What is Amazon FBA? Fulfillment by Amazon or Amazon FBA lets sellers in the Amazon marketplace take advantage of Amazon’s giant logistics operation to ship their orders. FBA items are eligible for Amazon Prime shipping and Amazon handles your angry customers (which Amazon considers its customers, not yours). Amazon has dozens of warehouses all over the country, and more around the world, so your products may be in your customers’ hands quickly.
If you pull back the Amazon curtain, however, you find the picture isn’t always rosy. For example, thousands of FBA sellers were severely impacted when Amazon enforced last minute changes to their inventory storage policy just before the holidays. And, during the coronavirus in spring 2020, FBA announced it would only accept shipments of goods it categorized as necessities. All other sellers were left out in the cold.
If you sell on Amazon and want to outsource your fulfillment, here are seven pitfalls to consider before you choose FBA over an independent 3PL services provider.
Amazon FBA Inventory Woes
The inventory that’s on the shelves and logged into the system is ready for your orders. This is the inventory your 3PL warehouse can pick, pack and ship to your customers. Amazon FBA sometimes falls short in this crucial metric. Mishandled inventory is one of the Amazon third party sellers problems most commonly reported.
Some sellers have complained of FBA inventory lag time. This can stretch from days to weeks as they wait for their inventory to be logged into the Amazon FBA system. This can cause delays in your customers’ shipments. And that lead to a drop in your seller ratings or even canceled orders. In addition, inventory that sits on a pallet on a loading dock ties up your capital without bringing in money, something you want to minimize in your ecommerce business.
Your product can also get lost in the Amazon supply chain. When this happens, you must file a claim and Amazon will usually reimburse you for the loss. In the meantime, once again, you aren’t generating sales. To add insult to injury, the amount of your reimbursement may be based on Amazon’s valuation of your merchandise, not what you actually paid for it.
Pandemic leads to major FBA warehouse disruptions
All these problems seem minor compared to the chaos Amazon created for FBA sellers in its response to the coronavirus pandemic. In March of 2020, people around the globe went into self-quarantine to slow the spread of the virus. Amazon scrambled to keep up with demand for everything from toilet paper to hand sanitizer. Amazon told FBA merchants it would sell the remaining stock in its warehouses. However, to deal with the rise in demand for household goods, it won’t accept restocks on other products. Companies that used FBA for their fulfillment had their eCommerce business model shattered by Amazon. FBA sellers had to turn to third-party fulfillment or see their ability to deliver orders evaporate.
Sellers also report extra inventory showing up after they ship to an FBA warehouse. It can take time and frustrating back and forth with customer service before your correct inventory numbers show up in the system.
Amazon runs an enormous fulfillment and logistics business. To do that, it has efficient systems in place. When there’s a glitch in those systems, however, it’s often the little guy who gets squeezed.
Amazon vs. Your Brand
If you’re like most entrepreneurs, you want control over every aspect of your business. That way, you can make sure everything runs properly. With Amazon FBA, you have no choice but to give up some of that control.
The most obvious place where Amazon places its stamp on your business is on the box. Amazon ships all FBA orders in boxes with the Amazon logo. You don’t have the option to include a personal note from you to your customer. You can’t ship in a box with your brand or even a neutral box. While Amazon FBA does offer multi-channel fulfillment, orders from your website and other platforms will still be sent in Amazon boxes. This can create confusion and could detract from the relationships you want to build with your repeat customers.
Missing that Personal Touch
Your 3PL warehouse can do a lot more than store inventory, pick and pack, and ship orders. At Red Stag, for example, we can add inserts and personalized marketing materials to your customers orders, or help you source uniquely branded boxes and even tissue paper with your company’s logo. We can also kit your inventory to increase your sales (and disassemble kits, if you need the product) to ensure you’re shipping an optimized number of parcels per order.
You won’t find services like these, which require personal attention and expanded capabilities, at Fulfillment by Amazon.
Customer Service Woes for Amazon FBA Sellers
The test of any vendor is not when things go smoothly but how well they handle the glitches that inevitably occur. According to Amazon seller forums, numerous Reddit forums, and countless other sites, Amazon FBA does not do well on this test, nor do they appear to be getting better.
Sellers report spending hours on the phone and exchanging multiple emails with customer service. Problems can sometimes take weeks to resolve.On the flip side, Amazon FBA will handle customer service when your customers have an issue. No one likes talking to an irate customer, so outsourcing your customer service may be a blessing. The question you should ask yourself is whether you trust Amazon to do a good job giving your customers the personal attention and respect that you want to reflect on your business.
