-party business also brings its fair share of headaches. Counterfeit goods are a big one. Separately, Amazon began investigating some of its own employees in China last year for allegedly leaking data to third-party merchants in exchange for bribes. Amazon’s growing power with merchants also helps fuel calls for deeper regulation of the company and its Big Tech peers.
But since Wall Street expects Amazon’s margins to keep rising, this particular party needs to keep raging.
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