Higher prices on Amazon cause a retail ripple effect
SEATTLE - As the holiday shopping season kicks off this weekend, consumers will find prices higher than theyve been in months.
That's particularly true at Amazon, which has raised prices faster than rivals, according to Profitero, an e-commerce data analytics company that tracks more that 20,000 popular items across several large online retailers. Amazon's prices on those items grew 7.5% in October, compared with the same month a year ago.
Walmart's prices in comparison grew 3.1% and Target's grew 3.6% for the same items over that period.
Amazon - the dominant online retailer with more than 41% of e-commerce, according to eMarketer - also plays a huge role in influencing prices across the Web. The phenomenon, which economists have dubbed the "Amazon Effect," happens because rivals tend to follow Amazon's lead to match each other on online pricing.
Retailers with brick-and-mortar stores are matching their online pricing to physical shelves, too, Harvard Business School economist Albert Cavallo said, homogenizing prices - low or high - across the board.
"Online competition is a force for price uniformity, and therefore also inflation equalization," Cavallo said. And as retailers get better at bringing online pricing, with its frequent swings, to their physical stores, the Amazon Effect becomes an even greater force.
That matters because consumer prices grew 6.2% in October compared to a year ago, according to the Bureau of Labor Statistics. The spike, the largest annual inflation increase in 30 years, is driven by soaring energy prices and ongoing supply-chain backlogs.
Retailers - including Amazon - are struggling with the global supply-chain crunch and a domestic labor shortage that have pushed up costs. Amazon said last month it plans to spend an extra $4 billion during the fourth quarter to lure seasonal workers with richer paychecks and benefits and to ensure that packages arrive at its warehouses. The company is hiring 150,000 seasonal workers. In the third quarter, the company spent $18.5 billion on fulfillment costs.
"We're doing everything we can," finance chief Brian Olsavsky said on a call last month with analysts. "The issue is, it's costly."
(Amazon founder Jeff Bezos owns The Washington Post.)
Amazon spokesman Patrick Graham acknowledged the pressure that increased manufacturing and supply-chain costs puts on pricing.
"Customers come to Amazon to find low prices, and we strive to deliver by matching the lowest price from across relevant competitors every day," Graham said. "In spite of increased manufacturing and supply-chain costs, Amazon continues to offer customers the best possible value and selection, not only during the holiday season but throughout the year."
Amazon has long used algorithms that scrape other retail websites to ensure its merchandise matches or beats the competition. The company doesn't always try to beat rivals, particularly on items such as large packages of toilet paper that can be more costly to ship. An 18-roll package of Charmin Ultra Strong, for example, was recently available on Amazon for $31.03, while Target offered the product for $18.79.
Amazon's Graham disputed that the company doesn't always try to beat rivals, and said that the Charmin toilet paper on its site was sold by a third-party merchant who sets its own prices.
"Amazon seeks to always meet or beat the best price offered at other retailers on the products we sell ourselves, and our systems continually benchmark prices in other stores to make sure we are delivering on this promise," Graham said after publication of this article. "If we find an isolated error where we offer a product at a higher price than other major retailers, we quickly investigate and take action to ensure our price meets or beats the lowest price elsewhere."
The majority of products offered through Amazon's marketplace come from third-party sellers, and Amazon pressures them to keep prices competitive. D.C. Attorney General Karl A. Racine filed an antitrust suit in May alleging that Amazon prevents sellers from offering their products at lower prices or on better terms on any other online platforms, including their own websites, and that prohibition results in "artificially high" prices across e-commerce sales. Amazon has said that sellers are responsible for the prices they offer on its marketplace.
One way Amazon keeps prices from third-party sellers low is through the "buy box" - the crucial piece of digital real estate on product pages that customers use to add items to their shopping carts. The buy box is often a boon for sellers, since studies have shown that shoppers regularly purchase items Amazon's algorithms elevate there.
There's also plenty of competition. Product categories like ear buds with several third-party sellers fighting one another for sales are less prone to inflationary pressure, said Juozas Kaziukenas, CEO of the e-commerce research firm Marketplace Pulse.
"The marketplace protects against rising prices because it dynamically shifts sales to the most competitive offers," Kaziukenas said. "On Amazon, it matters less if products X and Z are getting more expensive. Because on Amazon there are also Y, T, U, etcetera products that didn't get more expensive. Consumers will pick those."
Amazon's prices rose in part because it started with lower prices, Profitero President Sarah Hofstetter said. Even with the price increases on Amazon, Profitero found that Walmart's prices on the 20,000 items are 4% more than Amazon's prices, and Target's prices are 15% more expensive.
Target and Walmart did not immediately respond to a request for comment.
Across the board, however, prices are higher on some of those items. Take the Bose portable home speaker, an item that sold for $399 on Amazon, Walmart and Target sites last weekend. Profitero found that the average price for the speaker from July to October this year jumped 9% on Amazon compared to the same period a year ago. The price on the device jumped 3% at Target and 2.8% at Walmart.
Meanwhile, large consumer-goods companies are struggling to fill the orders placed by Amazon and other retailers - leading to price spikes in categories such as grocery and pet products.
CommerceIQ, a consultant for consumer-product brands including Johnson & Johnson, Kellogg's and Nestle, tracks the orders Amazon places for items from its 4,000 clients to sell on its site. CommerceIQ said those clients' ability to meet orders has dipped since spring.
Amazon is "ordering more, but vendors are less able to fill them," said Guru Hariharan, CommerceIQ's chief executive.