Ad Revenue To Reach $20B By 2020, And A Sales Tax Kerfuffle
Each week I share the top news that impacts brands and merchants who sell on Amazon. My digest for this week includes new estimates for Amazon’s share of the advertising market, the reality behind Trump's criticism that Amazon does not pay sales tax, and the catch-22 of offering free product returns.
New estimates for Amazon’s share of the advertising market
A media analyst estimates that Amazon currently constitutes $3 billion of the $200 billion advertising market, or 1.5%. But by 2020, this could grow to $20 billion, according to an interview with CNBC.
"I think Amazon will do retail search and take Google to the cleaners on retail search using their estate," says Alex DeGroote, a media analyst at Cenkos Securities who spoke with CNBC.
Amazon's strength would be in search advertising rather than display, according to DeGroote. This makes sense as Amazon’s core business is in serving and sorting physical products in search results. Consumer brands have been using Amazon Marketing Services (AMS) and Sponsored Products Advertising for many years to grow traffic and sales on their product listings. With Amazon’s continued investment in the Amazon Advertising Platform (AAP), its programmatic advertising product, more brands are likely to explore launching brand awareness campaigns with Amazon. This is especially the case as brands advertising on AAP can access Amazon’s valuable shopper data. Whichever way Amazon grows their ad revenue, it will benefit both brands ability to drive sales and eyeballs to their product listings, as well as Amazon’s bottom line.
Trump fires repeatedly at Amazon about sales tax
Amazon shares have taken a hit over the past few days after a series of tweets from President Donald Trump criticizing Amazon over taxes and its relationship with the U.S. Postal Service.
It’s been widely reported that Amazon does collect state sales taxes on products that it sells directly, through its vendor relationship with brands. But Amazon does not directly collect state sales tax for marketplace sellers, even those who use Amazon's countrywide warehouses to fulfill customer orders. Other retailers argue that this practice gives Amazon an unfair advantage, since product sales from marketplace sellers represent an estimated half of all product sales on Amazon. But this is only half the story.
Amazon has argued that they don’t need to collect and remit taxes for marketplace sellers because they don’t own the inventory. This presents an issue for many marketplace sellers who are legally required to collect and remit sales taxes in all states where Amazon holds their inventory. But marketplace sellers cannot control which states Amazon holds their inventory in--creating a cumbersome and costly requirement to comply with each state’s requirements for sales tax. The issue for most merchants who want to comply with their legal obligations is not paying the tax itself, it is the process of enrolling, reporting, and paying taxes on a quarterly or monthly basis in 45 separate states. In a recent article for Forbes, I wrote about a new association that has been formed for online merchants to protect their livelihood from a potentially enormous compliance burden.
Two states have passed laws requiring marketplaces like Amazon to collect tax on behalf of marketplace sellers, which will ease this burden and go some way to “leveling the playing field” as President Trump would say--and at the same time providing marketplace sellers with a simple and cost effective means of staying compliant with the states.
The catch-22 of offering free product returns
Forty percent of U.S. and UK retailers have seen a spike in intentional returns compared with a year ago, according to a February 2018 study from Brightpearl, reported by eMarketer. And the relatively recent phenomenon of offering shoppers the ability to “try before you buy” is contributing to the increase in returns.
"[Try-before-you-buy] creates a tsunami of returns that could easily overwhelm retailers who do not have the processes or workflows in place to cope with that level of change," the study said.
At the same time, shoppers feel more confident to buy from retailers (offline and online) who have generous return policies. According to a survey by coupon and discount website Promocodes.com, more than half of U.S. internet users would avoid buying from a retailer with a strict return policy.
So what does this mean for brands selling online? Most online marketplaces like Amazon require merchants to accept product returns and even go so far as to process refunds automatically. So for a brand’s marketplace channel, there may not really be much of a choice. Although it opens the door for some consumers to take advantage of the policy, it’s one of the ways that Amazon in particular uses to gain the trust and repeat business of shoppers.
This is all the news I have to share with you this week. Subscribe to our newsletter to make sure you receive my news recap next week!