Will Inflation Last Into 2023? Global CEOs Say Yes, While Key Price Indicator Hits Record Level

Inflation is worrying chief executives globally, according to a survey released Thursday by the Conference Board, a business research group, and data shared by the U.S. Bureau of Labor Statistics on Thursday backs their concerns.

Key Facts

Some 55% of CEOs expect higher prices to last until mid-2023 or beyond next year, according to the survey.

Rising inflation is the second-most common external business worry for CEOs, trailing only disruptions caused by Covid-19, after being just the 22nd most cited concern in Conference Board’s 2021 poll.

Supply chain bottlenecks were the most common explanation for the rising prices among CEOs, and 82% of respondents said their businesses were impacted by rising input costs, such as raw materials or wages.

The poll was conducted between October and November of last year among 917 CEOs in the U.S., Asia, Europe and South America.

Big Number9.7%. That’s how much the Producer Price Index, a measure tracking the prices manufacturers pay for goods, rose in 2021, the highest year-over-year increase since the Bureau of Labor Statistics began calculating the statistic in 2010. The PPI is considered a forward-looking indicator for consumer prices, meaning that the highest inflation U.S. consumers have faced in four decades could climb even further.

Tangent

The Conference Board survey found that the U.S. has faced unique labor issues during the pandemic. Labor shortages were considered the top external threat to business by U.S. respondents as a record number of Americans quit their jobs, but were not higher than third on the list of CEOs from other countries.

A primarily remote workforce is also a mostly American phenomenon: More than half of American CEOs said that they expect 40% or more of their workforce to work remotely after the pandemic, compared with just 31% of CEOs from Europe and 17% of CEOs from Japan.

Further Reading

Inflation Surge Is on Many Executives’ List of 2022 Worries (Wall Street Journal)

Inflation Spiked Another 7% In December—Hitting New 39-Year High As Fed’s Price Concerns Rattle Markets (Forbes)

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I’m a New Jersey-based news desk reporter covering sports, business and more. I graduated this spring from Duke University, where I majored in Economics and served as sports editor for The Chronicle, Duke’s student newspaper.

Source: Will Inflation Last Into 2023? Global CEOs Say Yes, While Key Price Indicator Hits Record Level

The Critics:

The 48 professional forecasters surveyed by the National Association for Business Economics were asked when the so-called core inflation rate (which leaves out food and energy prices) might return to the 2% range that the Federal Reserve targets (and that was commonplace before the pandemic).1 Right now the rate—as measured by the year-over-year change in the Bureau of Labor Statistics’ Personal Consumption Expenditures price index—is 4.1%, the highest since 1991.23

Most respondents said it would take at least until the second half of 2023, including more than a third who forecast 2024 or later. Since the survey was conducted in mid-November—before the omicron variant of COVID-19 was identified—it doesn’t account for how that news might impact their outlook.

The Federal Reserve has determined that roughly 2% is a healthy middle ground for inflation, one that enables a strong economy without hurting people’s buying power too much. The longer inflation stays hotter than that, the more likely the Fed is to do things to put a lid on it,4 like raise the benchmark federal funds rate. That rate influences all kinds of other interest rates, impacting the cost of borrowing on credit cards, mortgages, and other loans.5

Inflation has been double that 2% sweet spot because of the pandemic’s disruptions to supplies and the labor market. It’s hard for businesses to manufacture and transport enough goods to satisfy consumers’ unusually voracious demand for stuff.

Personal income grew 0.5% in October compared with the month before, as wage increases more than made up for declines in unemployment benefits from the government following the expiration of pandemic-era relief programs, the Bureau of Economic Analysis said Wednesday in its monthly report on income and spending.1

People were inclined to spend the extra pocket money, as inflation-adjusted spending accelerated for a third month, rising 0.7%. They also saved less of their disposable income—7.3%, compared with 8.2% in September—staying within pre-pandemic norms and a far cry from April 2020, when the saving rate hit 33.8%.23

All that extra money didn’t go as far as it might have, though. The report also showed core inflation (not including food and energy) rising to 4.1% from a year ago, compared with 3.7% in September, hitting its highest level since 1991. That was in line with what forecasters at Moody’s Analytics had expected, possibly signaling that elevated inflation isn’t going away anytime soon.

