December 31, 2011, 12:00 AM

The Risky Rumba With Amazon

Is there more profit or peril in embracing the world's e-commerce powerhouse?

Lead Photo

Ozbo wants to be another Zappos, and a key route to that goal is by going toe to toe with other retailers in the mammoth if hard-to-tame Amazon marketplace, says Joshua Wood, Ozbo's vice president of operations.

A diversified web-only merchant that sells products ranging from groceries and home-and-garden items to sporting goods and pet supplies, Ozbo racked up close to $15 million in sales last year and expects to almost double that in 2012 as it targets Zappos.com-level success. "Our goal is to take this to $25 million in 2012 and to be a $1 billion company five to six years out," Wood says.

Zappos parent Amazon.com Inc. will play an important role in that growth, he adds. The Amazon marketplace, where more than 2 million sellers worldwide present their products alongside Amazon's own listings to the many millions of unique monthly visitors on Amazon.com, accounts for half of Ozbo's orders. Moreover, many customers who buy from Ozbo on Amazon become repeat buyers on Ozbo.com—making the extra work of posting products for sale on Amazon well worth it, Wood says.

Well, to a degree, that is. Like other retailers of all sizes that sell, or have sold, through Amazon, Ozbo has learned that there's both a good and a bad side to tapping the selling power of the world's largest retailer by web sales. In fact, given Amazon's rampaging growth, one of the biggest decisions a web retailer has to make today is whether to work with Amazon or flee from it—and try to create a web store so unique and pleasing to customers that not even Amazon can take a big bite out of its market share.

A fair marketplace?

Some retailers have fled Amazon after selling on its marketplace, and have no intention of ever returning. They complain that Amazon skews the marketplace, which produces about 35% of Amazon's revenue, to its own advantage, uses seller data to plan its own product strategy, and retains the exclusive right to market to consumers who buy on Amazon.com.

But Ozbo and others say that, despite its challenges, the Amazon marketplace offers retailers who know how to play the game a wide open window to grow. Sellers on the Amazon marketplace range from small mom-and-pops to major multichannel and web-only retailers like Petco Animal Supplies Inc., jewelry merchant Ice and handbag and accessories retailer eBags Inc. Mercent Corp., a company that helps retailers sell through Amazon, says the Amazon marketplace consistently ranks as the top selling platform for Mercent's 180 retailer clients, with their third quarter 2011 sales through Amazon up 37% over the year-earlier quarter, far outpacing the 13.7% Q3 growth in U.S. e-retailing, according to the U.S. Commerce Department.

But Amazon's dominant market presence—with recent annual growth of over 40%, it accounts for about 13% of all North American online retail sales, according to comScore Inc.—has led retailers like Macy's Inc., Gap Inc. and sports gear retailer evo.com to decide to stop selling on Amazon.com and instead sell directly to consumers online. While giving up the opportunity to sell to the more than 150 million unique monthly visitors to Amazon.com, they retain full freedom to market to customers that buy from their own web sites, stop adding to Amazon's appeal with their merchandise, and keep Amazon from knowing what items are selling and at what price, information Amazon can put to use on its own behalf.

The more retailers feed Amazon with revenue and data, the more it undercuts those retailers on prices of similar products, competitors and some objective industry experts say. Fiona Dias, who was chief marketing officer of the old Circuit City Stores Inc., says she pulled Circuit City out of the Amazon marketplace years ago after learning of Amazon's aggressive pricing policies. (Though Circuit City Stores no longer operates, the Circuit City brand is now operated online by Systemax Inc.) Dias is now chief strategy officer of ShopRunner Inc., a free-shipping loyalty program that competes with Amazon's Amazon Prime free-shipping service.

The atypical behemoth

What other retailers have to realize, says Sucharita Mulpuru, vice president and e-business principal analyst at Forrester Research Inc., is that Amazon is not your typical big retail competitor. It's not just an online version of Wal-Mart Stores Inc. that grows through its economies of scale and superior efficiency. "In the last few years," she says, "it has become clear that as Amazon became profitable and began to outpace the industry, it started to also pick fights with everybody and undercut them on pricing."

But others contend that selling on Amazon can be beneficial to a marketplace seller that, while dancing with the bear, keeps a wary eye open at all times. "It's really about controlling your own destiny," says Cathy Halligan, a former executive at several major retailers who is now senior vice president of sales and marketing at PowerReviews Inc., a customer reviews network for online retailers.

Amazon, while declining to comment directly on charges that it uses marketplace revenue and sales data to compete with marketplace sellers, contends that its aim is to satisfy customers, and that both Amazon and marketplace sellers benefit as a result. "Our focus has always been on providing the best experience for customers and to help sellers do the same," says Peter Faricy, vice president, Amazon Marketplace. "We're always looking for new ways to enable sellers to grow their business."

Faricy cites several examples of how Amazon helps retailers that sell on Amazon.com. They include the Fulfillment by Amazon program, which Amazon opens up to marketplace sellers to let them offer the same efficient fulfillment and shipping services as Amazon offers, including its popular Amazon Prime free-shipping service; Amazon Selling Coach e-mails, which Amazon sends to sellers with alerts such as when they're nearly out of stock of popular items; and the Marketplace Deals page that Amazon ran last Black Friday, the day after Thanksgiving, with offers exclusively from marketplace sellers. Ozbo's Wood and other e-commerce experts say such services do help marketplace sellers improve their sales through Amazon.

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