Amazon's Latest Behind-the-Scenes Move to Compete With eBay and Walmart

MarketsMotley Fool

Amazon's (NASDAQ: AMZN) third-party seller services have become a growing part of its retail business. For a fee, small merchants can list their items directly on Amazon's marketplace. Listings don't differ too much from eBay (NASDAQ: EBAY) "Buy It Now" listings. Walmart (NYSE: WMT) has made a push to offer more products from third-party merchants on its online store in the last few years as well.

Being the biggest online retailer in the world has its benefits. Amazon has gotten away with charging merchants higher fees, in general, compared to eBay or Walmart. Merchants pay $40 per month (or $1 per sale) just to list items. They pay a referral fee to Amazon on each sale as well. Amazon generally has referral fees equal or higher than those of eBay and Walmart. Additionally, Walmart doesn't charge any listing fees.

Continue Reading Below

However, Amazon is taking some steps to lower its referral fees, particularly on lower-priced items, where it charges a minimum referral fee. Starting in February, the minimum fee will drop from $1 to $0.30 in many categories, and some popular categories will see overall rate reductions across the board. That could put the pressure on Walmart and eBay to retain their sellers' business.

What's changing at Amazon

As mentioned, the minimum referral fee for most categories will go from $1 to just $0.30. Jewelry's minimum will also eventually fall to $0.30 from $2.

Walmart, notably, doesn't charge a minimum fee to its merchants. However, it's much more selective than Amazon in what merchants it accepts to sell on its marketplace. That means, Walmart is able to exercise some control over the average sale price of its merchants' products. Still, that distinction has likely led some merchants to favor Walmart over Amazon.

eBay also doesn't have a minimum fee, but unlike Walmart, it charges fees per listing. Bigger merchants likely use a Store subscription to buy listings in bulk on top of additional benefits, including lower referral fees per item sold. Those subscriptions can easily be much more expensive than Amazon's $40 per month subscription for bigger merchants.

On top of decreasing its minimum referral fee, Amazon is also lowering its overall referral fees in select categories. That will make it more competitive with eBay and Walmart for merchants selling more expensive items.

A comparison of referral fees across the three marketplaces

Below is a sample of referral fees merchants can expect to pay on Amazon, Walmart, and eBay.

As you can see, referral fees are quite similar between Amazon and Walmart. Meanwhile, eBay offers merchants significantly lower referral fees, but it charges a lot more to get set up.

Starting in February, Amazon will make some significant changes to its referral fee schedule.

  • It will reduce the fees on Baby, Beauty, and Health & Personal items priced below $10 to just 8% from the current 15%. Merchants selling items above $10 will still pay 15%.
  • Merchants selling expensive furniture will only have to pay 10% for the portion of each sale above $200. Amazon will still charge 15% for the portion below $200.
  • Jewelry will also get a reduction for expensive items. The portion of sales above $250 will pay 5%, the first $250 will still pay 20%.
  • Amazon also appears to be making its Grocery category promotion that it started last year permanent. Items priced up to $15 will only be charged 8%. Items above $15 will pay 15%.

What it means for investors

Amazon's new pricing will mostly affect merchants selling lower-priced items. Amazon's minimum fees made selling those items on Walmart or eBay more profitable. With the popularity of Amazon's marketplace among consumers, the lower minimums ought to drastically increase the number of low-priced items available for sale on Amazon.com.

That goes double for the new referral rate on low-priced Baby, Beauty, and Health & Personal items. Amazon's discounts on high-end furniture and jewelry ought to increase product selection in those categories as well.

All told, Amazon's move should give online shoppers even more reasons to visit Amazon.com -- and fewer reasons to visit its competitors.

Amazon's third-party marketplace already accounts for nearly two-thirds of its retail sales, according to data from eMarketer, and it would be the biggest online retailer in the U.S. as a stand-alone business.

And third-party sales are growing quickly. eMarketer estimates Amazon Marketplace sales will grow 35.6% in 2018, double the rate of Amazon direct sales' 17.5% growth.

Third-party seller services are growing three times as fast as net sales for its core retail business through the first three quarters of 2018, and they have a significantly higher profit margin. So, Amazon can sacrifice a bit of that margin in order to keep its competition in its place. As CEO Jeff Bezos famously said, "Your margin is my opportunity."

10 stocks we like better than AmazonWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Amazon wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 14, 2018

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon and eBay. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.