The ongoing outbreak of the coronavirus in China is presenting a major problem for Amazon merchants who depend on Chinese factory workers for their products. As the number of cases surpasses 30,000 and the death toll climbs to over 600, many workers are hesitant or unable to return to their factories, resulting in potential shortages of products for sellers on Amazon. This situation sheds light on the vulnerability of Amazon merchants if worker shortages and factory closures continue due to the rapid spread of the epidemic.
Running out of stock can be devastating for sellers on Amazon. Amazon’s algorithm favors sellers with high sales volume and recent activity, giving them better visibility in search results and ultimately driving more sales. However, if sellers run out of stock, their sales can take a significant hit. Bernie Thompson, the founder of Plugable Technologies, emphasized the negative impacts of stock shortages, stating that “Going out of stock is the best way to kill that” in regard to sales.
In 2019, Amazon generated just over 19% of its net sales revenue from services provided to third-party sellers, excluding proceeds from its advertising business. According to a letter to shareholders written by CEO Jeff Bezos, independent merchants accounted for 58% of physical goods sold on Amazon in 2018. Therefore, any disruption to their operations could have a significant effect on Amazon’s overall sales figures.
To mitigate potential inventory shortages, many Amazon sellers stocked up on supplies before the Lunar New Year holiday, which is a period of manufacturing downtime in China. However, if factories remain closed or workers are unable to return, these inventories will quickly run out. Brandon Young, an Amazon seller who recently visited China, is currently self-quarantined at home and commented on the situation, stating that “People do have extra inventory, but that will quickly run out.”
Aside from inventory shortages, the coronavirus outbreak is also disrupting communication between Amazon sellers and their Chinese suppliers. Many sellers have been unable to reach their suppliers, and those who have made contact have been informed that operations are expected to resume around February 10. However, the suppliers anticipate a backlog of work due to the extended closure, which will likely result in delays in delivering the final products.
Several third-party tools that track Amazon listings have reported a rise in “out of stock” products. In response, Amazon has advised Chinese sellers to avoid low inventory and shipping delays. The company has suggested delisting products and putting stores into inactive mode as a way to mitigate the impact of the coronavirus on their operations.
The challenges faced by U.S. sellers have already been compounded by the prolonged U.S.-China tariff dispute in 2019. The coronavirus outbreak has further intensified their difficulties. Michael Smerling, the president of LCI Brands, described the situation as “insult to injury,” as tariffs had already resulted in a 75% reduction in profits for many sellers in the previous year.
In light of these circumstances, some merchants are exploring alternative sourcing options outside of China. They are considering countries such as Mexico, South America, India, Pakistan, and Vietnam as potential manufacturing locations. This shift aims to diversify their supply chains and minimize risks associated with relying solely on China.
However, not all sellers have contingency plans in place to cope with a prolonged shutdown in China. According to Chris McCabe, the founder of ecommerceChris.com, a consultancy for Amazon sellers, many merchants will face significant challenges and struggles as they navigate the impact of the coronavirus outbreak.
Overall, the coronavirus outbreak in China has created uncertainty and potential disruptions for Amazon sellers who depend on Chinese factory workers. The threat of worker shortages and extended factory closures poses significant challenges related to inventory shortages and communication difficulties for these sellers. As they seek solutions and explore alternative sourcing options, the upcoming weeks will reveal the full extent of the impact on their businesses and, consequently, on Amazon’s overall operations.