AAt the start of the pandemic, when people were locked down indefinitely and constantly shopping, e-commerce seemed unstoppable.
Physical stores were filing for bankruptcy after bankruptcy, and waves of analysts were predicting that consumers would completely change the way they shop, moving online permanently.
People like Mike Beckham, who sells products on Amazon, prepared for this change by ordering containers full of inventory – stainless steel glasses, in his case – from Asia, to ensure he would have something to buy for customers.
But the pandemic-driven e-commerce boom has slowed, and it’s causing a lot of pain for businesses big and small that couldn’t have foreseen that the end would come so soon. Now, with Amazon’s Prime Day approaching – the two-day bonanza when sellers like Beckham offer big deals – these incorrect predictions mean that many of those companies selling you stuff are actually losing money. on the case.
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“I feel like I’m on the front lines of Armageddon retail,” says Beckham, CEO of Simple Modern. “Mid-2020 to 2021 was the easiest time to be in e-commerce because there was so much demand and such a captive audience. From mid-2021 to now is probably the toughest year I’ve ever seen. »
The slowdown also affects Amazon. Last quarter, Amazon had its slowest quarter of revenue growth in 21 years, and its stock price is down 32% year-to-date. The company has spent a lot of money doubling its warehouse space over the past two years, just in time for demand to slow. But Amazon has a host of other lucrative businesses, including Amazon Web Services, which means it can afford to lose money in its e-commerce business. Third-party sellers like Beckham, who account for nearly two-thirds of Amazon sales, don’t have that luxury.
“They’re all victims of heightened expectations because of what’s happened during the pandemic,” says Andrew Lipsman, senior retail and e-commerce analyst at Insider Intelligence. E-commerce sales jumped 36% from 2019 to 2020, then 18% the following year, according to Insider Intelligence. In 2022, Lipsman predicts they will experience sub-single digit growth for the first time in years.
It would be one thing if consumer demand slowed. It’s something all retailers have to deal with. But Amazon sellers face an influx of costs. That’s partly because the e-commerce giant raised fees in January, February and April this year, then in May added extra fees for items left in warehouses too long.
It’s also because 2020 made e-commerce such a safe bet that more than 200,000 new sellers from around the world joined Amazon in 2020, a 45% increase from 2019.
All of these new sellers drove up ad rates as they competed for limited spots. And they competed for customers, trying to offer the lowest prices even as their costs rose.
“Sellers are increasingly feeling the pressure from all sides, given increased market competition, rising advertising costs, rising input costs and a slowing e-commerce market,” Lipsman says. .
Typically, retailers determine the quantity of products to order based on the number of shoppers purchased in previous years and trends in recent quarters. But the pandemic has changed shopping so abruptly that “you’re almost flying blind,” says Beckham. “Nobody knew what to expect. Nobody knows how long we’ve been in this alternate universe – it’s not just COVID, but also people buying different things than they did.
The pandemic-induced retail windfall has also contributed to transportation nightmares that clogged shipping lanes and slowed trucks at ports. Third-party sellers and big retailers like Target and Walmart, which were ordering more and more to satisfy consumer demand, couldn’t get it to the United States quickly enough. Afraid of missing out on what they thought would be a lucrative holiday season in 2021, they paid tens of thousands of dollars to get their products to warehouses on time.
But then, of course, consumer demand began to slow as inflation took a bigger slice of Americans’ paychecks. Retail sales actually fell in December 2021, which is unusual for the holiday season.
As a result, Amazon sellers found themselves with warehouses full of products no one wanted. “At one point, we had too many bribes [the toy] Brain Flakes that we just had paddles and paddles literally in our office against the wall,” says Mike Molson Hart, CEO of Viahart, which sells toys on Amazon. “We had boards stacked three, four pallets high.”
Excess inventory is one of the biggest problems facing Amazon sellers right now, because stocking things consumers don’t want is prohibitively expensive. Getting rid of goods often means giving Amazon more money, to pay for advertising or influencer marketing.
