E-commerce was unstoppable at the start of the pandemic when everyone had to be kept inside and they were shopping all day.
Many analysts forecast that brick-and mortar stores would file for bankruptcy following bankruptcy.
People like Mike Beckham, who sell products on Amazon, prepared for that change by ordering containers full of inventory—stainless steel drinkware, in his case—from Asia, to ensure he would have something for customers to buy.
But the pandemic-driven e-commerce boom has slowed, and that’s causing a lot of pain for the companies—big and small—that could not have predicted that the end would come so soon. Now, as Amazon’s Prime Day—the two-day bonanza where sellers like Beckham offer big deals—approaches, those incorrect predictions mean that a lot of these companies selling you stuff are actually losing money on the deal.
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“I feel like I’m on the front lines of retail Armageddon,” says Beckham, CEO of the company Simple Modern. “Mid-2020 to 2021 was the easiest time to be in e-commerce because there was just so much demand, and such a captive audience. From mid-2021 to now is probably the toughest year I’ve ever seen.”
Amazon too is affected by this slowdown. Amazon’s revenue growth was the slowest in 21 years. The share price has fallen 32% since then. Amazon spent huge to increase its warehouse space in the last two years, just as demand was slowing. Amazon Web Services is one of many money-making companies that Amazon owns, so it’s able to afford losing money on its ecommerce business. The third-party sellers like Beckham who make up nearly two-thirds of Amazon sales don’t have that luxury.
“They’re all victims of increased expectations based on what happened in the pandemic,” says Andrew Lipsman, principal analyst covering retail and e-commerce at Insider Intelligence. Insider Intelligence says that E-commerce sales rose by 36% in 2019 to 2020 and then increased 18% the year after. Lipsman expects that they will slow to 10% in 2022 for the first year since years.
If consumer demand was just slowing, it would be one thing. That’s something all retailers have to face. Amazon sellers face a slew of new costs. That’s partly because the e-commerce giant raised fees in January, February, and April of this year, and then in May added an extra fee for items that had been sitting around too long in warehouses.
It’s also because 2020 made e-commerce seem like such a sure bet that more than 200,000 new sellers from around the world joined Amazon in 2020, a 45% increase from 2019.
Because they competed for limited advertising spots, all those sellers drove up the cost of advertising. They also competed to be the best, offering lower prices while increasing their own costs.
“Sellers are increasingly feeling the squeeze from all ends, given the heightened competition in the marketplace, rising ad costs, rising input costs, and a softening e-commerce market,” Lipsman says.
Retailers usually base their order volume on the number of items they have sold in the past year and trends over the last few quarters. But the pandemic changed shopping so abruptly that “you’re pretty much flying blind,” says Beckham. “No one had any idea what to expect. Nobody has any sense of how long we’re in this alternative universe—it’s not just COVID, but also that people are buying different things than they did.”
Pandemic-induced retail boom also led to transportation problems that blocked shipping lanes and slowed trucks at ports. Third-party sellers and big retailers like Target and Walmart who ordered more and more to satiate consumer demand couldn’t get it to the U.S. fast enough. They were afraid of missing a profitable holiday season 2021 and paid thousands to have their goods delivered to the warehouses in time.
But then, of course, consumer demand started to slow, as inflation took a bigger bite out of Americans’ paychecks. In December 2021, retail sales fell by 0.2%. This is unusually low for holiday seasons.
Amazon sellers found themselves with warehouses full unused products. “At one point we had too many jars of [the toy] Brain Flakes that we just had pallets and pallets literally in our office against the wall,” says Mike Molson Hart, the CEO of Viahart, which sells toys on Amazon. “We had kickboards stacked up three, four pallets high.”
The excess inventory is one of the biggest problems Amazon sellers are dealing with right now, since storing stuff that consumers don’t want is prohibitively expensive. Selling goods means paying more to Amazon to purchase advertising and influencer marketing.
