Bloomberg News

Amazon’s Bezos Gambles Consumers Won’t Budge Amid Supplier Spats

August 14, 2014

Jeff Bezos

Jeff Bezos, chief executive officer of Amazon, unveils the Fire Phone during an event at Fremont Studios in Seattle, on June 18, 2014. Photographer: Mike Kane/Bloomberg

Jeff Bezos is betting consumers are so hooked on Amazon.com Inc. (AMZN:US)’s easy shopping and fast delivery that they won’t revolt even as negotiations with suppliers make it harder to find some items on the site.

Amazon’s chief executive officer is gambling on shoppers like Paul Shi, 23, who signed up for the company’s Prime fast-shipping service two years ago. Shi, a New York resident who buys products ranging from flip flops to used books on Amazon, said he’s keeping his spending patterns the same even as the company duels with Hachette Book Group and Walt Disney Co. (DIS:US) over the terms of selling goods on the site.

“Do I think they can be less confrontational and work toward a better resolution? Sure, but at the end of the day, they’re out to protect their bottom line, and it’s just a negotiating tactic,” Shi said. “I’m the consumer, and my job is to get the lowest price possible, even if it happens to be on Amazon.”

Shi’s actions illustrate why Bezos may have the upper hand even as the Seattle-based company grapples with negative publicity from its disputes with media companies. Since May, Amazon’s negotiations with Hachette over the cut of sales from e-books have spilled into the open, with the world’s largest online retailer blocking some Hachette titles on the site. More recently, Amazon stopped pre-orders of Disney movies like “Captain America: The Winter Soldier” in disc form.

Strong Business

Yet even though some books and DVDs are now unavailable for pre-order on Amazon, the company’s business has continued undented. Visitor traffic to the site was up almost 7 percent in June from a year earlier, third-party merchants’ sales through Amazon’s marketplace jumped more than 40 percent in July and even book buyers aren’t deterred, according to data compiled by Bloomberg.

That’s because Bezos over the years has locked in consumers with the Prime fast-shipping service, which gets a huge selection of items to people’s doorsteps in less than two days. Customers also remain attracted to Amazon’s low prices in general. All of that makes it easier for Bezos to retain his customer base -- and thus continue being tough on suppliers.

“At the end of the day, this is a company that has $100 billion in revenue,” said Kerry Rice, an analyst at Needham & Co. “It might suffer some, but I think overall the effect will be negligible.”

Brittany Turner, a spokeswoman at Amazon, declined to comment beyond a letter the company posted over the weekend. In the missive, Amazon appealed to readers to write to Hachette CEO Michael Pietsch with their thoughts on the dispute.

Amazon has been taking on vendors more publicly as it faces investor pressure to boost profits. The company’s stock fell 9.7 percent last month the day after it reported its widest loss since 2012. In total, its shares are down 18 percent (AMZN:US) this year through yesterday, compared with a 5.3 percent increase in the Standard & Poor’s 500 Index.

More Visits

Amazon’s entrenched position with consumers is evident as people keep visiting its website. Unique visitors in the U.S. to Amazon’s site increased slightly more than half a percentage point to 159.6 million in June from May, when the disputes became public, according to ComScore Inc. In total, visitor traffic to Amazon in June was up 6.9 percent from the same month a year earlier, ComScore said.

Product orders on Amazon also remain strong, according to third-party sellers’ sales. Transactions from third-party merchants who use Amazon’s platform to sell their goods jumped 40.4 percent in July from the year before, compared with June’s 34.4 percent and May’s 28.1 percent increases, according to data from ChannelAdvisor Corp., which helps e-commerce retailers access various distribution channels.

Still Buying

Even consumers who are aware of the Hachette spat, which prompted authors to run an ad in the New York Times in protest over the weekend, have stayed firm in their book-purchasing habits. Of the 39 percent of book buyers aware of the discord between Amazon and Hachette, the majority have no opinion or aren’t buying fewer books from the online retailer, according to a survey last month by consulting company Codex Group LLC.

Amazon Prime users, who pay an annual $99 fee for the shipping perks and access to streaming movies and e-books, are a captive market. Amazon added more Prime members in the second quarter of this year than the same period in 2013, even after increasing the annual price of the program to $99 from $79, Chief Financial Officer Tom Szkutak said on a conference call last month. In his 2013 letter to shareholders, Bezos said there were tens of millions of Prime members worldwide.

Some Limits

There may be some limits to Amazon customers’ loyalty. When the company boosted Prime’s price in March, it faced criticism, said James Cakmak, an analyst at Telsey Advisory Group. Consumers may also change their behavior if prices on the site rise, as companies such as Apple Inc. and Google Inc. move into e-commerce, he said.

Still, Amazon holds the customers that the suppliers need right now so the Web retailer should prevail in the end, Cakmak said.

“Where else are they going to go?” he said. “It’s not the first time there’s been disagreements in negotiations. This is probably one of the higher-publicized ones, but it’s not new, and it’s certainly not the last.”

Amazon can leverage its status as one of the “few digital providers who are able to provide a range of services” in its negotiations with Disney, said Richard Cooper, an analyst at IHS Inc. who is based in London. The company won’t miss out on too many sales by blocking pre-orders and is trying to use its influence to strike new deals on digital titles, he said.

Shi said only higher prices, less selection, and slower deliveries would discourage him from buying on Amazon.

As a Prime member, “you’re pretty much locked into Amazon as your primary vendor for online purchasing,” said Shi, who put in his 268th order since 2007 in the website last week.

To contact the reporter on this story: Jing Cao in New York at hcao38@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Jillian Ward


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • AMZN
    (Amazon.com Inc)
    • $323.63 USD
    • -0.87
    • -0.27%
  • DIS
    (Walt Disney Co/The)
    • $88.31 USD
    • -0.98
    • -1.11%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus