Third-party sellers benefit from Amazon’s huge fulfillment network
During the 1Q15 earnings call, Amazon (AMZN) management was asked what’s the biggest operational difference between China and India (EPI). Management replied that the Indian e-commerce market is primarily focused on third-party sellers. These are the small-scale sellers that depend on big e-commerce players such as Amazon to sell their products.
Amazon added that it’s trying to improve the general selling experience for those that sell products to Amazon customers. The company noted that these sellers now account for 44% of units sold on the Amazon platform. Third-party sellers have taken advantage of Amazon’s fulfillment network to sell products. Amazon now has 109 fulfillment centers around the world.
Amazon’s gross margins improve thanks to third-party sellers
Third-party sellers benefit Amazon in a big way. The company doesn’t have to invest any product cost, yet it gets a commission from sales. This is a great source of profit for Amazon, as the gross margins associated with these transactions are essentially 100%. This is the primary reason why Amazon’s gross margins grew from 29% in 1Q14 to 32% in 1Q15, as the chart above shows.
The third-party seller strategy is bearing gross-margin fruit for Amazon. Bricks-and-mortar players such as Walmart (WMT), Best Buy (BBY), and Target (TGT) can’t reap such benefits because they have to buy merchandise first, before selling it to customers.