At a time when much of the retail sector is collapsing, Amazon is strengthening its competitive position in ways that could outlast the pandemic — and raise antitrust concerns.
by Renee Dudley
April 26, 5 a.m. EDT
During the second week of March, as the stock market and many U.S. businesses slumped, Peter Spenuzza’s company, Rise Bar, enjoyed an unexpected boost. Amazon, where the protein bars are sold, suggested Spenuzza keep 18,000 packages in its warehouses, up from the usual 4,000, based on soaring demand for almond honey and other flavors.
Demand on Amazon, which is still close to that peak, poses a dilemma for Spenuzza. Rise Bars are also sold in grocery chains nationally. Although his Irvine, California, plant has been running at full production capacity, he didn’t have enough bars to send both to Amazon and to all the brick-and-mortar retailers who also have increased their orders. One week in March, when he ran out of stock on Amazon, its algorithm demoted his product listings in Amazon’s search results and removed his sponsored ads. Rise Bar plummeted from 2,000 to 8,000 in Amazon’s “best seller” ranking in the grocery category, allowing competitors to leapfrog him.
The brand’s weekly Amazon sales dipped by 25%. Dismayed, Spenuzza decided to regularly send the e-commerce giant the “lion’s share” of his inventory and ship whatever is left to everyone else, he said.
“I’ve done as much as possible to filter all of our in-demand items to Amazon,” he said.
He’s not alone. At a time when much of the retail sector is collapsing, Amazon is strengthening its competitive position in ways that could outlast the pandemic — and that could raise antitrust concerns. Increasingly, manufacturers of in-demand products are catering to Amazon, while competing retailers take the leftovers, consultants and brand executives told ProPublica.
“Amazon has the power to bury sellers and suppliers if they don’t comply,” said Sally Hubbard, director of enforcement strategy at Open Markets Institute, a think tank that has been critical of Amazon and other big tech companies. “It might be automated through an algorithm, but it’s still the wrath of the monopolist that they are afraid of. … Amazon is able to cut off its competitors’ access to inventory by leveraging its monopoly power.”
As locked-down shoppers have flocked to buy food, medicine, cleaning supplies and personal care products on Amazon, the retailer has in turn upped its suggested inventory levels for many manufacturers that sell their products on its platform. It has also expanded purchases of certain essential products that it sells directly to shoppers, often buying two or three times as much as it did before the pandemic, executives said.
The heightened demand has forced both third-party sellers on Amazon’s platform and its direct suppliers into difficult decisions over where to send inventory, consultants said. Often, like Rise Bar, they’re favoring Amazon ahead of other retailers. Third-party sellers like Spenuzza don’t have to keep as much merchandise in stock as Amazon recommends. But if they run out on Amazon, where “best seller” status and a listing’s position in search results are linked to availability, the impact on sales could be devastating.
This pattern makes it harder for Amazon competitors, such as grocery and discount chains that have remained open during the pandemic, to keep coveted items in stock. “Everybody in retail realizes there’s limited access to certain stuff, so you better get there first,” said James Thomson, the former business head of an Amazon team that recruits third-party sellers and now a consultant to brands working with the company. “The difference is that Amazon can afford to pony up the cash all at once and say, ‘Back up the trucks, we’ll take it all.’” Thomson called going out of stock on Amazon a “cardinal sin.”
An Amazon spokesperson said that the company is a relatively small player in the retail market, competing with “all the other online and brick and mortar stores,” and that Amazon is not responsible for suppliers prioritizing it over other customers. The algorithm is designed “to feature items we believe customers will want to purchase, and that includes items that are in-stock,” the spokesperson said. “We are working to help our selling partners during this challenging time and evaluating several ideas to mitigate the impact of different demand patterns we are seeing in light of COVID-19.”
“Retail is a competitive industry with many choices for both customers and suppliers,” the spokesperson added. “Suppliers make their own business decisions, not Amazon.”