“Inflation is no doubt a headwind, but in October at least, it was not enough to stop consumers from spending,” economists at Wells Fargo Securities said in a commentary.

The Inflation Suspense Goes On

Today’s consumer price report came as a huge surprise to almost everyone — because the numbers came in almost exactly in line with expectations, which basically never happens. Analysts whose job is to forecast what official numbers will say a few hours before they come out — a job of dubious usefulness, but whatever — expected the one-year rate of inflation to come in at 6.8 percent; it came in at … 6.8 percent. “Core” inflation that strips out volatile food and energy prices came in right on expectations too.

If there was any information content in today’s release, it was that extreme scenarios in both directions became a bit less likely. There wasn’t anything in the report suggesting that inflation is rapidly spiraling upward; nor was there anything lending comfort to those hoping to see inflation fade away in the next few months.

For what it’s worth, financial markets appear to have taken onboard the reduction in risks of really high inflation: “breakeven rates,” which measure market expectations of the inflation rate over the next few years, came down modestly. But nothing major happened.

That said, the headline number is highly likely to come down over the next few months, if only because the big run-up of oil prices from their pandemic lows seems to have gone into reverse:

Image

Oil wells that end well?
Credit…Bloomberg

Some other components may also be coming down — or will at least stop rising rapidly. Hyun Song Shin, head of research for the influential Bank for International Settlements, recently made the case that a lot of recent inflation reflects the “bullwhip effect”: panic or at least precautionary buying of goods that seem to be in short supply, which intensifies the shortage. Remember last year’s toilet paper shortage?

Shin points out, among other things, that shipping costs, while still very high, seem to have peaked:

Image

Containers contained?
Credit…Bank for International Settlements

But even if you try to adjust for special circumstances, underlying inflation appears to be running high by recent standards, maybe around 4 percent instead of the 2 percent that is the Fed’s target and has been the norm since the mid-1990s. This in turn reflects an economy in which spending is more or less back to the prepandemic trend but production is constrained both by bottlenecks and by the withdrawal of several million Americans from the labor force.

As an aside, 4 percent inflation isn’t hyperinflation; it isn’t even the double-digit inflation of the 1970s. In fact, whether they know it or not, Americans of a certain age can attest that it’s not so bad. It was, after all, the inflation rate that prevailed for much of the Reagan years — you know, after morning in America:

Image

Those horrible 1980s.Credit…FRED

I, at least, don’t remember the late 1980s as hellish.

Still, the Fed would consider a sustained doubling of the inflation rate a blow to its credibility. So how long will elevated inflation last?

The secret answer (don’t tell anyone) is that we don’t know.

I still think the most likely scenario is a minor-league version of the 1946-48 inflation spike, when pent-up demand after the end of wartime rationing caused an inflationary boom — inflation peaked at around 20 percent — but price stability quickly and more or less painlessly re-emerged once the spending surge was over.

I still don’t see any evidence that 1970s-type stagflation, in which everyone kept raising prices because they expected everyone else to keep raising prices, is emerging.

But today’s numbers neither reinforced nor challenged my beliefs. This report was shockingly unsurprising.

Image

By:

Paul Krugman has been an Opinion columnist since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman

Source: Opinion | The Inflation Suspense Goes On – The New York Times

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Why Data Is The Key To Driving Sustainability In Retail

Both corporate values and customer expectations are driving more conscious policies and spending to benefit the planet. Here’s how data and analytics are helping retail organizations hit their sustainability targets.

We are entering the age of circular economics where “once is never enough.” Products and businesses will need to be designed for regeneration, rather than produced, delivered, and trashed.

Is your business sustainable, equitable, ethical? These days, does it have a choice not to be?In 2020, interest in “ethical brands” and online shops exploded, growing between 300% and 600% based on Google searches alone.

