In the ongoing trade war with China, Amazon in particular faces a tough road ahead.
That’s not to say tariffs will single-handedly bring down the ecommerce giant—CEO Jeff Bezos has done a pretty good job diversifying—but the small businesses responsible for 58% of Amazon’s physical gross merchandise sales in 2018 rely heavily on Chinese manufacturing.
In a series of tweets on August 1, President Donald Trump said the U.S. will add a 10% tariff on $300 billion worth of goods from China starting September 1. The Wall Street Journal reports this tariff will impact “essentially all Chinese imports,” including consumer goods like smartphones, apparel and toys. And per Allen Adamson, co-founder of marketing services firm Metaforce and adjunct associate professor at the NYU Stern School of Business, it will also impact goods like computers that are assembled in the U.S. with parts that come from China.
Unless Trump backs down, first- and third-party merchants alike will start paying higher prices for the goods they import next month. And the odds are fairly good that the additional cost will be passed on to consumers in some way unless those sellers opt to become less profitable or stop offering tariffed goods altogether.
While he’s fairly confident that the overall impact of the new tariff will be limited as long as the economy remains strong and unemployment remains low, Michael Gravier, associate professor at Bryant University, noted that many Amazon purchases are not necessities like food, but rather discretionary—and this could hurt the platform if there’s a downturn in the economy.
But that’s not the only reason Amazon may be sweating the prospect of additional tariffs more than its peers, though the ecommerce platform did not respond to multiple requests for comment.
The Everything Store
Let’s consider where Amazon gets the goods it sells. The platform has more than a million third-party sellers and nearly half a dozen told Adweek that they source the goods they sell from China, and often Alibaba specifically, which connects them to manufacturers in China—and the practice is widespread.
They shared emails and internal correspondence from Alibaba’s messaging center to verify this.
“Today, the majority of our buyers are U.S.-based [small- and medium-sized businesses (SMBs)] who source and buy both customized and finished products through our platform,” said an Alibaba spokesperson. “Many U.S. SMBs source with Alibaba at the beginning of their supply chain before moving into other sales channels like Amazon, eBay, Facebook or even physical shops.”
Deneiro Bartolini, who sells products on Amazon in categories like kitchenware, baby and mobile accessories, estimated there are millions of so-called private label products from third-parties on Amazon at this point, which are “generic AliExpress-type products.”
AliExpress is a consumer-facing marketplace from Alibaba—not to be confused with the b-to-b marketplace Alibaba.com, which sellers use to find manufacturers. Amazon sellers refer to their own goods as “private label,” but they are distinct from Amazon’s own 100-plus private labels, including brands like Stone & Beam, Presto and Mama Bear.
Bartolini said Alibaba is a great place to start sourcing products to sell on Amazon as it has supplier ratings and provides trade assurance.
“There may be a little variety, but it’s all basically the same and this is where everyone is sourcing their stuff from,” added John Frigo, a seller with three private labels on Amazon, which declined to provide specifics about his own products as a result of fierce competition among sellers.
And it’s SMBs like these sellers that are in a more vulnerable position now. Ironically, that’s in part because of the opportunity they found. Many Amazon shoppers don’t care about brand name products, but are instead looking for items with good reviews at a certain price point, Adamson said.
By raising prices, however, those sellers become less competitive on the platform, which could ultimately put them out of business, he added.
“Because price on Amazon is critical to the success of a seller in terms of ranking high in the algorithm, [these sellers] must be very cautious on raising prices,” added retail consultant Stephen Rector.
Save money, live better
When asked for comment on the tariffs, a Walmart spokesperson said the retailer has nothing to add beyond its previous comments, which were made most recently during its June 2019 shareholder meeting.
According to a transcript, Walmart executive vice president and chief financial officer Brett Biggs said the company will work with suppliers and “do everything we can to protect our customer in [regard to tariffs], but with shareholders in mind.”
In addition, Walmart CEO Doug McMillon noted two-thirds of the U.S. business is sourced domestically with the remaining third “from a variety of countries,” which helps cushion some of the blow.
To be fair, it’s unclear where third-party vendors on Walmart’s marketplace source their goods. Bartolini, for example, also sells on Walmart and Shopify, but said the bulk of his sales come from Amazon.
The same is true for any other U.S. retailer with stores, online platforms and/or third-party marketplaces, but retailers like Target and Kroger either declined comment or did not respond.
At the same time, Amazon dominates U.S. ecommerce with a projected 47% share this year. Its nearest competitor, eBay, has just over 6% of total retail ecommerce sales, followed by Walmart with 4.6%. As such, Amazon has the most to lose.
Ultimately, McMillon said tariffs might actually be good for business as Walmart becomes a more appealing option for customers that find themselves in need of lower prices. When the economy is bad, “you find customers that come to Walmart for a breadth of categories that they weren’t previously,” such as women’s clothing, he added. The key is to “make sure the quality is right,” so Walmart can retain those shoppers after the economy rebounds.