A look at Amazon’s growing third-party seller business

Car Toys Inc. sells GPS navigation devices, car stereos and cell phones at its 49 brick-and-mortar stores and through its website. But the Seattle-based electronics chain also does a lot of its selling through the nation’s biggest online retailer, Amazon.com.

“It’s been good or better than any of our online channels,” said Car Toys’ online director Glen Hamilton, who said his company’s sales via Amazon have increased 300 percent this year.

Amazon.com Inc. has turned third-party sales into one of the pillars of its business strategy since opening its website to other retailers a decade ago. The third-party seller business has helped Amazon rapidly expand its product selection, and contributed to the company’s continuing growth in a tough economy. Amazon just had a blowout third quarter, with profit up 68 percent to $199 million and sales up 28 percent to $5.45 billion. The company’s shares surged to an all-time high following the earnings report.

The Seattle-based e-commerce giant doesn’t break out the dollar value of third-party sales, but the company’s latest regulatory filing indicates they made up 31 percent of overall unit sales in the third quarter. Amazon said more than 1.8 million seller accounts were active on its site worldwide in Q3, up 24 percent from a year ago.

Amazon has been steadily moving beyond its bookseller roots to become a retailer of all merchandise, and the third-party sellers have helped the company broaden its offerings. Amazon takes a cut of every third-party sale through its website (the percentage ranges from 6 to 20 percent, depending on the product category), and in many cases doesn’t bear the costs of sourcing, owning, or warehousing the products.

“We recognized the ability for sellers to add products both new and used that increase selection for customers,” said Amazon spokesman Craig Berman, adding, “There may be products that we don’t offer in our retail selection that third parties do offer.”

Amazon’s third-party seller business competes with rival eBay, which lets people auction items or sell them at a fixed price on its website. Now, other retailers are beginning to take note of the strategy.

Giant warehouse chain Wal-Mart Stores Inc., which is the nation’s biggest retailer but lags Amazon in e-commerce sales, recently invited select retailers to sell products on its website (boosting its online selection by a million items). Sears also has opened its website to other retailers.

Eric Best, CEO of Seattle-based Mercent Corp., a company that helps big brands such as Car Toys, Guess, and The Body Shop sell and market products online, said he’s seen “significant interest” from clients in the new Wal-Mart and Sears third-party programs. But Best, a veteran of Amazon who worked on the company’s early third-party seller programs, said, “Amazon has a major head start.”

Mercent tracks the sales growth of 40 of its largest clients, and these merchants saw third-quarter sales on Amazon increase an average 70 percent from the same quarter a year ago.

The third-party model holds some risks for Amazon. The company can’t entirely control the quality of products sold by other retailers on its website, though it can promote sellers with the best track records by giving them priority in product search results.

For retailers, selling through Amazon also has hazards. They may compete against the same products sold by Amazon or by other sellers on Amazon. By selling on Amazon, retailers also give the e-commerce giant insight into how their products are performing — crucial intelligence that could inform Amazon’s development of future e-commerce initiatives.

Car Toys’ Hamilton calls this dynamic with Amazon “co-optition” — competitors using each other to achieve their goals. And Hamilton doesn’t pin his entire strategy on Amazon. Like other online sellers, he also lists products in major shopping portals such as Google Product Search and Bing Cashback (a feature of Microsoft’s new search engine).

Amazon has been trying to entice more sellers into its program by offering services like fulfillment (storing third-party products in Amazon warehouses, which allows them to be included in Amazon free shipping offers) and online checkout (Amazon’s payment system). – Techflash

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