Castle Amazon

“In business, I look for economic castles protected by unbreachable moats,” famously said Warren Buffet, American business magnate and philanthropist. An economic moat is a competitive advantage that one company has over other companies in the same industry. The wider the moat, the larger and more sustainable the competitive advantage of a business. When it comes to Amazon its moat is wide and deep: Prime memberships, AWS cloud hosting, etc. But probably the most under-appreciated moat is the marketplace and its impact to competing retailers.

The share of sales on Amazon by marketplace sellers is up to 53%. Making the sellers as a group the largest online retailer in the US. With a moat larger than the castle Amazon is virtually unbreachable to other retailers waking up to online retail. Because what they miss is that Amazon’s moat is not only digital, but also physical.

Castle Amazon

70% of the top sellers on Amazon.com have their inventory stored in Amazon’s fulfillment warehouses FBA. This enables them to offer Prime to Amazon shoppers, but also makes it challenging to expand to other marketplaces. Using FBA for other channels than Amazon is more expensive, increasing product prices or forcing a smaller margin, and those channels do not want their customers to receive boxes with Amazon branding.

“It doesn’t seem appealing to me to add an enormous burden of having another inventory somewhere other than Amazon just to be able to sell 10% more than we currently sell on Amazon.”

Top Amazon seller

When Walmart or Google launch their new marketplaces the idea is that sellers will flock to them. But the reality is that most of them have a well-oiled process with Amazon and doing anything else is distracting. The repeatability of selling on Amazon, combined with expertise in launching products, reviews building, advertising, and other skills is not easily transferrable.

The notion of multichannel, selling on dozens or even hundreds of marketplaces, is often a pipe dream. As Amazon gets bigger and as more shoppers join Prime, more sellers buy-in into FBA. And thus as a result for those sellers multi-channel becomes something they do to appear diversified, and not an actual business strategy. Multichannel inventory storage is an unsolved problem, at least competitively compared to FBA prices.

Castle Amazon Jeff Bezos

From 30,000ft above the Amazon ecosystem does look like the castle protected by an unbreachable moat Warren Buffet described. Other castles - to continue the analogy - in the form of Walmart and eBay don’t have a moat because they don’t have what built Amazon’s: Prime and FBA. Even if Amazon continues to upset some number of sellers, change rules, or increase fees, the moat only gets deeper as more sellers join and as more shoppers subscribe to Prime.

Amazon’s stronghold is built on the army of sellers with inventory stored in FBA. The switching cost and cost advantage of FBA is why it is a moat. There is a reason why most sellers use FBA and only few do Seller Fulfilled Prime. Because of this Amazon will only get bigger. All things being equal the equilibrium state in the market is Amazon having captured all of the consumers and all of the sellers. There are, of course, many reasons why that won’t happen. Hopefully. It’s not clear yet what it will take to crack Amazon.

What’s unique about Amazon’s moat is that it is being powered by the consumer. FBA was built because it enables Prime and that’s what consumers want - there are 100 million Prime members after all. So while the moat itself is sellers, what’s keeping them in that moat is not Amazon, but the consumer. The hundreds of millions of consumers.

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Juozas "Joe" Kaziuk─Śnas

Founder of Marketplace Pulse, Joe wears multiple hats in the management of Marketplace Pulse, including writing most of the articles. Based in New York City. Advisor to other startups and entrepreneurs. Occasional speaker at conferences.

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