I ordered a $5.80 radio antenna from Amazon earlier this week. It arrived two days later, with free second day shipping, courtesy of my Prime membership. If I’d ordered another $29.20 worth of stuff, it could have been delivered the same day, also completely free.
We should all be delighted at the convenience and the value of Amazon’s service. I certainly am, and I buy things on Amazon once or twice a week most weeks.
But, as Amazon continues to steadily gobble up market share and get ever larger, at what point do we suddenly realize that our entire retail world is now dominated by one single company? Already, there are very few categories of goods (and increasingly services too) which can’t be purchased on Amazon, and for ordinary day-to-day household needs, one could live perfectly well never leaving one’s house and ordering everything needed through Amazon.
To date, Amazon has been very consumer-friendly, and deserves its success. It is growing the best way possible – by providing excellent service and excellent value. But should we trust that to remain the case into the future? What happens when Jeff Bezos retires, and new management with new values replaces him? When there’s no longer any remaining active competition to ‘keep them honest’? When the mantra of ‘creating shareholder value’ becomes code for ‘price-gouging our customers’?
Back to my $5.80 antenna. Here’s the Amazon listing. The same antenna is available elsewhere – for example, on eBay, where it lists for anywhere between a low of $1 and a high of about $12, and also with free shipping. So, on the face of it, the retail world – at least online – still offers viable alternatives, right?
But there’s a catch with the lower priced eBay listings. They are shipped from China/Hong Kong, and instead of arriving two days later, they arrive semi-randomly somewhere between two and six weeks later. That might sometimes be acceptable, but more often, is not.
The $12 antennas offer free shipping from California, and that probably would take three or four days, depending on where in the country you were. Would you pay twice as much, and accept slower shipping, when Amazon was offering a better price and faster shipping?
So, there you are, the buyer, choosing between $1 and about a month’s wait, $5.80 and for sure delivery in two days time, or $12 and delivery in maybe three, possible four days. That’s a fairly easy choice, isn’t it.
As buyers, we should be, and we are, delighted. But what say you are a US seller – how easy is it to compete with Amazon? Indeed, let’s widen that question to also consider the low-priced Chinese competition, too.
Amazon and China – The Two Impossible Competitors Threatening Regular US Businesses
Let’s work through the example of the antenna I bought, and consider the implications if you had a US business that sells antennas.
We’re going to guess you can buy antennas from somewhere, delivered to your store, at a cost of 50c each (noting the eBay selling prices). Say you decide to match Amazon on both price and service, and so are selling them also for $5.80, two-day delivery guaranteed. You could ship UPS or Fedex, but you’re looking at some cost so far in excess of $10 for second day service as not to be worth even researching. Or you could ship USPS, using their priority mail service, and hope that you are lucky with their two-day delivery expectation.
For a 1.9 ounce package (the weight of the Amazon package), USPS will charge $7.15 to send it across the country in a flat rate box, or $6.65 if it will fit in a flat rate envelope (not sure about thickness restrictions). The good news is this includes their smallest size box or envelope, but the bad news is that your cost is now 50c for the item, $7.15 for shipping, 3% to accept the credit card payment, and a small amount extra to print a label and invoice and some packaging ‘filler’ so the antenna doesn’t rattle around in the box, plus whatever else you might also spend money on. You can probably get about a 70c discount going through Stamps.com. That $5.80 sale will result in you losing perhaps $1.80. To match Amazon’s service, and make a modest return, you’ll have to sell at about $8.10 – 40% more than Amazon’s price. Good luck with that.
Perhaps you instead decide to sell at the same price as Amazon, but to save on shipping and just use regular first class mail. The good news is the cost of regular first class package mail is a more moderate $3.00, the bad news is that you’re now looking at three-day delivery, with a higher possibility of delay, and no tracking for either you or the buyer. You also have to provide your own packaging. But let’s say the packaging is only 20c, and now your transaction is promising to return you a $1.90 profit, more or less. Maybe you’ll get another 10c saving on mail costs through stamps.com. That’s a reasonable return, if you can arrange a very efficient fulfillment operation.
But, switch back to the buyer perspective. $5.80 from Amazon, guaranteed second day delivery, and tracking information all the way through. Or buy from you, same price, hopefully three-day delivery, and no tracking information at all. Which would you choose? Of course, you’d almost certainly choose Amazon, wouldn’t you. Only if the other seller was selling for appreciably less would you give up your fast guaranteed delivery.
So, returning to the seller perspective again. You tried ‘same price, same service’ and that was going to lose you $2.30 per sale. You tried ‘same service, higher price’ and the extra 40% you have to sell the product for means no-one buys from you. You try ‘same price, poorer service’ and again, no-one buys from you.