It can be hard to remember just how much things have changed in the months since the pandemic seized the world. Sustainability is now as much about the resiliency of your business as it is that of the planet—with both benefiting accordingly. Sustainability represents a huge opportunity to serve consumers with what they want, and the world with what it needs, in order to help keep everyone thriving—including your bottom line.

We are entering the age of circular economics where “once is never enough.” Products and businesses will need to be designed for regeneration, rather than produced, delivered, and trashed.

Sustainability is rapidly growing as a way to evaluate the non-financial performance of companies and measure the purpose and values that drive a brand.

Coupled with the ongoing concerns around the environmental impacts of carbon emissions, material waste, energy consumption, and scarce resources, retailers are using the challenges raised by the pandemic as a chance to rewire their systems to drive healthier, sustainable, and more resilient value chains that will allow them to thrive in the future. 

For example, reducing synthetic PVC plastics in products can reduce fossil fuel consumption. Sourcing raw materials ethically and sustainably helps increase supply chain longevity. Providing services that encourage consumers to repair, rather than buy new products, can reduce unnecessary waste.

Such an emphasis on sustainability may seem like a whole new way of doing business that at times runs counter to the conventional practices of the past. Yet if we don’t seriously reconsider the future of business, will there be much of a future for businesses at all?

Building this future will require an entirely new understanding of the components, inputs, and resources that go into a business. This kind of understanding is made possible on the cloud.

Sustainability sells: Consumers are driving new transformation

The turmoil of COVID-19 didn’t just bring social distancing—it marked the beginning of an eco-awakening. The increased attention on health, safety, and well-being sparked a renewed awareness around sustainability, particularly in the personal choices consumers make in their own lives and how those choices impact the environment.

In fact, Google research* shows that people now have a greater appreciation for life, are more aware of how valuable nature is for their mental and physical health, and recognize being sustainable plays a critical role in protecting it. As a result, sustainability is more top of mind than before the pandemic.

Now, shoppers are looking more closely than ever at the products they buy and the brands they support—and they’re ready to make different choices if they don’t like what they find:

  • As mentioned, Google search interest in “ethical brands” and “ethical online shopping” during 2020 grew 300% and 600% compared to the previous year.
  • 1 in 3 shoppers stopped purchasing certain brands or products due to ethical or sustainability related concerns.
  • Nearly 6 in 10 consumers say they are willing to change their shopping habits to reduce environmental impact.

Retailers were already feeling the pressure to reduce their impact on the environment long before the pandemic. After all, the fashion industry alone accounts for 20% of wastewater and up to 8% of carbon emissions globally. But this new shift in consumer behavior serves as an extra warning that it’s time to accelerate changes now—or pay the price later on. 

And it’s not just consumers looking for a commitment from retailers—suppliers, investors, employees, and policymakers are also expecting tangible, sustainable action from businesses. Sustainability is rapidly growing as a way to evaluate the non-financial performance of companies and measure the purpose and values that drive a brand.

At least 65% of world economies have made 2050 net-zero commitments and new EU regulations even require businesses to disclose ESG data about what and how they operate and manage social and environmental challenges.

These changes are already underway. So how can retail businesses stay ahead of them?

Data is key for doing good for retail and for the planet

Retailers have been pushed to illuminate the murkier aspects of their value chains to strengthen credibility and prove in concrete terms exactly how they are delivering on sustainability. But companies can only manage what they are able to measure, so data is crucial for sustainability efforts.

There is a lot of valuable data that can be generated from the first mile to the last mile of products; from direct energy consumption in stores and in warehouses; to CO2 emissions from supply chains and manufacturing; to the effects of resource procurement. Organizations can also gain insight into upstream and downstream activities, such as product distribution and delivery, consumer disposal of product packaging, and other waste.

Migrating to a sustainable cloud can reduce CO2 emissions by 59 million tons a year, which is equivalent to taking 22 million cars off the road, according to Accenture research.

Nearly every aspect of the value chain has the potential to be measured in terms of the impact on the environment as long as companies have the right technologies in place.

