Amazon’s Fulfillment Service Is a Winner With Third-Party Merchants

NEW YORK (TheStreet) -- One of the things Amazon (AMZN) has down pat is fulfillment. It has figured out that this is one of the most important parts of an e-commerce business and has invested energy and money into bettering the way packages are delivered.

Amazon expanded its fulfillment capabilities to third-party sellers in 2006 through Fulfillment by Amazon, or FBA, which takes care of the logistics for small and medium-sized businesses. Nine years later, the initiative is going strong and has become one of the centerpieces of Amazon's business.

"As you'll notice in our most recent letter to shareholders from Jeff Bezos, Fulfillment by Amazon is the glue that links Marketplace and Prime," Mark Mitchke, vice president of Fulfillment by Amazon, said in an interview. "In short, our strategy with FBA is to continue to help sellers grow their business and continue to increase Prime-eligible selection for customers."

In May, third-party sales through FBA accounted for 35.4% of Amazon's general merchandise volume, according to ChannelAdvisor, an e-commerce service provider. That's up from 29.2% in May of 2014, for year-over-year growth of 21.1%. In 2014, the number of active sellers using the service grew by more than 65% from the year before, according to Amazon. The company doesn't disclose how much revenue comes from FBA.

"Sellers are generally happy with FBA when we talk to them," said ChannelAdvisor Executive Chairman Scot Wingo. With FBA, sellers get to hand over the entire logistics process to Amazon, which could be a headache for a small business to deal with. Plus, they can process non-Amazon sales through FBA as well, meaning that if they sell a product on another site, Amazon will still ship it.

"FBA is a very reasonably priced storage option," said Rachel Valosik, director of e-commerce at Griffin Technology, who is a happy FBA seller. "Griffin decided to use FBA because we know that Amazon shoppers prefer to buy when a product is Amazon-fulfilled. They like the fast shipping, and they like knowing they will be dealing with Amazon customer service should anything go wrong."

The other benefit FBA currently offers is expanding a seller's reach to Amazon Prime members. As of now, products must be delivered through FBA to be eligible for Prime -- that way, Amazon can maintain its control over the process and ensure two-day delivery.

"We've seen that Amazon Prime customers will often begin their product search by filtering for just Prime-offered listings," Valosik said. "So immediately, FBA may determine whether your product is even seen or considered by these customers."

However, there have been reports that Amazon may be changing this policy and letting businesses sell on Prime without enlisting in FBA, as long as they meet certain requirements. Amazon has yet to comment on these reports, but it could theoretically have an impact on the growth FBA has been seeing.

As it stands, though, FBA remains a win for sellers, consumers, and Amazon. Sellers don't have to worry about the logistics and can reach tens of millions of Prime members -- according to Amazon, 71% of U.S. FBA merchants reported more than a 20% increase in unit sales after joining the service -- while consumers get a wider selection of products that will be delivered efficiently and reliably.

"We focus our efforts on innovating on behalf of customers and sellers, and what's good for customers and sellers is good for Amazon," Mitchke said.

Beyond happy customers and sellers, Amazon also gets more products on its site without taking on the production costs. The average retail business has a profit margin of about 10%, Wingo said, and he estimates that Amazon's net margins on third-party sales are about 30%.

FBA also encourages third-party sellers to choose Amazon over other marketplaces such as eBay (EBAY).

"By making it more friction-free, it creates barriers to entry for other competitors," said Greg Portell, a partner in A.T. Kearney's Consumer Products & Retail and Media Practices. "If it is so easy for me to do business inside the Amazon marketplace, I have no incentive to go somewhere else."

More from Investing

Never Buy Stocks Based on Unusual Call Activity: Doug Kass Insider

Never Buy Stocks Based on Unusual Call Activity: Doug Kass Insider

Wells Fargo to Face $1 Billion in Fines Over Car-Insurance Probe

Wells Fargo to Face $1 Billion in Fines Over Car-Insurance Probe

Starbucks Got a Few Things Wrong in Managing Crisis, Expert Says

Starbucks Got a Few Things Wrong in Managing Crisis, Expert Says

Mattel Names Ynon Kreiz CEO to Replace Georgiadis

Mattel Names Ynon Kreiz CEO to Replace Georgiadis

Will Tesla Stock Tumble 33% to $195?

Will Tesla Stock Tumble 33% to $195?