A clearance sale is one of the great miracles of business, one Amazon (NASDAQ:AMZN) shared with small merchants on Prime Day.
Merchandise is usually sold to retailers on “60-day net” terms. That means they have 60 days to pay for it. Big box retailers like Walmart (NYSE:WMT) destroyed small retailers by turning goods over in two weeks, selling goods before they bought them.
Prime Day is a clearance sale, where AMZN expects to bring in about $5 billion during what would normally be a slack period.
That’s why clearance sales are held in the summer. They create excitement when stores, both online and off, would otherwise be empty.
Competitor Walmart Joins the Fun
Four of Amazon’s 10 biggest sellers this year were electronics products from last season. Basically, stuff it needed to move to make room for new stuff.
Thanks to the hype Amazon has created around this “event,” other big retailers are able to do the same thing.
Walmart was able to move many of the same slow-selling products Amazon was selling, along with mattresses, tents, and electronics.
Best Buy (NYSE:BBY) moved speakers, monitors, and robot vacuums. Gamestop (NYSE:GME) was able to push out old Nintendo equipment. Wayfair (NYSE:W) got rid of outdoor grills and patio furniture before the season changes. Even eBay (NASDAQ:EBAY) was able to unload old drones, printers, and cameras.
For those seeking a lesson in all of this, note how many of these stores, including Amazon, were offering special deals on the Apple (NASDAQ:AAPL) Watch.
By turning a mid-summer clearance into a holiday, Amazon was able to clear the decks for itself and for others before they must commit to buying the holiday merchandise that makes for profits. Prime Day also provided a stern test for Amazon’s fulfillment system, its warehouses, and delivery people, before competition heats up in the fall.
The Real Amazon Model
The success of Prime Day comes as Amazon is under government pressure to change its current sales model, which emphasizes third parties, eliminating the inventory risk which makes clearance sales necessary.
An appeals court ruling that makes Amazon responsible for products it never owned, combined with a European agreement forcing it into better treatment of third party merchants, could induce it to take back some inventory risk.
So could the rising cost of counterfeits and Congressional complaints that Amazon’s off-brand merchandise is unfair to third parties.
Amazon’s Asian rival, Alibaba (NASDAQ:BABA), has been steadily increasing its inventory risk, while Amazon has reduced its own to make money on fulfillment. The Amazon purchase of Whole Foods two years ago has yet to pay off, while Alibaba has been buying entire shopping malls to gain more control over customers.
A change of direction by AMZN could devastate small businesses. About 58% of Amazon’s retail sales are on behalf of third parties. 73% of them are by small businesses with five or fewer employees. Such small businesses are also those most likely to be selling counterfeit goods. Amazon has little choice in cracking down.
The Bottom Line for AMZN Stock
Amazon is a retail ecosystem. It lets small companies compete directly with Walmart, Target (NYSE:TGT) and other big box shops, setting up online shops, shipping through automated warehouses, and getting the best deals on bookkeeping and delivery.
Amazon is proud of these merchants, giving them access to its entire set-up, including analytics tools.
As the sun sets on another Prime Day, with courts and legislators closing in to call Amazon a monopoly, these small merchants are its secret weapon. They should no longer be a secret to Amazon shareholders.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and AAPL.