Given the public cloud’s inherent efficiencies, it is one of the fastest paths to hit sustainability targets and reduce energy costs. In fact, according to Accenture research, migrating to a sustainable cloud can reduce CO2 emissions by 59 million tons a year, which is equivalent to taking 22 million cars off the road.

But the cloud offers other capabilities that benefit the overall sustainability efforts of retailers, too. Namely, the cloud enables a strong data foundation that allows information to be collected, processed, managed, and analyzed in one place.

The reduction of silos and the availability of a single, centralized view of all relevant data creates the end-to-end visibility needed to understand the full environmental impact of business decisions across the value chain.

Here’s how data is helping retail organizations hit their sustainability targets:

  • Lowering carbon emissions and energy usage. Retailers need to accurately measure and understand carbon emissions and energy consumption across thousands of devices, facilities, processes, and locations. By gaining a full picture of carbon emissions, businesses will have the power to optimize and implement sustainable best practices—and track future progress—that will deliver real reductions. For example, data can be used to identify cleaner times of day or lower carbon density regions that can create big opportunities to offset and lower emissions.
  • Reducing waste and optimizing supply chains. There are numerous opportunities for retailers to apply data to supply chain sustainability problems, such as inaccurate demand and inventory planning, manufacturing inefficiencies, packaging or product surplus waste, and more. Integrating data from disparate internal systems, partners and suppliers, and external public sources can help create more sustainable and resilient supply chains. Real-time visibility and advanced analytics enable retailers to drill down into key sustainability metrics, benchmark their progress against other industry players, identify and mitigate risks, and improve overall production quality.
  • Unlocking deep insights for better decision making. Retailers are looking to answer questions about how current processes impact the environment now and how their businesses will be affected by climate change in the future. Leveraging rich datasets about the planet, new AI and machine learning models, and smarter analytics enables them to extract insights and predict outcomes around sustainability, helping them to make better decisions that keep them on track to future goals.

Retailers are already working on sustainability

Putting their vast amount of data to work, retail companies are already starting to harness, organize, and democratize data both within and outside of their organizations, identifying where environmental impact is happening and taking action.

For example, retailers are applying predictive forecasting models to chase down waste to make demand planning more accurate. Understanding what products customers are most likely to buy and where they will purchase can influence decisions about sourcing, where to place inventory, and optimize shipments and deliveries. It also provides a more personalized product selection, keeping both customers and suppliers happy.

Retailers can also reimagine last-mile delivery packaging. For instance, intelligent packing recommendation (IPR) solutions can analyze the physical dimensions of every SKU, packing materials, and other properties like fragility and temperature to make sure every box is optimally packed. Google Cloud research shows that IPR brings significant savings and an improved customer experience, reducing the total packaging cost per order by 29% and total shipping costs by 19%.

When retailers do good while doing well, everyone wins—consumers, businesses, and the planet.

To learn more about the role of technology in sustainability, check out our Sustainable IT Masterclass or watch our “Solving for Sustainability in Retail and Consumer Goods” on demand.

Maria McClay, Director, Department Stores, Fashion and Beauty, Google Cloud. Maria McClay is a director at Google Cloud, working with Fashion &

Source: Why Data Is The Key To Driving Sustainability In Retail

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S&P 500 Closes At New Record Despite Inflation Hitting Nearly 40-Year-High

The stock market moved higher on Friday—extending this week’s rally—despite consumer prices surging 6.8% last month, the highest inflation reading in nearly 40 years, according to data released by the Labor Department.

Key Facts

The Dow Jones Industrial Average rose 0.6%, over 200 points, while the S&P 500 gained nearly 1% and the Nasdaq Composite 0.7%.

While markets took a hit after the first case of omicron was reported in the United States last week, stocks have recently bounced back as investors grow less fearful about the Covid omicron variant—with the S&P 500 hitting a new record high on Friday.

Even a bad inflation reading on Friday morning wasn’t enough to spook investors: Consumer prices rose 6.8% in the 12 months ending in November, according to Labor Department data, which shows inflation at a nearly 40-year high.