Free Shipping and Amazon Fulfillment
The products of sellers who use Amazon FBA are automatically eligible for free Amazon Prime shipping. While this can be a plus in attracting more Prime customers, you still have to pay for the shipping costs.
You won’t be able to decide which products get free shipping. Whatever your margin on an item, you’ll have to absorb the shipping costs for Amazon Prime orders.
Before you sign up for Amazon FBA, you’ll need to calculate not only the fees for the service but also the extra bite that free shipping can take out of your bottom line.
Sales Tax Nexus and FBA
Sales tax nexus means a physical presence in a state such that you must pay sales taxes in that state. For example, Bob runs a business selling kitchen appliances. Bob is based in Pensacola, so he has sales tax nexus in Florida. When he ships an order to a customer in Florida, he must add sales tax and remit that tax to the state.
One of the ways Bob’s business may get sales tax nexus outside of Florida is if his products are stored in a warehouse in another state. If Bob chooses Red Stag Fulfillment as his order fulfillment company, his inventory in our Knoxville fulfillment warehouse may trigger an obligation for him to register to collect and remit Tennessee sales tax. Red Stag has warehouses in just two states and our clients have full transparency about where their inventory is stored. Thus, the additional sales tax paperwork is manageable for Bob.
If Bob signs up for Amazon FBA instead, however, he could open a sales tax nexus can of worms. Amazon has fulfillment warehouses in at least half the states in the US. It’s hard to keep tabs on exactly where these fulfillment centers are located. Amazon doesn’t like to reveal this information.
Amazon FBA won’t tell Bob where his inventory is stored. The company may move his blenders and toasters from one warehouse to another. He can only learn where Amazon FBA stored his products by looking at the locations from which they were shipped. This can create sales tax collection headaches for Bob.
The bill comes due for FBA sales taxes
Amazon’s practice of moving inventory to different warehouses without informing the seller has led to serious tax problems for some Marketplace merchants. One seller testified to the House Committee on Small Business about the consequences of Amazon moving his company’s goods to different FBA warehouses. Then one of these states came after him for back taxes. The resulting bills wiped out his profits and put him in the red. And one Pennsylvania seller got a sales tax bill of $1.6 million from California. That was simply because his goods were stored in an FBA warehouse in the state.
In California, a business owner filed a lawsuit against Amazon for failing to collect taxes on sales by Marketplace sellers. The suit claims that Amazon meets California’s definition of a retailer, so Amazon should be liable for all sales taxes. That case is still pending. However, in 2019 Amazon lost another lawsuit filed by the State of South Carolina over sales taxes.
Marketplace facilitator laws offer hope for sellers
The sales tax picture for sellers who use FBA could be getting brighter. In South Carolina, the courts ruled that Amazon, not the Marketplace sellers, had to pay uncollected back taxes. Some states have enacted marketplace facilitator laws.
These laws require eCommerce marketplaces like Amazon to collect sales tax on all sales on their platform, even those by third-party sellers.
However, not all states have marketplace facilitator laws. In addition, states may still try to collect back taxes from sellers rather than Amazon. The bottom line is that FBA can lead to sales tax problems that bite into your bottom line.
Amazon Fulfillment Inventory Swap
This is perhaps the most troubling problem sellers have encountered with Amazon. To explain it, let’s go back to Bob in Florida. One of Bob’s most popular items is a Rise ‘N Shine brand coffee maker. Amazon FBA has Bob’s coffeemakers in warehouses around the country, but not on the West Coast.
Then Zelda in Eugene, Oregon orders a Rise ‘N Shine coffeemaker from Bob. Amazon has some Rise ‘N Shine coffeemakers with the same SKU in a warehouse in Northern California. The inventory belongs to another Amazon FBA seller. In the name of efficiency, Amazon ships a Rise ‘N Shine coffeemaker from its California fulfillment center to Zelda in Eugene. However, Bob in Florida gets credit for the sale.
There are some benefits to this inventory flexibility. It saves on shipping time and costs, which is good for Bob and his customer. But what if the item in the California warehouse is actually a knockoff another merchant is selling under the same SKU? When Zelda opens the box and finds she’s gotten a lower quality product, she will not be happy. The bad rating from this incident will go to Bob. That can damage his seller reputation, even though he didn’t market substandard goods under false pretenses. Mistakes like this have happened to more than one seller.
In an ecosystem the size of Amazon FBA personal attention is hard to come by. The flip side of the company’s huge logistics machine is mistakes that can ruin your company’s reputation. Is this a risk you are willing to take?