In an April 16 letter to shareholders, CEO Jeff Bezos said the “demand we are seeing for essential products has been and remains high” and acknowledged it has created “major challenges for our suppliers and delivery network.” The company has waived fees typically imposed on suppliers who can’t fulfill purchase orders.
Amazon is facing at least one European antitrust investigation and two in the U.S. The House Judiciary Committee last June announced an investigation into possible anti-competitive conduct by large tech companies including Amazon. In addition, the Federal Trade Commission has been looking into possible anti-competitive practices at Amazon for at least nine months, examining among other things the power the company exerts over its suppliers, according to media reports. The House investigation is ongoing, according to a spokesman for the chairman of the Judiciary committee’s antitrust subcommittee, while the FTC declined to comment.
The Amazon spokesperson declined to comment specifically on the investigations. “We face intense competition in every segment in which we operate, and we love that competition because it makes us serve customers better,” the spokesperson said.
To build an antitrust case against Amazon, the government would need to prove that the company has substantial market power that was gained or maintained through improper conduct, said William Kovacic, director of the Competition Law Center at George Washington University Law School and a former chairman of the Federal Trade Commission. Sellers favoring Amazon over other retailers could be a sign of market power, he said.
“That everybody does just what you want and puts you first out of fear that if they fall out of favor with you, they’re in real trouble — that could be taken as proof of your market power,” Kovacic said. “How people regard you, how they react to you, how they respond to your wishes is an indication of whether you have market power, and that is a key issue in these cases. If people say, ‘We don’t dare alienate them,’ that is a part of that proof. You have market power with respect to retailing and distribution because everyone knows if they disappoint you there will be a heavy price to pay. … The crisis reinforces the position of significance that they had before.”
One advantage that Amazon has long enjoyed over some competitors is that it can afford to make little profit on retail in the short term to boost market share and traffic, Hubbard said. Unlike most traditional retailers, Amazon can rely on revenue from other parts of its business empire, such as cloud computing. It has a history of pricing below cost to exclude competitors, a practice known as predatory pricing, said Hubbard, a former New York state assistant attorney general for antitrust issues.
To be sure, even Amazon doesn’t always have enough toilet paper and disinfecting wipes. And traditional retailers also have ways of penalizing suppliers who don’t fulfill purchase orders. For example, they can reassign the shelf space reserved for one supplier’s merchandise to a competitor. Retailers including Walmart, Target and Costco also sell merchandise online, but those retailers’ e-commerce sites account for a small proportion of their overall sales, so suppliers may be less concerned about running out of stock on those sites.
Aside from the stick of the algorithm, Amazon offers several carrots to brands, including a massive customer audience and high levels of customer trust, said Steve Yates, chief executive of a firm that advises sellers on the platform. “There’s good reason to say, ‘If I have limited amount of inventory and where am I going to put it that is going to be most effective,’ that Amazon is that place,” Yates said.
Amazon represents less than 4% of the U.S. retail market, and the same percentage of the grocery segment, according to the company spokesperson. Its 2018 retail sales were less than one-third of Walmart’s, according to data published by the National Retail Federation. However, Amazon accounts for nearly 40% of U.S. online sales, as against less than 5% for Walmart, according to eMarketer. Both e-commerce’s proportion of overall retail sales, and Amazon’s slice of e-commerce, are expected to increase because of consumer shifts online during the pandemic, according to the market research firm.
While U.S. retail sales decreased by 8.7% in March, the worst monthly decline on record, sales at Amazon have been booming. In response to customer demand, the company has hired 100,000 workers, with plans to hire 75,000 more. For the week ending April 12, customer spending on Amazon grew about 44% compared to the same period last year, according to Facteus, a company that analyzes consumer transaction data. Spending at Walmart was flat over the same period, although it did experience a spike in mid-March, according to Facteus.
