November 17, 2016 10:10 AM, EST
Amazon Taps Merchants for Warehouse Space to Expand Inventory
Chris Ratcliffe/Bloomberg News Inc. is turning to merchants who sell on its marketplace for extra warehouse space, a less-costly way to expand inventory available for quick delivery.

Inventory available for delivery within two business days expanded by 6 million items under the Seller Fulfilled Prime program, the company announced Nov. 17. Amazon earlier this year introduced the program, which lets independent merchants sell goods on Amazon as “Prime Eligible,” even if Amazon isn’t handling packaging and delivery.

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It’s the latest sign the world’s biggest online retailer can’t build facilities quickly enough to meet demand for an ever-expanding assortment of goods that customers want delivered fast and free. Warehouse capacity issues and the cost of new facilities helped increase Amazon’s spending on order fulfillment 34% in the third quarter. The big expenses caused the Seattle-based company to miss analysts’ profit projections, driving down shares 8.8% since the results were reported Oct. 27.

Amazon’s revenue is projected to increase 28% to $137 billion this year, according to analysts’ estimates compiled by Bloomberg News. The fast growth prompted the company to accelerate its warehouse building spree, with more than 15 fulfillment centers opening in California, Texas, Illinois, Kansas, New Jersey, Georgia and Florida that will collectively employ more than 12,000 workers.

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In addition to adding capacity, Amazon introduced Seller Fulfilled Prime to take advantage of the warehouse space of its merchant partners. Amazon sells its own inventory as well as products owned by merchants who give the company a cut of each sale, similar to a consignment shop.

Many of those merchants send their products to Amazon warehouses and pay the company extra to handle packing and shipping, which lets their products be listed as Prime eligible. Seller Fulfilled Prime is a way to let select merchants get the Prime label on products without using Amazon’s facilities. Prime subscribers pay $99 a year for faster, free delivery in addition to other benefits such as access to the company’s video service.

Jeff McDonald, owner of Raw Paws Pet Food in Indianapolis, joined the program in August about a year after he began selling products on Amazon. His company had to pass a test by fulfilling 300 orders with little wiggle room for returns, defective products or late shipments, he said.

"It was a really hard approval process," he said.

The advantage is that he can now list all of the pet food and chew toys in his inventory as Prime eligible to see which ones are the most popular.

Earlier this year, Amazon began restricting access to its warehouses due to capacity concerns and it changed its fee structure to penalize merchants who store slow-moving and off-season products during the busy holiday shopping period.