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February 26, 2020 1:45 PM, EST

Amazon Merchants Spooked by Coronavirus Fallout Curtail Ad Spending

Amazon packagesMelissa Lyttle/Bloomberg

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Chuck Gregorich, who sells China-made patio furniture on Amazon.com Inc., expects to lose as much as $2 million in sales this year due to factory closings and other coronavirus-related slowdowns. So he’s cutting his ad spending on Amazon and thinking about raising prices to avoid running out of inventory.

The sudden shift in sales tactics by merchants like Gregorich threatens one of Amazon’s fastest growing and most profitable revenue sources.

“If we’re going to run out, why not run out at full price,” he says. “We have to make sure the sales we have are as profitable as they can be.”

Amazon merchants spent about 6% less on advertising over the past two weeks than they did a year ago, says Daniel Knijnik, who runs Quartile Digital, a New York firm that helps manage Amazon advertising for 2,300 brands selling goods on the site. Many of them are small outfits forced to react more quickly than big brands selling to the likes of Walmart Inc. and Target Corp., he says, because they lack the inventory stockpiles and alternative suppliers their larger counterparts can draw on.

Amazon’s advertising sales are a small piece of overall revenue, but they help the company offset the huge costs of storing and shipping millions of products. In the holiday quarter, what Amazon calls “other” revenue — most of which is advertising — totaled $4.78 billion, up 41% from a year earlier.

Like many of its tech industry peers, Amazon started 2020 predicting strong sales growth. Now mounting fears of a pandemic and the related economic fallout has put those rosy projections in question. Amazon’s shares had dipped 5.9% by the Feb. 25 close and were up less than 1% at midday Feb. 26. The falloff in advertising could be a harbinger of worse news to come.

Amazon last month forecast sales of $69 billion to $73 billion in the current quarter and has not adjusted that outlook in response to the coronavirus. Apple Inc. warned that it is likely to miss its sales forecast for the current quarter due to the outbreak, which disrupted smartphone production and forced store closings in China. “We are monitoring developments related to COVID-19 and taking appropriate steps as needed,” Amazon said in an email, using the official name for the virus.

The company is taking other measures to soften any virus impact for smaller sellers. As previously reported by Business Insider, Amazon on Feb. 7 advised merchants that they could put their accounts in “vacation status” to avoid getting penalized by its algorithms if they suspected items would run out of stock. It also instructed merchants to cancel any customer orders they would not be able to fulfill.

“If your performance metrics have been impacted by this event, please include a brief description of how your business was impacted when you respond to the relevant performance notification,” Amazon said in a notice. “We will consider this unforeseen event when we evaluate your account’s recent performance.”

More than half of the items sold on Amazon come from independent merchants like Gregorich, who pay the company a commission only when shoppers buy their goods. That puts Amazon in a very different position than traditional retailers when reacting to supply-chain disruptions. Walmart and Target remain in constant contact with their wholesale suppliers about postponing delivery deadlines and finding alternative sources for products to keep shelves stocked. Amazon has those relationships as well, but has less direct contact with smaller merchants.

Its marketplace is largely managed by machine, with algorithms deciding in real time which products people see. Prices, consumer feedback, advertising and the speed of delivery all factor into the calculation. Amazon’s algorithms can punish merchants whose products sell out by making it harder for shoppers to find their wares, giving sellers an incentive to protect their inventory until they can replenish it. Cutting ad spending is the easiest lever for them to pull.

“We have reduced our ad spend and have identified the stock level where we’ll increase prices to slow down the rate of sale even more,” says Jerry Kavesh, a Seattle merchant who sells cowboy boots and hats on the site.

Mark Looram, managing director of GTO Limited, which oversees factory operations in China and the Asia Pacific region for big importers, expects prices for China-made products to shoot up on Amazon more quickly than at competing retailers that have more control. “One of the major differences with Amazon sellers is that they control their pricing and can increase or decrease depending on market conditions,” he says.

Price spikes can attract the attention of regulators. In 2017, after back-to-back hurricanes struck Florida and Texas, Amazon fielded complaints of price gouging on bottled water. In fact, the high price reflected the expense of quickly shipping a heavy case of water across the country when local supplies were depleted. It was an example of how Amazon’s machines, designed to help match supply with demand, lack the judgment of a human touch.

So far, there haven’t been reports of virus-related shortages of essentials in the U.S. Instead, merchants are facing delays in replenishing inventory of things like dog treats, wine refrigerators and patio umbrellas. With no clear answers about when China will be back to full production, sellers are trying to stretch out what they have until new supplies roll in. Even with those adjustments, some merchants have already run out of stock.

Host Seth Clevenger went to CES 2020 in Las Vegas and met with Rich Mohr of Ryder Fleet Management Solutions and Stephan Olsen of the Paccar Innovation Center to discuss how high-tech the industry has become. Listen to a snippet above, and to hear the full episode, go to RoadSigns.TTNews.com.

“I have clients in various categories that are getting crushed because of the coronavirus,” says Dan Brownsher, who runs Channel Key, a Las Vegas e-commerce consulting business with more than 50 customers who sell products on Amazon. “What was supposed to ship in February or March now won’t be shipped until April. We have items out of stock that won’t be back until April.”

Virus-related disruptions will be most immediate to those selling spring and summer seasonal goods like inflatable pool toys and patio umbrellas, which could push any impact on Amazon into the second quarter.

Gregorich might have to hold off introducing a new line of patio furniture until next year. He ordered 14 containers of products from a Chinese factory, which recently refunded his deposit because it can’t complete the order in time. He’s keeping in touch with the factory in case it can make part of the order before the outdoor furniture selling season ends in the summer.

“We told the factory to let us know where they are and maybe get a partial order in the summer and still make some sales so we don’t miss the whole season,” he says. “We’re going to miss that product this year.”

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