The only thing this leaves is ‘lower price, poorer service’. You decide you’ll have to sell for $4.80 to compete with Amazon. This means your net profit now is something under $1.00. Not very enticing for you, and unlikely to take a lot of business from Amazon either.
Maybe you decide that you’re going to have to concede the ‘quality’ part of the market to Amazon. Instead you’ll change marketing strategies and, now that you’ve reconciled yourself to low profit margins, you’ll compete against the suppliers shipping from China. You’ll sell for the same price as them, but with faster shipping.
But – what’s this? Buyers can purchase the product from China for $1, including shipping, and your shipping cost – not from China to the US, but domestically within the US, is $3.00! Plus you’ve got another 50c to pay for the antenna itself, and a bit more for the packing, invoicing, credit card processing, etc. You need to sell at $4 just to break even, but you’re competing against Chinese companies who are selling at $1. How is this even possible?
Do you notice a commonality of problem, here?
Amazon, using a mix of shipping services, but including USPS for the last part of their package’s journey, can guarantee a tracked two-day shipment anywhere in the US for less that it costs you for the shipping alone, never mind the cost of the antenna.
And Chinese suppliers, also using a mix of shipping services and also using USPS within the US, can send a slower untracked shipment, again including the antenna itself, for less than it costs you for ordinary first class mail shipping alone.
Even if someone gave you a crate of antennas for free, you’d still lose money selling them. You’d be better advised just to donate them to the local Goodwill store and hope for a tax writeoff.
The Surprising Source of the Problem?
With a 50c antenna that is selling on Amazon for $5.80, the underlying cost of the antenna is not the issue. Even if Amazon was only paying 25c each for them, that’s only a 25c difference in cost for an item selling for $5.80.
The huge difference in cost is not in product sourcing. It is in shipping, where, it seems the difference in cost is not 25c but probably $2.50 or maybe even more.
One commonality of problem is the role of the US Postal Service, which not coincidentally lost $5.6 billion in 2016. This loss is even more than the $5.1 billion it lost in 2015, about the same as the $5.5 billion lost in 2014, and worse than the $5 billion in 2013. In total, USPS has lost $57 billion in the last ten years (almost all of these losses are attributable to the cost of their pension plan).
Sure, we all know that Amazon has enormous volumes, and so can negotiate favorable deals with shippers all the way through the process, but how much of a discount can the USPS afford to give Amazon when it is losing $5.6 billion? Yes, we’ll anticipate that the US Postal Service might say ‘we’d have lost even more without Amazon’s business’ and that’s another topic entirely, calling for some forensic accounting and complex value judgments about how one allocates fixed and variable costs. Suffice it to say, for this article, that even though the business they get from Amazon is growing very rapidly, their losses are also continuing to grow. So, albeit simplistically, it is hard to see any benefit.
The top-level reality, especially for smaller shippers, is much easier to comprehend. From their perspective, the Postal Service is selling its service too cheaply to Amazon, and/or too expensively to smaller shippers. We all know that Amazon only uses the Postal Service because it is the lowest cost option. How much higher could the Postal Service go with its Amazon pricing without losing Amazon’s business? A 10% increase in fees would probably still see the Postal Service competitive and the preferred choice for Amazon, while adding $1.6 billion in profit to the Postal Service’s bottom line.
Or, for that matter, how much lower could the Postal Service go with smaller shippers without going deeper into debt?
Ultimately, how much of a pricing differential should USPS allow between smaller customers and larger ones? We all understand and accept the concept of ‘quantity discounts’, but is it possible the USPS is currently killing off its smaller customers by giving too much of an impossible cost advantage to larger shippers? An advantage that not only kills off smaller customers, but is not entirely commercially necessary?
And what about those Chinese shippers. Why is it cheaper to mail a package all the way from China to somewhere in the US than it is to mail the same package domestically? We guess it is costing 50c to ship from China, compared to $3.00 to ship domestically. How can it be six times cheaper to ship from China than domestically!?
How can it cost about 50c to ship a 1.5 ounce packet all the way from China, when a regular first class letter, weighing under 1 ounce, costs 49c domestically!?
Yes, we know there are complicated international mail treaties, but if the mail treaty ends up so that the US Postal Service is both losing money and simultaneously enabling foreign companies to kill off our local retailers, isn’t it time to renegotiate that mail treaty, like sort of super-fast?
Has anyone stopped to consider the strange situation where the US government, via its enormously loss-making Postal Service, is in essence subsidizing both Amazon and Chinese merchants, while destroying the rich tapestry of competition and smaller businesses in our country?