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Amazon has slashed seller fees to try to improve its grocery selection online

The economics of selling low-priced packaged goods online are tough.

Amazon Prime logo made out of ground meat at Whole Foods
Amazon Prime logo made out of ground meat at a California Whole Foods location.
Kurt Wagner
Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.

Amazon cemented its long-term interest in the grocery industry when it spent nearly $14 billion to acquire Whole Foods earlier this year. Now it’s making a subtler move aimed at improving its own grocery selection online.

Amazon recently told businesses that sell non-perishable grocery items on that it was lowering the fee it charges them on items priced at $15 or less. Amazon previously charged 15 percent on all grocery items, but will now charge only 8 percent on the lower-priced goods for at least the next year.

“To help you list more products and keep prices competitive, we are offering you a limited-time referral fee discount on Grocery products,” the email said, according to a copy forwarded to Recode. “This fee promotion starts at 12:00 a.m. October 15, 2017 (PST), and will run through 11:59 p.m. October 14, 2018 (PST).”

The move could be looked at as a competition-focused one: While Walmart also charges 15 percent across the board for grocery items sold through its online marketplace, its subsidiary charges only 10 percent for most non-gourmet packaged foods, according to its website.

Perhaps more importantly, though, the fee reduction seems like an acknowledgement that it’s difficult for businesses to make a reasonable profit when selling some inexpensive groceries online.

Take, for example, a business that wants to sell a 40-ounce jar of peanut butter that retails for $5.49. The easiest way to make the product eligible for the Prime shipping program is to store it in an Amazon warehouse under its Fulfilled By Amazon — or FBA — program.

But the FBA storage-and-shipping fee alone for this one jar would be about $4.44 — in part because of its weight — and that’s before you factor in the cost for the seller to make or acquire the product as well as Amazon’s 15 percent commission under the previous fee structure. The economics don’t really work.

As a result, sellers and grocery brands have had to come up with alternatives to sell these lower-priced grocery staples through Amazon. One popular option is selling a certain product in a more-expensive bulk pack, as you might find in a Costco or BJ’s Wholesale Club.

Others sell their items at a wholesale price to Amazon, which then funnels the low-priced goods into membership programs such as Prime Pantry or Amazon Fresh.

The Prime Pantry program lets Prime members fill a box full of grocery items but it costs $5.99 per box for shipping. Amazon also sells low-priced grocery items through Amazon Fresh, but that grocery program costs $14.99 a month in addition to the regular $99-a-year Prime membership fee.

Still, Amazon recognizes that there are plenty of Amazon customers that will never pay for either program and it still wants those people to think of Amazon as a grocery destination. The problem is, it’ll never win that perception by only selling bulk-size packs.

That’s the context that likely played a big part in Amazon’s decision to lower its fee. (Amazon declined to comment.) The question is whether the reduction is a real solution to the problem.

David Rekuc, the marketing director for the e-commerce consultancy Ripen eCommerce, is skeptical that it is. While he believes there are some types of grocery items that might become profitable with the fee reduction, Rekuc says FBA fees or the cost for a seller to ship the item themselves still make it difficult to profitably sell a single unit of a low-priced grocery item — despite the lower commission.

“It’s nice to see and it may move the needle a little bit,” he said of the fee discount, “but it won’t fundamentally change [Amazon’s] penetration in grocery.”

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