Fahim Naim, a former Amazon category manager who now runs a consulting firm advising consumer brands working with the company, said large requests for high-priority goods have pushed some of his clients to choose between Amazon and other retailers. One supplements brand deliberated last month about whether to send its in-demand inventory to Costco or to Amazon, both of which it considered important to its business. In the end, the brand drastically reduced supplies to Costco, Naim said. Naim declined to identify the company because it did not want to upset Costco.
Similarly, clients that sell deodorant, feminine care items and beauty and sexual wellness products have asked Naim whether they should sideline big-box retailers — even ones where sales have been strong — in order to maintain high levels of inventory at Amazon, he said. He typically advises to favor Amazon.
Going out of stock on Amazon harms a brand’s rankings, such as “best seller,” which directly correlate to sales and are “difficult to recover,” he said. Brands may give Amazon 80% of inventory “so they can at least have something left over” for big-box retailers such as Walmart, Target and Costco, he said. Spokesmen for Costco and Target declined to comment. Walmart did not respond to a request for comment.
“It’s a tough decision,” Naim said. “But you’re almost pinned against the wall in that you have to allocate at least a sufficient amount to Amazon to avoid going out of stock because the consequences of going out of stock on Amazon are often greater than the consequences of going out of stock elsewhere. Amazon is so powerful right now, and there are so many customers on it. The impact of not being on Amazon is probably greater than not being in some of those stores.”
Another Naim client, Ramon van Meer, CEO of Las Vegas-based Alpha Paw, hasn’t been able to obtain new supply of his company’s popular dog training pads even as demand on Amazon for them has risen. China has diverted some of the raw material used to manufacture the pads to making protective face masks, van Meer said. Down to a 6- to 8-week supply of pads, van Meer has put on hold plans to expand to brick-and-mortar stores, and he will reassign inventory designated for sales on his own website to Amazon. He’s also suspended advertising on Facebook and Instagram to dampen demand until he can find a manufacturer in a different country.
“The worst thing that can happen for an Amazon seller is to go out of stock,” van Meer said. “I’m really holding as much inventory as possible for Amazon. I’d rather be out of stock on my own store than be out of stock on Amazon.”
Some suppliers have enough inventory to accommodate Amazon and their other customers. Beginning the first week of March, Amazon began sending purchase orders to Italy-based Corman of up to three times the normal amount for its Organyc brand feminine care products, said James Ebel, the company’s global vice president of marketing. In addition to Amazon, which sells Organyc’s products directly to customers, Corman also supplies pharmacies such as CVS and Walgreens. Corman, which had already planned for U.S. growth, was able to increase production to keep up with demand from both Amazon and traditional retailers.
“On Amazon, there has been a remarkable change in terms of our volume,” Ebel said. “The migration of consumers to the platform is going to have a long-term impact.”
Amazon typically recommends that Fairy Tales Hair Care, based in New Jersey, keep a 30-day supply of its bestselling children’s shampoo. That recommendation is now up to 90 days, CEO Risa Barash said. Even so, the brand has enough inventory for Amazon and traditional retailers like the Wegmans, Meijer and H-E-B grocery chains, Barash said.
Eric Heller, a former Amazon senior manager, said some household-name brands he advises are shifting inventory from brick-and-mortar retailers to Amazon. Beyond a desire to prevent going out of stock, they view supplying Amazon as “altruistic” since consumers are wary of leaving their homes, Heller said.
Hubbard, of Open Markets Institute, acknowledged the value of online shopping during the pandemic. “It doesn’t have to be evil for it to be anti-competitive,” she said. “You can create something of value but still be engaging in conduct that is distorting the competitive marketplace.”
Even as Amazon has increased its stock of high-priority merchandise, it has reduced purchases of some items it deems nonessential. “Exploding Kittens,” a popular card game made by one of Naim’s clients, went out of stock when Amazon temporarily stopped ordering it, Naim said. Amazon also extended delivery times for some of his other clients’ products. Slower delivery correlates to lower sales because customers generally don’t want to wait weeks to receive an order.
