Amazon is paying up to 25% more to some suppliers to offset the tariff impact — but still plays 'hardball' with smaller vendors (AMZN)

Jeff Bezos, Amazon

  • Amazon has been paying up to 25% more to some suppliers to help them deal with the tariffs imposed on Chinese products.
  • The move shows how Amazon, the largest online retailer in the US, is dealing with the tariffs.
  • Walmart launched a new program last year to help its suppliers deal with tariffs, but Target reportedly told its suppliers that it won’t offer any price increases.
  • Analysts say last week’s trade agreement could have a positive financial impact on Amazon’s margins.
  • Click here to read more stories on BI Prime.

While hardware companies like Apple stand to gain the most from last week’s US-China trade agreement, Amazon could also be a key beneficiary of the reduced tariff deal.

That’s because Amazon has been paying up to 25% more for the products it buys from some of its bigger suppliers in order to help them offset the tariff costs, according to people familiar with the matter.

Amazon buys products wholesale from these suppliers — commonly called first-party vendors — and resells them at a profit. So the higher price Amazon pays suppliers cuts into its gross profit margins.

In one of the messages sent to suppliers, seen by Business Insider, Amazon asked them to “submit a product cost revision for consideration” in order to get a price increase in light of the tariffs.

“We understand that tariffs can have a significant impact on the landed cost of your products and want our business relationship to be mutually beneficial,” the message said.

The move shows how Amazon, the largest online retailer in the US, is dealing with the tariffs imposed on Chinese imports, which account for billions of dollars worth of products sold on its site annually. Almost half of all products sold on Amazon come from first-party vendors, and roughly 20% of them are sourced from China, according to a recent estimate by Bank of America.

Retailers in the US are taking different approaches to tariffs. Walmart, for example, launched a new price changing tool last year to allow suppliers to request price increases related to tariffs, according to Bloomberg. Target, meanwhile, told suppliers that it would not accept any new cost increases, effectively telling them to bear the cost, the Wall Street Journal reported.

In a statement to Business Insider, Amazon’s spokesperson confirmed that certain suppliers have received pricing concessions related to the tariff costs.

“Companies of all sizes throughout the supply chain have been making adjustments to increased costs resulting from tariffs, and we have been working closely with vendors to make these adjustments as smooth as possible and minimize impacts on customers,” the spokesperson said.

Last week, the US and China agreed to halve the tariff rate on $120 billion worth of Chinese products to 7.5%, while delaying planned tariffs on $160 billion of Chinese goods. A 25% tariff will remain on roughly $250 billion in Chinese-made goods, including furniture and machinery.

Playing hardball

The price increase, however, is mostly offered to larger vendors, leaving smaller suppliers to foot the bill when it comes to tariffs, people familiar with the matter said. Those larger vendors typically sell more than $10 million a year to Amazon and have access to an Amazon vendor manager, who negotiates the price increase in person, these people said. 

Smaller vendors without a human representative to talk to at Amazon still have an option to submit price increases, but rarely get them accepted, these people said. Those vendors usually end up moving to the third-party marketplace, where they can set the price on their own.

But even for those large vendors, the price increase often comes only after playing hardball with Amazon. Some vendors told Business Insider that they had to stop shipping their popular products to Amazon in order to get the company’s attention. Because Amazon had orders to fulfill, and to keep those popular products in-stock, it had to accept the price increase requests, these vendors said.

“We noticed that your company has stopped shipping us some [products], I assume, in reaction to this unresolved discussion,” Amazon’s vendor manager told one supplier in an email seen by Business Insider. 

One supplier, who wanted to remain anonymous due to confidentiality agreements, told Business Insider that Amazon denied multiple price increase requests he submitted over the past year. As a result, his cost is up 30% this year, and total sales are cut in half as he stopped shipping inventory after it made little financial sense to sell to Amazon.

“Amazon plays a particularly hard form of hardball,” one of the suppliers told Business Insider.

‘Headache removed’

Analysts say it’s difficult to estimate the exact financial impact of the tariff agreement on Amazon. But the change is likely to reduce Amazon’s wholesale costs and have a “single digit” positive impact on Amazon’s profit margins, Wedbush’s analyst Dan Ives told Business Insider.

“It’s a clear benefit for the company — a headache removed from Amazon’s story,” Ives said.

D.A. Davidson’s Tom Forte said Amazon’s hardware business could also get affected by the tariffs, although it would have a minimal impact on the overall company. He said last week’s tariffs agreement could ease some pressure on Amazon’s margins, but pointed out the company was already in a good position with expectations of having another record holiday season.

“We expect Amazon’s sales to be strong and gross margin, for the most part, to hold up well despite tariffs,” Forte said.

SEE ALSO: In leaked recording of internal meeting, Jeff Bezos and Amazon’s top execs respond to employee questions about some of the company’s biggest challenges

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