Some investors who expected an even higher inflation reading were relieved by the news and sent stocks up, while others remain optimistic about the ongoing economic recovery boosted by a strong labor market recovery.

Shares of tech giant Oracle jumped over 15%, a day after beating quarterly earnings estimates, while shares of at-home fitness company Peloton added to the previous day’s losses, falling over 5% on Friday.

Vaccine maker Moderna’s stock, meanwhile, fell nearly 6% as investors await more data and updates on the efficacy of the company’s Covid treatments against the omicron variant.

Big Number: $15.1 Billion

That’s how much Oracle cofounder Larry Ellison’s net worth jumped on Friday, to $135.7 billion, according to Forbes’ estimates. He is now the fifth richest person in the world.

Key Background:

After the emergence of the omicron variant led to a sell-off last week, stocks are now on pace for a solid weekly rebound. All three major indexes have risen by nearly 4% this week as investor concerns about the new variant abate amid news that vaccines are effective against it.

Crucial Quote:

“The inflation print from this morning will reinforce the Fed’s resolve to accelerate tapering,” predicts Anu Gaggar, global investment strategist for Commonwealth Financial Network. “With the strength in the economic recovery, it is time to take the crutches away,” he says, adding, “supply and labor shortages will keep aggregate prices elevated for longer, keeping inflation higher than the Fed target for a while.”

What To Watch For:

While December has historically been a great month for the stock market, the new omicron variant is causing “major volatility” and complicating the inflation outlook, says Ryan Detrick, chief market strategist for LPL Financial. Despite the myriad of challenges facing markets in 2022, he remains “optimistic” that stocks will finish the year on a solid note.

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Source: S&P 500 Closes At New Record Despite Inflation Hitting Nearly 40-Year-High

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More Contents:

Inflation Spiked Another 6.8% In November—Hitting 40-Year High As White House Tries To Temper Price Concerns

Stocks Rally For A Second Day—Dow Gains 500 Points—As Investors Shake Off Omicron Fears

This Vaccine Maker Can ‘Dominate’ The Covid Market For Years To Come, Wells Fargo Predicts

The Number Of Americans Filing For New Unemployment Benefits Just Fell To A 52-Year Low

Amazon shares dropped 2.1% after the e-commerce giant badly missed earnings and revenue expectations for the third quarter. Apple stock fell 1.8% after the tech giant’s quarterly revenue fell short of expectations amid larger-than-expected supply constraints on iPhones, iPads and Macs. It was the first time Apple’s revenues have missed Wall Street estimates since May 2017.

However, Microsoft rose 2.2% to surpass Apple as largest listed company in the world by market cap. Nike and Intel also had solid days to boost the Dow.

Despite the disappointing results from Big Tech, the stock market has been raking in records amid solid earnings even with global supply chain concerns. About half of the S&P 500 have reported quarterly results and more than 80% of them beat earnings estimates from Wall Street analysts. S&P 500 companies are expected to grow profit by 38.6% year over year.

“So far, I think it is fair to say that companies have managed to navigate these headwinds effectively, of course having the benefit of strong demand,” said Angelo Kourkafas, an investment strategist at Edward Jones. “But they are not immune to it. These input cost pressures will show up as reduced revenue or potentially lower profit margins.”

“But I think so far, with about half to the S&P 500 companies having reported, the initial assessment is that profitability has remained fairly resilient because of strong demand and pricing power,” he added.

Shares of Exxon Mobil and Chevron rose on Friday after the energy giants topped earnings expectations. Starbucks, however, was under pressure after revenue from China missed expectations.

All three major averages posted their fourth positive week in a row and finished solidly higher for the month. The Nasdaq gained 7.2% for October, while the S&P 500 gained 6.9%. The Dow rose 5.8% for its best month since March. The month marked a rebound from September, where the major indexes declined.

Market sentiment was also helped by developments in Washington. On Thursday, President Joe Biden announced a framework for a $1.75 trillion social spending deal. The agreement, which is expected to make it easier to pass the separate infrastructure spending bill currently stalled on Capitol Hill, came in lighter on spending and taxes than earlier proposals.

