Amazon cuts third-party prices (NASDAQ:AMZN)has quietly started lowering prices by as much as 9% in recent weeks on goods offered by independent merchants on its site, ratcheting up a price war with other retail giants -- and potentially straining its relationship with some sellers.

Until now, Amazon has generally controlled prices only on merchandise it sells directly to consumers. Now, it is discounting some items sold by third parties, covering the cost difference itself to ensure competitive pricing.

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The new "Discount provided by Amazon" tag allows Amazon to compete more fiercely with low-cost rivals including Wal-Mart Stores Inc. (NYSE:WMT) and Dollar General (NYSE:DG) just as the all-important holiday season gets under way.

On Amazon this week, a Boots No7 Instant Illusion Wrinkle Filler sold by kn9ght was marked down 6% to $19.99, matching the same price offered online by retailer Ulta Beauty Inc. (NASDAQ:ULTA) Amazon discounted a Risk Legacy board game sold by VirVentures by 6% to $43.92, 3 cents less than at Wal-Mart.

"This item is sold by a third-party seller. The discount is provided by Amazon," Amazon says on listings with the new tag.

VirVentures Senior Manager Amit Sharma said the company currently has two units of the board game for sale, adding that it appears most sellers still haven't noticed the new discounts. The practice allows the seller to benefit as Amazon competes for more sales. "We are still receiving the same amount of money," he adds.

Kn9ght didn't immediately respond to a request for comment.

According to pages viewed by The Wall Street Journal, discounts appeared to be less than 10% and applied to items from sellers using Amazon's in-house fulfillment option. The special offer frequently disappeared within days. It's unclear how Amazon selects which prices to lower. Sellers said they weren't notified of the change.

The unusual move, while good for consumers, could further strain Amazon's complicated relationship with big-name brands, manufacturers and its merchants. Sales by independent sellers are a significant area of growth in Amazon's retail business.

It also shows how much Amazon is willing to pay for market share, part of its strategy to reinvest profits to grow the company. Amazon last week posted a 34% increase in revenue in its most recent quarter to $43.74 billion, but profits were nearly flat at $256 million.

The discounts could be a mixed bag for some sellers. A lower price on an item that matches or beats a competitor could help drive more sales at no extra cost to the seller. It may deplete inventory unexpectedly, though. And the lower prices could inadvertently violate a merchant's agreement with a brand to keep its products at or above a set minimum advertised price.

Jason Boyce, chief executive of home recreation retailer, says he's been selling on Amazon for nearly 15 years, and the majority of his more than $20 million annually in sales stem from that platform. He isn't sure if any of his products have been marked down yet, but said he's signed agreements with Wal-Mart and other marketplaces to maintain price parity on the same products he's also selling on Amazon.

"At first glance, we thought it was great," he said of the practice. But it would mean "violating our seller agreement with every other marketplace that we sell on."

An Amazon spokeswoman said the discount is a way to provide low prices for customers while sellers receive the list price. Sellers can also opt out. She declined to comment on how the company is selecting which items to discount.

Amazon for years has been helping drive prices lower across the board, in part through algorithms that scrape competitors' websites to match or cut prices on merchandise Amazon holds and sells directly.

But over the past few years, third-party sales have become more dominant on Amazon. Third-party merchants are expected to account for roughly 70% of the estimated $340.71 billion of merchandise bought on Amazon this year, according to FactSet forecasts.

Third-party goods are typically more profitable for the Seattle-based company, reducing inventory risk while increasing selection. But it's unclear how much the new price cuts, absorbed by Amazon, will eat into its already thin profit margins.

The surge in those third-party sales, plus Amazon's aggressive pricing policies, has significantly undermined brands' pricing control.

That has caused some brands, ranging from luxury goods maker LVMH Moët Hennessy Louis Vuitton SE to outdoor apparel company the North Face, to avoid selling directly to Amazon to help protect their pricing and branding strategies. Nike Inc. (NYSE:NKE) was a holdout until this summer, when it negotiated stricter controls on counterfeits and unauthorized sellers in exchange for selling some merchandise on the site.

As a result, some other brands have decided to sell on Amazon's platform as third-party sellers to retain more control over pricing.

James Thomson, partner at brand consultancy Buy Box Experts and a former senior manager in business development at Amazon, said it's difficult to find a way to opt out of the discounts on Amazon's internal seller site and that it's likely most sellers won't notice the change since it doesn't impact sales.

But "when Amazon becomes the problem by modifying the price of third-party seller options, how is a brand supposed to enforce its pricing policies?" he asks.

The new policy could help boost Amazon's sales, though. Rosa Ruiz price compares on her phone during her 40-minute commute into New York City every morning, shopping for things like toiletries and ironing boards on Amazon, Wal-Mart and Target Corp. (NYSE:TGT) sites. If she doesn't need it fast, the sale goes to the lowest bidder -- which frequently isn't Amazon, she says.

"I'm a bargain shopper," says the 32-year-old customer success manager. "Sometimes there are certain things that I wouldn't purchase from [Amazon], but if they do drop the prices, I'll buy them."

(END) Dow Jones Newswires

November 06, 2017 02:47 ET (07:47 GMT)

This article is being republished as part of our daily reproduction of articles that also appeared in the U.S. print edition of The Wall Street Journal (November 6, 2017).