Wholesale and retail inventory has always been a mainstay for lenders, but with millions of businesses now selling their wares on Amazon, what are the potential implications for the ABL sector?
ABL Advisor sitting with Ryan Davisgeneral manager of Tiger Assessment Servicesto discuss some of the considerations involved in making loans to Amazon sellers. “Inventory quality at FBA [Fulfillment by Amazon] is excellent, so there are phenomenal opportunities for the ABL sector here,” Davis said. “However, assessing borrower health and orderly net liquidation worth (NOLV) in this space requires enhanced data analysis capabilities. There are also many misconceptions that need to be dispelled.
ABL Advisor: What is your fundamental sense of the opportunity that Amazon represents?
Ryan Davis: Amazon has around 300 million users. It’s so huge and diverse, and it gives companies a tremendous opportunity to sell directly to consumers.
There are two ways to sell through Amazon. The first is where a business sells through Amazon but fulfills orders from its own warehouse – we call this the Marketplace model. The second is where a business sends its inventory to Amazon’s warehouses and Amazon handles all the fulfillment – this is the FBA model.
I believe a lot of the fears in our industry stem from the Marketplace model, where the seller controls their own fulfillment. It’s absolutely true that these sellers are at substantial risk of being shut down by Amazon during a liquidation, as they are more likely to fail to meet Amazon’s rigorous standards for on-time order fulfillment and return. timely. We recommend that you approach these offers with caution.
But where Tiger sees a huge opportunity for ABL is the FBA model. With FBA, sellers physically send inventory to Amazon’s warehouses and in doing so, essentially eliminates operational risk. This is because Amazon uses its own infrastructure, expertise, and staff to handle ordering and order fulfillment.
ABL Advisor: Are these two fundamental distinctions well understood in the ABL industry?
Davis: No not yet. In fact, many of the misconceptions circulating about Amazon risk are rooted in confusion around these different models. If you’re a lender, the easiest question to ask, in determining whether a business sells through FBA, is simply, “Who does the fulfillment?” If it’s not Amazon, it’s probably not FBA. The only caveat here is that a small portion of sellers have such a strong order fulfillment history that Amazon will label the seller’s warehouse as FBA – but that’s very rare.
The good news is that something like 9.5 million sellers — the majority on Amazon — are part of FBA, so that’s no small chunk. And we’ve seen investors in recent years pour billions of dollars into FBA businesses, so there’s a lot of growth.
ABL Advisor: Is the pandemic part of what is fueling this growth?
Davis: Trends triggered by the pandemic are certainly playing a contributing role. For example, when e-commerce picked up speed during the pandemic, UPS and FedEx started raising prices and also started to let smaller e-commerce sellers off the hook in favor of fulfilling customer orders. more important. Warehouse worker shortages and other supply chain challenges have also come to the fore during the pandemic. Letting Amazon handle package shipping and returns in this environment adds certainty to seller execution and also helps control shipping prices, as the seller no longer runs the risk of being singled out by UPS or FedEx for price increases.
On the other hand, Amazon FBA was already growing. Sellers and investors have long appreciated that Amazon is the world’s leading e-commerce channel. I believe Amazon now accounts for something like half of all e-commerce sales in the United States.
ABL Advisor: And what are some of the misconceptions?
Davis: Most importantly, Amazon will suspend or cancel your account if you discount too much. It’s a lingering concern, but it’s very well documented that Amazon doesn’t interfere in pricing. Lenders also asked if manufacturers could prevent FBA sellers from selling below MSRP/MAP. The answer is ‘no’ – the biggest threat a supplier can pose to a reseller is to prevent the reseller from buying more, but they cannot take any punitive action for selling below a certain price. .
A key part of the Amazon listing system is that all items have a standard description. So, if multiple sellers offer the same SKU, a buyer will see the exact same listing for both sellers and the only distinction between the two is the price. In other words, sellers cannot edit an Amazon listing the same way they could edit their own website or an eBay listing. The price is the only thing the seller controls.
This is important because another misconception is that if you use the term “liquidation” in your ad, you will be closed. If it’s true that you can’t add the term “liquidation” to an Amazon listing, it’s only because you can’t edit the listing’s description at all, not because Amazon has rules against it. liquidations. In other words, a “liquidation” through Amazon simply means lowering prices and not replenishing inventory. This is a perfectly acceptable option in FBA. We saw the effectiveness of this when Tiger liquidated $20 million in Shoes.com inventory, mostly through Amazon FBA.
ABL Advisor: Is there a possibility to prevent returns in Amazon closeouts?
Davis: It’s true that Amazon requires FBA sellers to accept returns, but most returned merchandise goes straight back to inventory, and Amazon’s return rates are relatively low (less than 10%), even for shoes. and the clothes. With data, the quantity and impact of returns are highly predictable, which can be factored into the assessment.
A related misconception is that seller accounts will be closed if stocks fall below a certain threshold. In fact, FBA sellers are free to withdraw goods from the program. Amazon operates as a 3PL (Third Party Logistics Provider). If an item is in Amazon’s FBA warehouses and the seller wants it, just tell them where to ship it and they will, for a fee, of course.
ABL Advisor: Can you tell us about the differences between Amazon and conventional closeouts?
Davis: For traditional retail closeouts, it takes an experienced merchant to know how consumers will react to discounts and sales language. An Amazon FBA liquidation is more about objective data and pure price than subjective merchandising and marketing creativity. What you need to make good predictions is lots of data, along with a great analytics engine and the right analysts.
So, by far, the biggest challenge in evaluating FBA inventories is the need to take a data-driven approach. Additionally, the world of Amazon is changing much faster than physical retail. At Tiger, we’re comfortable pricing and lending against FBA inventory in part because we’ve been building our predictive analytics model for years. Plus, since we review so many FBA operators, we can keep tabs on the latest Amazon policies as well as data trends, helping us stay ahead of the curve.
ABL Advisor: You mentioned Shoes.com. Does Tiger support more GOB FBAs?
Davis: So far, FBA liquidations have been extremely rare, but for very good reason: these companies are extremely scalable, both up and down. FBA is an almost exclusively variable cost business model, whereas wholesale and retail businesses have quite large fixed expenses with their rent and payroll. For these more traditional business models, when sales drop below a certain level, companies often cannot make adjustments quickly enough to cover these fixed costs, which of course is what leads to financial hardship.
However, FBA sellers usually have relatively low business overhead, but in each product sale, there are quite large variable expenses of Amazon commission, FBA pick-up fee, and shipping. With a retailer, a low-margin product sale may still result in a positive contribution to overhead, but with FBA, a low-margin product sale may result in a negative net margin after all variable costs. With such a model, it means that for FBA sellers, gross margin percentage is actually more important than volume. For example, we’ve seen Amazon FBA customers reduce their overall sales by over 50% by removing low-margin items from their inventory, and the result was that they were actually more profitable with lower sales.
So between the resilience of the FBA business model to absorb change and the amount of data and analytical capabilities available to our assessment team, Tiger is very bullish on Amazon FBA business for ABL. Much like the physical retailers of yesterday, FBA sellers are hungry for the capital they need to grow. We are confident in these opportunities and, in partnership with banks, we are ready to deploy capital as a lender to FBA sellers.