Can Amazon's Fastest-Growing Segment Keep Up the Pace?
Amazon's (NASDAQ: AMZN) fastest-growing segment in the fourth quarter wasn't its cloud computing or advertising businesses. It was third-party seller services.
Revenue from Amazon's third-party marketplace services, which include listing referral, storage, and fulfillment fees, grew 24% year over year on an currency-neutral basis. Amazon has consistently increased the prices it charges merchants using its platform almost every year, and just implemented new pricing for sellers in January.
But sellers are now paying over 50% of their revenue to Amazon in the form of fees and paid advertising, according to Marketplace Pulse. That may put a damper on Amazon's ability to continue raising the prices it charges merchants to sell on its website.
A slowdown in seller services growth coming?
Amazon's seller services growth benefited from a weak comparison in 2021. Combined with pushing up against the upper limits of price hikes, it could lead to slower growth going forward.
The fourth quarter of 2021 was notable for the supply chain shortages that left many items out of stock and customers waiting weeks for items they previously received in days. That had an impact on marketplace sellers as Amazon limited the amount of inventory it could stock for sellers while it worked to get items out of its doors and on to customer's doorsteps, drastically increasing its fulfillment expense.
At the start of 2022, Amazon was well on its way to reaching a level where it could take all the inventory its sellers could get into its warehouses. But it implemented an inflation and fuel surcharge for sellers amid the rising costs of gasoline. The new fee structure for 2023 does away with those surcharges, instead implementing a standard price hike across the board for fulfillment and other marketplace fees.
That is to say, the growth numbers going into 2023, particularly the second half of the year, won't look nearly as good as they did over the last two quarters. However, the long-term health of Amazon's marketplace business remains strong.
Amazon's services are hard to replace
Merchants selling on Amazon cannot simply abandon the e-commerce giant if the fees go up too much. Amazon counts over 200 million Prime members worldwide. Those members prefer to shop on the website, making it the first place they look for a product online in most cases. And often, Amazon is where the searching stops, too. In addition, Prime members consistently spend more than non-members on Amazon.
This shopper loyalty makes it difficult to sell anywhere close to the same volume online anywhere else. Merchants could try other online marketplaces or set up their own online stores with their own website, but drawing the traffic of an Amazon listing on other websites and marketplaces is no easy feat.
Amazon also has an unmatched logistics network. Sellers looking for comparable services elsewhere will often pay more, according to Marketplace Pulse. And after doubling its footprint in the last two years, Amazon's advantage in the space has only gotten bigger. That said, Amazon may have overbuilt, and it's now looking for ways to grow into its warehouse space.
Amazon's position as a one-stop shop for finding customers and delivering items quickly gives it pricing power in the space. And it's not even always higher priced than replacement services. That means it should be able to continue raising its rates long term.
At some point, sellers start raising prices to offset fees. And then more customers may start shopping around to see if they can find better deals. But we haven't reached the point where Amazon is losing sales. Therefore, the revenue growth outlook for third-party seller services remains strong.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool has a disclosure policy.