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Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said the deal appeared to be in a “sweet spot” and should create more optimism among investors.

“The tax portion of it is looking like it’s going to come in probably below all of the original expectations. So the burden for specifically corporate taxes is going to be lower than the concerns and the expectations in the marketplace were,” Ma said.

Treasury Secretary Janet Yellen spoke to CNBC on Friday morning, saying she was hopeful that the administration’s infrastructure package would be approved soon while saying she does not believe it will add to the inflation problems the U.S. has been experiencing.

“It will boost the economy’s potential to grow, the economy’s supply potential, which tends to push inflation down, not up,” Yellen said during a live “Worldwide Exchange” interview.

Amazon Funds Its Empire By Squeezing Its Marketplace Sellers

Amazon has always presented its Marketplace, where outside businesses sell products through Amazon’s platform, as one of its biggest success stories: mutually beneficial to Amazon, sellers, and customers alike. But a new report says those benefits are increasingly lopsided — in Amazon’s favor.

The report, which comes from the nonprofit Institute for Local Self-Reliance (ILSR), asserts that Amazon takes a larger and larger cut of sellers’ earnings through the various fees it levies on them. These fees have become so lucrative for Amazon that they now represent the company’s most profitable segment as well as its fastest-growing revenue stream, according to ILSR. And because sellers are paying Amazon high fees, customers may face inflated prices, even when they shop beyond Amazon’s borders.

“Amazon is the only winner here,” Stacy Mitchell, ILSR co-director and author of the report, told Recode. “It’s exploiting its monopoly power over these small businesses to pocket a huge and growing cut of their revenue.”

You might consider this to be a good business strategy on Amazon’s part, as it’s certainly paid off for the company. And some sellers on Amazon’s platform say they’re happy with the arrangement — at least, for now. But a growing number of others argue that Amazon’s dominance over the e-commerce market and its power over its sellers has given rise to anti-competitive practices that hurt Amazon’s competitors, competition in general, and consumers.

“Amazon’s dominance is bad for businesses, jobs, and America’s competitiveness,” Rep. David Cicilline, chair of the House Judiciary Antitrust Subcommittee, told Recode. “This important study makes clear that Amazon is crushing sellers through abusive policies that make it nearly impossible for everyday businesses to get ahead.”

These are some of the same issues identified by regulators and lawmakers who have accused Amazon of abusing its market dominance. They say it’s further evidence that action must be taken to curb Amazon’s power — and some of them are already working on legislation.

“It is important to understand how tech platforms can exploit their power to hurt small businesses and raise prices for consumers,” Sen. Amy Klobuchar, chair of the Senate Judiciary Antitrust Subcommittee, told Recode. “This report highlights how Amazon’s tactics can lead to that result and why Congress must act to set clear rules of the road for the digital giants that dominate our online economy.”

Amazon disputes the report’s findings, calling it “intentionally misleading” for lumping its mandatory fees and optional services together as “seller fees.” Amazon maintains that all of its fees — mandatory and optional — are competitive with what similar services charge, and that many sellers are successful without taking advantage of those optional services. But Mitchell says many sellers feel compelled to pay those ostensibly optional fees if they want their businesses to stay afloat.

Marketplace: The gift that keeps on giving (to Amazon)

Marketplace is a huge part of Amazon’s business. In his 2020 letter to shareholders, Jeff Bezos said it accounted for nearly 60 percent of Amazon’s retail sales, which come from nearly 2 million sellers. So when you buy a product on Amazon, chances are it was sold by an independent business using Amazon’s platform. Amazon isn’t providing that platform for free.

“The trade-off that any seller is dealing with is you get access to a huge audience, you get access to scale, the ability to scale your sales, but it comes at a cost to margin,” Andrew Lipsman, principal analyst at eMarketer, told Recode.

The cost to sellers is increasing every year, according to ILSR’s analysis, making business unsustainable for some sellers while Amazon’s profits grow.

