26 Aug

Third-Party Sellers: Opportunity or Threat for Amazon?

WRITTEN BY Margaret Patrick

At the end of the second quarter, Amazon’s (AMZN) third-party sellers accounted for 54% of the paid units sold on the platform. This figure was higher than the 53% paid units sold by third-party sellers at the end of 2018. Serviced through Amazon Business Solutions, third-party sellers are an integral part of the company’s B2B (business-to-business) e-commerce growth strategy. To learn more about Amazon’s B2B strategy, read Amazon Is Targeting a $9 Trillion B2B Opportunity.

Third-party sellers a major driving force

According to Evercore ISI analyst Anthony DiClemente, are a major driver of Amazon’s e-commerce business. In terms of first-party sales, Amazon sells the products, which are sourced from vendors, under its own brand name. Third-party sellers sell products on Amazon’s marketplace platform in exchange for fees. Evercore ISI analyst Anthony DiClemente has estimated the worth of Amazon’s third-party business to be $490 per share. This amount is even higher than the estimated value of the company’s e-commerce business, which is around $230 per share.

In his letter to shareholders in April, CEO Jeff Bezos highlighted the rise of the third-party seller share in physical gross merchandise sales from 3% in 1999 to 58% in 2018. He explains that first-party sales grew at a healthy CAGR (compound annual growth rate) of 25% from $1.6 billion in 1999 to $117 billion in 2018. However, third-party sales grew at a much faster CAGR of 52% from $0.1 billion in 1999 to $160 billion in 2018.

Who’s competing with Amazon’s third-party seller marketplace business?

In his letter, Bezos identified eBay (EBAY) as a key competitor for its third-party marketplace business. However, eBay’s gross merchandise sales have grown at a CAGR of 20% from $2.8 billion in 1999 to $95 billion in 2018. Despite starting at a lower level, Amazon has outpaced eBay in the third-party marketplace business. Bezos attributes the success of the third-party marketplace business to the Prime customer base and Fulfillment by Amazon program.

However, eBay seems to be gearing up for the challenge. On July 24, the company announced a plan to launch its fulfillment service, Managed Delivery, by 2020. The company plans to position Managed Delivery as a cost-effective option for third-party sellers to deliver products in a fast and consistent manner. Hence, Managed Delivery will compete with Fulfillment by Amazon for a share of the third-party seller market.

Third-party business is also facing significant risks

On August 23, the Wall Street Journal reported that thousands of products that had been categorically banned, mislabeled, or proven unsafe by regulatory agencies were being sold freely on Amazon. Some of the products also had the “Amazon’s Choice” label. The report highlights Amazon’s inability to effectively monitor listings from third-party sellers. This not only affects the company’s overall customer trust but also may expose it to legal risk. Contrary to previous rulings, on July 3, the US Court of Appeals for the Third Circuit in Philadelphia ruled that Amazon could be held liable even for products sold by third-party sellers on its platform.

Amazon’s share price movements

After the report, Amazon’s share price fell 3.05% and closed at $1,749.62 on August 23. The stock, however, was up 16.49% YTD (year-to-date).

The 49 analysts tracking Amazon have an average target price of $2,261.27 on its stock. This target indicates a potential upside of 28.59% in the next 12 months based on its current price of $1,758.45.

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