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Kea Babies, which sells baby products online, ran out of inventory in May 2020 and dramatically increased orders to compensate, says company co-founder Ivan Ong. Now Kea Babies is overloaded with everything, resulting in an additional storage charge of $300,000 in the fourth quarter of last year. Warehousing in Los Angeles, where its products are stored, costs around $40 per pallet, so the company pays to move its stock to Las Vegas, where storage costs are lower. The company also ended up paying a liquidator to get rid of some products.
Kea Babies is holding sales on Prime Day to get rid of some of its extra business, but it can be a losing proposition for many companies. Molson Hart, the owner of Viahart, says rising costs this year mean Prime Day deals wouldn’t pay off for him. For example, it has a year-and-a-half supply of a game called Goodminton, but has already dropped the price to $10.99 from $12.99 each, even as Viahart costs have increased by about 30 %. In 2020, Molson Hart made a gross profit of $4 for each Goodminton set; this year, he earns 84 cents, before expenses.
The Viahart warehouse has many years of supply of toys and games due to the slowdown in purchases.
Courtesy of Mike Molson Hart
“Our margins are compressing, we’re making less and less money, and so if we’re going to use Prime Day to liquidate this stock, we basically have to lose money,” he says.
Molson Hart predicts that many third-party sellers will go bankrupt or leave Amazon altogether.
This could lead to a worse shopping experience on Amazon, says Lipsman, the retail analyst. Without as much competition between sellers, buyers may see higher prices, more advertising, and less product in stock.
“I’ve personally done searches where sponsor results misdirected me to products that didn’t have the features I wanted,” Lipsman says. “The consumer experience, in some respects, has deteriorated.”
It doesn’t help sellers that Amazon raised its fees while its own sales slowed. In its latest earnings call, Chief Financial Officer Brian Olavsky said the company was passing on more costs to third-party vendors to offset inflation.
Amazon increased the processing fees it charges sellers in January. It increased storage fees in February. In April, it added a fuel and inflation surcharge of 5%. And starting in May, it introduced an “aging inventory surcharge” that adds costs for products that have been in warehouses for 271 days to a year.
The fuel and inflation surcharge is temporary, the company said in a statement provided to TIME, and the other increases are only part of Amazon’s annual fee changes. Amazon says it’s launching more programs to help sellers succeed, and Amazon fulfillment is still 70% cheaper than other services that offer two-day delivery.
Still, the past six months have left some Amazon sellers wondering about their future on the site. Brandon Young, who sells toys on Amazon and also runs a class helping people sell goods on the site, says he thinks Amazon sellers are going to have a hard time competing with brick-and-mortar retailers like Walmart on cheaper products. Earlier this year, Amazon changed the way it charges for shipping, so light but bulky items cost significantly more. A toy bucket that used to cost $3.54 to ship now costs double that, he says. So he had to raise the prices. A bucket he sold for $11 now costs $18, whereas it would cost $5 at Walmart. As a result, its sales of these types of products are down 80%. And it’s not just buckets.
“I can offer a number of products that are significantly down or dead from retail,” he says.
(Amazon says it made the change to be consistent with industry standards, and affects a small number of products.)
Pessimistic about the near-term outlook on Amazon, sellers like Young are beginning to return to retail stores. Young, who says 99% of his sales are on Amazon, says it’s risky to be so reliant on one site. It therefore caters to hundreds of small physical stores across the country. He is also keeping an eye on the trend of live e-commerce, where internet celebrities hold a sales event and in China have sold billions of dollars worth of goods. That, and not Amazon, could be the future of e-commerce, he thinks.
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It can be hard for shoppers to imagine Amazon being replaced by anything, let alone brick-and-mortar stores or internet celebrities. But new retail trends are not always easy to predict. Just over two decades ago, Amazon’s business model was met with skepticism by some. Financial publication Barron’s ran a cover story titled Amazon.BOMB at the time that proclaimed “the idea that Amazon founder and then CEO Jeff Bezos pioneered a new business paradigm is dumb.” This not only turned out to be wrong, but also shows how difficult it is to know how someone will be shopping in two decades, which companies will go up and down, and how many containers filled with stainless steel glasses a company should order at some point.
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