The new ILSR report found that Amazon’s seller fees accounted for an average of 19 percent of sellers’ earnings in 2014. That’s almost doubled to 34 percent in 2021. And while seller fees accounted for 14 percent of Amazon’s entire revenue in 2014, that figure is up to 25 percent in 2021. Amazon will pull in $121 billion from seller fees alone, ILSR estimates.

That revenue translates to a lot of profit — more than even Amazon Web Services (AWS), Amazon’s cloud computing platform typically believed to be the company’s most profitable arm. AWS netted $13.5 billion in 2020, according to Amazon’s financial data. ILSR estimates seller fees netted $24 billion. (Amazon says these figures are inaccurate but did not provide its own; the company’s public earnings statements also don’t combine seller fees in this way.)

“Everyone thinks AWS generates all of Amazon’s profits,” Mitchell said. “But in fact, Marketplace is this massive tollbooth that gushes profits.”

Seller fees primarily come from three things: sales, fulfillment, and ads. Every item sold is subject to a referral fee, which is Amazon’s commission. Over the years, that’s stayed pretty consistent at 15 percent (it may be lower or higher, depending on the product category). According to ILSR, those referral fees made up the majority of seller fees as recently as 2017.

Since then, however, the majority of fees come from Fulfillment by Amazon (FBA), Amazon’s service that stores, packs, and ships sellers’ items to customers. Ad revenue is steadily gaining ground as more sellers pay for more ads to get prominent placement on Amazon’s site, including on product pages and search results.

Sellers who use FBA pay Amazon a fee based on the size and type of item they sell. Sellers also have to pay to ship items to and from Amazon’s fulfillment centers and to store them there. For some sellers, this might be a cheaper or easier option than doing it all themselves. Amazon says FBA’s pricing is competitive with similar fulfillment services if not cheaper, and sellers aren’t required to use it.

But help with logistics isn’t the only appeal of FBA for many sellers. Enrolling in the FBA program is the only way that most sellers can qualify for Prime. (Some sellers may qualify for Seller Fulfilled Prime, but it’s not accepting new enrollees at this time.) Getting that Prime badge is huge for a seller. Amazon shoppers — especially those 200 million Prime members — are far more likely to buy products that qualify for Amazon Prime. But that’s not only because they want to take advantage of the free shipping. It’s also because customers may not even see non-Prime offerings in the first place, thanks to the mechanics of the so-called Buy Box.

When multiple sellers offer the same item, Amazon’s algorithm picks one of them to be the default purchase on the product’s page. This is called “winning the Buy Box,” and when the customer clicks to add an item to their cart or to buy now, the seller who won the Buy Box is the one who gets the sale.

Prime items are far more likely to win the Buy Box than non-Prime items, and customers rarely click on that small “other sellers” link or the small “new and used” box where all the other listings are housed. This gives sellers a major incentive to pay for FBA, even if it costs more than taking care of the shipping themselves.

These FBA fees have been great for Amazon, which has dramatically expanded the logistics network that powers FBA as well as the number of sellers participating in the program. Five years ago, about half of Amazon’s top 10,000 sellers worldwide used FBA. By 2019, it was 85 percent. Amazon even offers a version of FBA for products ordered from other e-commerce services, including Shopify. Dave Clark, the CEO of Amazon’s consumer business, believes his company will be the largest delivery service in the United States by early 2022.

FBA aside, there are other ways sellers are paying Amazon more and more in the hope of generating sales. Amazon has been making a big push into digital advertising recently, and seller ads are part of its strategy. Critics have accused Amazon of increasing the number of sponsored slots in search results to increase ad inventory, and of charging more for the ads in them. (Amazon says the number of ads varies, and pricing is determined by an auction.)

Because of this, some sellers feel like they’re paying more and getting less. Amazon itself says these ads increase product visibility, which can translate into more sales. But that also means less visibility for the products in organic search results that earned their placement through strong sales and positive reviews. Sellers are already competing for this space with Amazon’s own products, and that competition might not be fair, as Amazon reportedly ranks its own products above others that had higher ratings. (Amazon has disputed these reports and says its ranking models don’t take into account whether the product is made by Amazon or offered by a third-party seller.)