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Kea Babies, which sells baby products online, ran out of inventory in May of 2020, and dramatically upped its orders to compensate, says Ivan Ong, the company’s co-founder. Kea Babies now has too much inventory. The company was charged extra $300,000 for storage in the fourth quarter last year. Los Angeles warehouses are where the products are kept at $40 per pallet. The company has decided to pay to have its stock moved to Las Vegas where storage costs are less. In order to dispose of products, the company hired a liquidator.
Kea Babies runs Prime Day sales in order to eliminate some excess stuff. However, this can lead to many businesses losing money. Molson Hart, the Viahart owner, says that increased costs this year mean that Prime Day deals wouldn’t be profitable for him. For instance, he has a year and a half supply of a game called Goodminton, but has already lowered the price to $10.99 from $12.99 per unit, even as Viahart’s costs went up about 30%. Molson Hart earned $4 per Goodminton set in 2020; this year he makes 84c before any expenses.
Due to the slowdown in shopping, Viahart has a warehouse that can hold many years worth of toys and games.
Mike Molson Hart
“Our margins are getting compressed, we’re making less and less money, and so if we want to use Prime Day to clear that stock, we basically have to lose money,” he says.
Molson Hart expects that many third-party vendors will be out of business soon, or even quit Amazon.
According to Lipsman the analyst in retail, this could make Amazon shopping more difficult. At times, there may not be as much competition between sellers. This could lead to higher prices, increased advertising and less stock.
“I’ve personally done some searches where the sponsor results have misdirected me towards products that did not have the features that I wanted,” Lipsman says. “The consumer experience, in some respects, has degraded.””
It doesn’t help sellers that Amazon has raised fees as its own sales slowed. Brian Olavsky (chief financial officer) stated in the most recent earnings call that Amazon was shifting more costs onto third-party sellers to offset inflation.
Amazon has increased fulfillment fees that it charges sellers since January. In February, it increased storage fees. It added an inflation and fuel surcharge of 5% in April. And beginning in May, it introduced an “aged inventory surcharge” that adds costs for products that have been in warehouses for 271 days to a year.
The fuel and inflation surcharge is temporary, the company said in a statement provided to TIME, and the other increases are just a part of Amazon’s annual fee changes. Amazon claims it will launch more programs to support sellers and fulfillment through Amazon still costs 70% less than services that offer two-day delivery.
Despite this, some Amazon sellers are questioning their future. Brandon Young, who is a seller of toys on Amazon, and also runs a course that assists people in selling goods on Amazon, believes Amazon sellers will struggle to compete with brick and mortar stores like Walmart when it comes to cheaper goods. Amazon recently changed its shipping charges so heavy and bulky goods now cost more. According to him, shipping a toy bucket used to be $2.54 but now it costs more than twice. So he’s had to raise prices. He now sells a bucket that he bought for $11 for $18, while it was $5 at Walmart. His sales of these products have dropped 80%. And it’s not just buckets.
“I can come up with a number of products that are significantly down or dead compared to retail,” he says.
Amazon claims that the changes were made to conform with industry standards and only affects certain products.
Young, a seller who is pessimistic about Amazon’s future prospects, has started selling again in retail. Young, who says 99% of his sales are on Amazon, says it’s risky to depend so much on one site. So he’s reaching out to hundreds of small brick-and-mortar stores across the country. He’s also keeping his eye on the trend of live-streaming e-commerce, where Internet celebrities host a sales event and, in China, have sold billions of dollars worth of goods. This, not Amazon may prove to be the future in ecommerce, he says.
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For many shoppers, it may seem difficult to believe that Amazon will be replaced by any other retailer. But new trends in retail aren’t always easy to predict. A little more than two decades ago, Amazon’s business model was met with skepticism by some. The financial publication Barron’s ran a cover story headlined Amazon.BOMB at the time that proclaimed “the idea that Amazon founder and then CEO Jeff Bezos pioneered a new business paradigm is silly.” That not only proved to be wrong but also shows how hard it is to know how anyone will shop two decades from now, which companies will rise and fall, and how many containers full of stainless steel drinkware any company should order at any given time.
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