Amazon Marketplace Grows, Taking Small Businesses Along

NEW YORK (TheStreet) -- Amazon (AMZN) is in the business of selling virtually everything. If there is something it does not sell, odds are it will eventually. The online behemoth has been blasted as a killer of small businesses because its low margins are usually unmatchable by most mom & pop retailers.

Well, guess what: Amazon is helping small businesses, too.

The Amazon Marketplace is now in excess of two million sellers who shipped more than a billion units worldwide in 2013, a growth of 65% year-over-year. According to ChannelAdvisor, sales by outside merchants on Amazon were up 34.4% in June year-over-year.

By paying a fee to store and fulfill orders, small businesses on the Amazon Marketplace are able to offer fast shipping and gain huge exposure on the Amazon Web site, two things out of reach for most small sellers. For this added convenience Amazon takes a commission that has now grown to represent over 20% of its annual revenue. The huge popularity of Amazon Prime, and the benefits that come with it, actually help these businesses succeed.

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Before Amazon Marketplace, many of these businesses would sell their goods on their own Web sites, pay for online advertising if they could afford it or list their goods on eBay (EBAY) and hope for the best. Small businesses that have embraced Amazon Marketplace have found both success and growing sales.

One such beneficiary of Amazon Marketplace and Amazon Prime is Wagner Concepts and its drinking board game called Drink-A-Palooza. We spoke with Dave Wagner, CEO of Wagner Concepts recently to learn how Amazon has changed his business for the better.

"If it wasn't for Amazon I don't know where my business would be right now," he said. "Thanks to the Amazon program I can pass on my savings to my customers and offer them reduced or even free shipping now. I have only positive things to say about them."

Before using Amazon Marketplace Wagner was forced to charge his customers $15 per order for shipping, over 50% of what his actual product cost. This turned many potential customers away. Now prospective customers can buy his product for $27.99 and get free shipping under the Amazon Prime program.

Before listing on Amazon Marketplace, Wagner was selling a handful of games a month. In the last few months, since listing his product there, his sales have exploded to hundreds of units per month. After spending thousands of dollars on advertising on Google (GOOGL) to get ranked 20th, Wagner now finds himself ranked #4 on Amazon. This added exposure, for his unique leisure product, has helped to increase his sales dramatically.

Not everyone is so enthused with Amazon Marketplace. A local San Diego small business owner who sells her own beer-infused bakery goods stated she was hesitant to sell her products on Amazon. The reason the owner of PubCakes.com gave us was a fear that Amazon, or other companies, would copy her product and sell it for less.

This is an issue that has merit and has dogged Amazon for a few years now. Merchant Jeff Peterson, owner of Collectible Supplies, told The Wall Street Journal in 2012 that Amazon would match his price on the Pillow Pets product he was selling every time he reduced his prices, to the point he finally gave up trying to compete with them.

Baird Equity Research analyst Colin Sebastian estimates that Amazon has increased its item selection by 19% year-over-year, driven mostly by third-party sellers who account for 90% of its physical products. He sees Fulfillment By Amazon (FBA or Marketplace) as the key driver of its Prime service growth. According to Sebastian, "Our survey indicates a high rate of FBA adoption among third party sellers, most notably in Shoes, Beauty, Jewelry, and Clothing and Accessories categories," he wrote. "Importantly, we see this creating a virtuous cycle of increasing Prime subscriptions, further category expansion and greater unit velocity."

Amazon is set to report 2nd quarter results on July 24. Analysts will be looking to see if the rapid expansion of its fulfillment centers, and associated costs, are paying off finally for the retail giant.

And for small businesses that embrace Amazon Marketplace, sales are growing and that means Amazon sales are growing, too.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates AMAZON.COM INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate AMAZON.COM INC (AMZN) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 4.4%. Since the same quarter one year prior, revenues rose by 22.8%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • AMAZON.COM INC has improved earnings per share by 27.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, AMAZON.COM INC turned its bottom line around by earning $0.58 versus -$0.10 in the prior year. This year, the market expects an improvement in earnings ($1.05 versus $0.58).
  • Despite currently having a low debt-to-equity ratio of 0.30, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further.
  • The gross profit margin for AMAZON.COM INC is currently lower than what is desirable, coming in at 33.92%. Regardless of AMZN's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 0.54% trails the industry average.
  • Net operating cash flow has declined marginally to -$2,502.00 million or 5.48% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.

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