Will All Amazon Resellers Disappear?

Amazon has grown dramatically and a large part of it can be attributed to launching Amazon marketplace in 2000 which allows third party retailers to sell their products through Amazon. Over 50% of sales on Amazon are now sold through third parties. Amazon's focus is lowering prices to get consumers to buy more. In turn, consumers become more frequent shoppers on Amazon for all their purchases. With more volume, they make more money and more capital. With more capital, they can scale more by building their distribution and delivery network.

In order to continue growing, Amazon will need to cut out the middle man. Middle men buy directly from manufacturers or from distributors and wholesalers. Then they sell their wares to the final consumer. The layers of middle men are being slowly peeled away. For example, if a shirt retails for $10, a retailer will buy it for about $5. The distributor may buy it for $2.50. The manufacturer may sell it to the distributor for about a dollar. The retailer will end up making about $2 after paying $5 to the wholesaler and $3 to Amazon for their Fulfilled by Amazon services. Now let's cut out the distributor because the internet and companies like Alibaba are helping to connect manufacturers directly with retailers thus by passing wholesalers. Let's say the manufacturer will sell it now for $2 because volume is much less with smaller retailers versus wholesalers but small retailers are more than happy to pay $2 since the price is lower than how much the wholesaler would have charged. Now manufacturers are making twice the revenue. This helps with rising cost, especially with labor cost growing in China and the rest of the world. The retailer can sell it for less than $10, perhaps just $8 because the cost of the goods are much lower. They will continue to make huge margins even if letting Amazon take care of the marketing and shipping through FBA which is about 30%. Retailers will still make $3.50 after paying $2.50 to Amazon and $2 to the manufacturer. So both the manufacturer and retailer is happier with the manufacturer doubling their income from $1 to $2 and the retailer growing their profit from $3.50 versus $2.

Amazon can cut another layer of middle men by getting rid of the retailer. Amazon can be the ultimate platform for direct to consumer. If Amazon can help manufacturers earn more without doing anymore work than just providing products to Amazon's market, then not only do they achieve lower prices but also providing business to their logistics network to lower margin cost. Let's say Amazon approaches the manufacturer directly and tells them that they can sell their products directly to consumers all over the world without doing anymore work via Amazon services. Financially the manufacturer is happy as long as they bring in more than $2 per item at this point. Even if Amazon take 50% in shipping and marketing cost (which would be high), they can list the same shirt for only $6 and give the manufacturer $3 per shirt instead of $2 while cutting out the small retailer. This $1 more for the manufacturer than selling directly to the retailer. The manufacturer now controls their price and have increased revenue through Amazon without anymore work. Amazon handles the sales, distribution, storage, and fulfillment. Amazon wins with more purchases because of lower prices. They can make higher commissions. They have more products in their network that lowers cost. The best part is consumers win because they were originally paying $10 but now pay $6 for the same item.

How will Amazon do this?

Amazon is creating the infrastructure to become a complete logistics network. In addition to building out their warehouse network, they are building out a delivery network that challenges FedEx and UPS. While still far from overtaking them, they will lower cost as their network grows. Not only are they trying to become unbeatable in term of scale but also unbeatable in terms of the network. In their effort to provide the best customer service, they need to provide the most efficient and cheapest shipping options in the world. In order to do that, they need to have the biggest and most efficient delivery network that delivers from factory to consumer. But in order to encourage manufacturers to use them, they need to provide added services such as marketing, distribution, storage and fulfillment. Their simple marketing message is that they are have the lowest cost and largest selection with the fastest cheapest shipping with the best customer service. No real marketing required with that promise. If sellers provide the lowest prices with best service, their listing rises to the top. If they don't, someone else will make millions. It's a self regulating system. Distribution wise they are building a delivery network that owns planes, last miles couriers through Amazon Flex, drones through Amazon Air, US Postal Service, and overseas freight. Amazon sells over $200 billion dollars of merchandise through their marketplaces. Building a larger network of warehouses and hiring thousands of workers will enable Amazon to service thousands of manufacturers who do not have a presence in the US or importing countries. The more retailers means more competition and thus lower prices for consumers which encourages volume. Volume will continue lowering Amazon's cost which can encourage lower fees to sellers who can continue to lower prices. It is a self feeding cycle that makes the monster that is Amazon grow larger and larger.

The only losers are the layers of middle men, namely the retailers and the distributors or wholesalers. The middle men will die in e-commerce. The Amazon small retailers will disappear. The Amazon "Death Star" will crush another victim. In the end, the owners of capital will win. All hail the the manufacturers and Amazon.