Partnering with Amazon: A Cautionary Tale

As Amazon introduced its Prime Now app to Portland, Ore., allowing Amazon Prime members to place free, two-hour delivery orders through local business partners, Dave Weich, former director of marketing and development at Powell's Books, recalled on medium.com what it was like working with Amazon during his time at Powell's.

Dave Weich

In the early 2000s, Powell's built up a nice business selling new titles Amazon had overbought. As Weich wrote, "Amazon started selling overstock to us by the pallet. Many pallets. Powell's was unique among potential buyers in that we sold enough books to replenish in such bulk, and Portland is just a short drive down I-5 from Amazon. We made easy partners."

The sales were "our most profitable inventory. They sold much faster than used books, and at a far greater profit than new ones. Priced at a discount, a viable market existed for them. So Powell's bought more and more. And then Powell's bought more warehouse space to accommodate the more and more. Our dot-com and marketing teams moved from a 10,000-square foot building in the gentrifying Pearl District to a 60,000-square foot warehouse on the edge of the city. Our staff grew in order to handle all these books: receiving them off trucks, unpacking boxes, data entering and shelving, and then only a few weeks later pulling the same books from those shelves and packing them to ship. We got very good at all that."

Powell's wanted to diversify, but "there were no other sources of such fast-selling books at such low prices. There was only Amazon.

"And of course they stopped selling to us. Amazon realized that they could make more money by holding onto the books a while longer and selling directly to their own customers; and when they were ready, they did. But not until we'd invested in infrastructure and equipment, not until we'd hired staff, not until we'd scaled to serve customers who thereafter didn't find many of the books they'd come to expect in our stores and at Powells.com. That sucked."

For Amazon's new partners in Portland, particularly the New Seasons grocery chain, Weich sees a similar situation developing. "What is New Seasons' plan if Prime Now catches on? How will their model evolve to handle the growth? They'll need new and expanded supply chains, right? What else? More warehouse space and staff? Will they ramp-up investments in technology? Can they maintain the superior food quality and best-in-town in-store experience?

"The articles I've read haven't mentioned how much money Amazon takes from each transaction through Prime Now, but you can bet it's a healthy cut. That means that as the delivery app catches on, an ever-increasing proportion of New Seasons' revenue will be generated at smaller margins.

"And all of that revenue, day-to-day and quarter-to-quarter, will be dependent upon the functionality and features of the app, which no doubt Amazon will reinvent when and how it pleases."

"I'd like to ask a publisher, or any of Amazon's other so-called partners: How should these businesses protect themselves for the day when 'The Everything Store' deems that it's no longer in its best interest to make the partners as profitable? Or, worse and just as likely, once Amazon has established the local infrastructure and customer base to compete directly."

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