Amazon Retail: 1P vs 3P Economics
Former General Manager at Amazon
inpractise.com/articles/amazon-retail-1p-vs-3p-economics
Former General Manager at Amazon
The executive spent over 10 years at AMZN running various categories including mens, children's, footwear, and clothing broadly. Each role had full P&L responsibility.
Interview Transcript
This is a snippet of the transcript, sign up to read more.
Thanks a lot for the background; very helpful. We know you're the right guy to ask these questions to. How much do the economics for Amazon differ between different merchandise categories?
For Amazon, going down the list of books and media types of items typically are in the 20s. Consumables can actually get even lower. While they may have a much faster inventory turnover, consumable items, office product type items that are on replenishment and whatnot, a lot of those can be in the low 20s, sometimes even in the high teens. Picture anything that a grocery store sells or a drugstore sells, likely it is in the lower margin rate. Likely anything that Costco sells is typically no higher than 20 points as a simple gross margin. The idea is that you're turning over your inventory much faster and generating cash flow that way, whereas the inventory turnover of a consumable item might be as high as 12 to 18 per year. In clothing and footwear, you're lucky if you get three to four. The margins almost are somewhat inversely related to what your expected inventory turnover is.
This is a snippet of the transcript, sign up to read more.
It makes sense because you're basically leaving this very, very low return business to the third-party merchant, which is financing the inventory, and hopefully, they make some money.
On the third-party side, there's two benefits. One is that if it's a low margin business to begin with, you have a guaranteed margin. If you're not doing the shipping, then you're not paying for the shipping anyway. If the seller is taking care of the shipping, then you're not even involved in it. All you're doing is charging 15% as a rent to be on the site. If you are doing the shipping, then you're charging an FBA fee that will cover the cost of that shipping and maybe a slight profit. You still want to encourage people to use FBA, because Amazon would prefer everything to be Prime eligible, but you're going to charge the seller for that service.
This is a snippet of the transcript, sign up to read more.
Related Content
Copyright Notice
This document may not be reproduced, distributed, or transmitted in any form or by any means including resale of any part, unauthorised distribution to a third party or other electronic methods, without the prior written permission of IP 1 Ltd.
IP 1 Ltd, trading as In Practise (herein referred to as "IP") is a company registered in England and Wales and is not a registered investment advisor or broker-dealer, and is not licensed nor qualified to provide investment advice.
In Practise reserves all copyright, intellectual and other property rights in the Content. The information published in this transcript (“Content”) is for information purposes only and should not be used as the sole basis for making any investment decision. Information provided by IP is to be used as an educational tool and nothing in this Content shall be construed as an offer, recommendation or solicitation regarding any financial product, service or management of investments or securities. The views of the executive expressed in the Content are those of the expert and they are not endorsed by, nor do they represent the opinion of In Practise. In Practise makes no representations and accepts no liability for the Content or for any errors, omissions, or inaccuracies will in no way be held liable for any potential or actual violations of laws, including without limitation any securities laws, based on Information sent to you by In Practise.
© 2023 IP 1 Ltd. All rights reserved.