Amazon has also differentiated delivery times for nonessential items in a way that some of its critics regard as potentially anti-competitive. It placed shipping delays of several weeks on nonessential items sold by some third-party merchants on its platform. But it promised delivery within days of nearly identical products that it sells under its AmazonBasics private label. While Amazon said its private label products are only about 1% of total sales, consultants said that AmazonBasics has taken market share from competitors in products such as batteries.
In late March, ProPublica found that products including an in-stock backpack, a wireless mouse, a digital alarm clock and a set of wine glasses offered by third-party sellers all showed a delayed delivery of three weeks. (Items may arrive faster than the stated delivery date.) Amazon’s own, similarly priced versions of those products were available in several days, though some AmazonBasics products, such as a coffee maker, were also delayed. A review this past week indicated that this gap had been eliminated and delivery times were similar.
“The changes to our logistics network to meet increased demand resulting from COVID-19 were not designed to advantage Amazon brands, retail vendors or sellers,” the Amazon spokesperson said. “They have been based on how to best serve customers during the outbreak while helping ensure the health and safety of our employees.”
Kovacic, the former FTC chairman, said if he were Amazon’s general counsel, “I’d be begging” for the company to avoid the appearance of self-preference — a key area of government inquiry, he said — even if unintentional. “They should not want to be doing anything at the moment that reinforces those concerns.”
Other Amazon decisions during the pandemic have highlighted the risk to sellers of relying on the company. Under its Fulfillment by Amazon program, the retail giant for a fee packs and ships third-party sellers’ goods from its warehouses to their customers, as well as providing customer service. But on March 17, it told these merchants that its warehouses would temporarily stop accepting shipments of products it deemed nonessential. Combined with Amazon’s nearly monthlong shipping delays on nonessential items already in warehouses, many sellers were left scrambling to fill customer orders themselves, said Tim Hughes, chief operating officer of a consulting firm that helps brands manage their Amazon accounts. In addition, sellers whose nonessential products were already stored in Amazon’s warehouses have been temporarily unable to retrieve their merchandise as the company has prioritized fulfilling customer orders.
“A lot of these people send all their inventory to Amazon, so there’s nothing they can do,” Hughes said. The merchandise is, in effect, “held hostage” until Amazon employees fetch it from the warehouse and return it to sellers, said Hughes, who worked in product management at Amazon.
To prioritize products such as household staples and medical supplies, Amazon has “temporarily paused removal operations” in some of its warehouses, the spokesperson acknowledged. “We know this is a change for our selling partners. … We are working to increase capacity.”
Spenuzza, the Rise Bar CEO, has sold his product on Amazon for nine years. Last month, he and consultant Rachel Johnson Greer, who advises him on his Amazon business, discussed whether to fulfill a large order from Costco, she said. Greer, a former Amazon senior program manager, warned him that being out of stock on Amazon would cause the algorithm to send Rise Bar listings further down on the search results pages, resulting in fewer potential customers seeing — and buying — his products there.
“If you go out of stock on Amazon, you can have major problems,” Greer said. “If I fulfill this order for Costco, I might drop in my rank from Amazon and I might not be able to get it back. … Amazon is a single point of failure for a lot of these folks.”
Spenuzza filled Costco’s order for one week, and also sent stock to Amazon, he said. But it took more than a week for Amazon to move the packages into its warehouse, and by the time the inventory was entered into the system, most of the Rise Bar flavors were out of stock. “Amazon was so overwhelmed that they needed to prioritize the highest selling essential items,” he said.
During a late-March trip to a grocery store in Long Beach, Spenuzza noticed that shelves usually stocked with dozens of types of bars now looked “half-empty,” he said. He knew that stores would be grateful for any bars he shipped to them, he said. But he couldn’t spare the product. That week, he sent about three-fourths of his protein bars to Amazon, up from 45% in January.
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Ava Kofman contributed reporting.