Either way, many sellers increasingly feel pressure to buy ads just to get the same search placement (and sales) they once got for free. In a statement to Recode, Amazon maintained that FBA and ads are not mandatory and that sellers may find them beneficial.

“Sellers are not required to use our logistics or advertising services, and only use them if they provide incremental value to their businesses,” an Amazon spokesperson said.

How sellers’ problems affect your wallet

If you’re not a seller that relies on Amazon to survive, you might not see how any of this affects you. If you’re an Amazon customer, you might even think that this system is ensuring that you can buy products at the best price. But you might be wrong.

“Whether you shop on Amazon or not, you are paying higher prices because of its monopoly power,” Mitchell said.

When sellers have to raise their prices to account for Amazon’s increased fees, they often pass those costs along to the customer. And, thanks to Amazon’s fair pricing policy, sellers have to offer the same price on other platforms that they do on Amazon — even if their costs to sell on those platforms are less. If they don’t, Amazon may suspend or demote their listings. Sellers don’t want to take that risk, which could be potentially devastating to their business.

This policy could mean that, as sellers adjust their prices to account for Amazon’s fees, prices end up being higher elsewhere, too. It also makes it harder for other e-commerce platforms to compete with Amazon and challenge its market dominance, since they aren’t able to offer lower prices that would attract more customers. The lack of options means sellers are basically stuck with Amazon if they want to reach its exponentially larger and loyal consumer base.

Sellers have helped Amazon grow to own 40 percent and 50 percent (depending which report you cite) of the e-commerce market in the United States, and in some product categories, its share is far higher. Its closest platform competitor, Walmart, has just 7 percent. Amazon is often the first place online shoppers look for products — even before search engines — especially if those shoppers are Prime members. A large, established company can pull itself out of Amazon, as Nike did in 2019, and still do fine. Most businesses don’t have that luxury.

“Small businesses don’t have other options when it comes to the digital economy,” Rep. Ken Buck, the ranking member of the House Judiciary Antitrust Subcommittee, told Recode. “Amazon continues to use their monopoly power to crush competition.”

One solution is for lawmakers and regulators to step in. Some are trying: The European Commission announced last year that it is investigating whether Amazon gave preferential treatment to itself and sellers that used FBA when determining who gets the Buy Box. The fair pricing policy and its potential to inflate prices across the internet is the basis of the District of Columbia’s lawsuit against Amazon, as well as a class action lawsuit filed by Amazon customers last year.

Several members of Congress — Buck, Cicilline, and Klobuchar among them — have introduced bills that would forbid some of Amazon’s practices they believe to be anti-competitive. These bills came out of a 16-month-long House antitrust subcommittee investigation into Big Tech companies, including Amazon. The committee accused Amazon of luring in customers and sellers with artificially low prices and Prime memberships that the company loses money on, only to raise rates as soon as Amazon’s market dominance was assured.

The proposed legislation would forbid Amazon from giving its own products prominent placement, unless it earned that place organically, and from requiring sellers to pay for ads or services like FBA in order to get preferred placement. One bill would forbid Amazon from competing in a marketplace it also owns, and could force Amazon to split off into a first-party sales company and a company that operates a platform for third-party sellers.

Amazon has responded to all of this by denying that such measures are necessary or that it’s doing anything wrong. The company has become one of the biggest lobbying spenders in the country, and it’s been emailing select sellers to warn them that pending antitrust legislation could make it difficult or impossible for them to sell their products on Amazon.

After years of studying Amazon’s business practices, Mitchell, of ILSR, thinks the best solution is arguably the most drastic.

“Policymakers could regulate Amazon’s fees — basically accept it as a regulated shopping monopoly, like a utility,” she said. “But I think a much better, more market-oriented approach is to break it up by splitting Amazon’s major divisions into stand-alone companies.”

Source: Amazon funds its empire by squeezing its marketplace sellers

 

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