Fulfillment by Amazon is a game changer: Is your business prepared?
INSIGHT ARTICLE |
Originally published April 2018 and updated August 2018
“It’s a game changer” is an expression thrown around the consumer products and retail industries when discussing an unexpected yet crucial strategy that can mark a turning point for growing businesses. These efforts can improve engagement with consumers, and sometimes accelerate a company’s growth beyond that of their competition.
The Fulfillment by Amazon (FBA) solution is one of these game changers. Amazon FBA is fast becoming a growing customer for both branded and private label businesses. According to Fortune, Amazon more than doubled the total items it delivered for third-party sellers to two billion in 2016 from the year prior. Active sellers using FBA rose more than 70 percent, and these numbers are expected to continue to rise. Amazon FBA could be a great opportunity to market and sell your products to millions of consumers, without the uncertainty of chargebacks and discounts encountered when selling to traditional bricks-and-mortar and online retailers.
While FBA can provide that game changing advantage to many businesses, it may not work for all business and there are important areas consumer products companies should address to ensure business, financial and tax considerations are aligned with this solution. Addressing these areas before launching FBA is essential and continued assessment is also a must to optimally realize this fulfillment strategy’s best outcomes.
Right for your buyer and your business
No doubt you’ve determined the core preferences of your consumer. Knowing your buyer is paramount to everything you do as a business. Whether it’s design, quality, convenience, cost, or experience, you’ve pinpointed their needs and your product delivers.
To that end, make sure the FBA solution also aligns with your customers’ preferences and buying behaviors. Under the fulfilment solution, the right price, online product engagement, transaction and delivery must complement your overall intended brand experience and omnichannel strategy. Assessing your customer data and selling periods as well as evaluating your pricing plus the added FBA costs are critical before launch. For example, through this assessment and by leveraging your enterprise resource planning strategy or other tools, perhaps you’ve identified that the traditional holiday season is your peak sales time; perhaps you lack internal resources to keep up with sales demands. Using FBA during the holiday sales cycle might be the right solution for your business. In this instance and others, careful data analysis can identify volume demands, inventory needs, pricing and an optimal sales period against associated FBA and other fees. Use your data to guide your decisions in order to make the best FBA choices for your business and customers.
Financial considerations: Does it add up?
Another consideration before FBA launch includes a comprehensive assessment of your back office, controls and financial reporting. Managing a fulfillment system, even if it’s provided externally, requires a diligent financial reporting effort to ensure accurate accounting and appropriate revenue recognition. Inventory management is a prime example of where many companies fail to maintain control. In many instances, the unsold inventory shipped to Amazon’s FBA distribution hub is legally yours until it is sold to the consumer; therefore it is imperative that you keep track of that inventory. A holistic approach, keeping in mind ongoing costs, fees, sales revenue, inventory management and marketing costs is essential. This financial data can help you manage margins and profitability. In addition, sound financial and reconciliation controls from day one will position the business favorably to avoid any potential errors or material misstatements through selling cycles and resulting reporting.
Keep in mind, while Amazon may provide Service Organization Control 1 financial reporting related to its fulfillment services, in the end it’s your responsibility as a business to maintain the adequate supporting financial information for reporting and a potential audit. Failure to do so exposes your company to compliance violations, business disruptions and costly penalties.
What’s next on nexus?
Nexus, the framework for determining if a state has jurisdiction to collect sales tax on products sold by out-of-state sellers, has been an ongoing topic of discussion in the world of e-commerce and remote sellers for the last decade. It is especially important for businesses leveraging FBA, because under this and similar fulfillment solutions, products are stored, purchased and shipped in and out of multiple states, resulting in a sales tax nexus determination challenge.
In June, the U.S. Supreme Court issued a landmark decision addressing sales tax nexus in South Dakota v. Wayfair. With this ruling, the Court eliminated the “physical presence” standard upon which many state sales tax collection laws are built. For retailers, this means that the variables used to determine if sales tax is owed in states where you are selling a product have likely changed. States are quickly moving to what are commonly known as economic nexus standards, whereby no physical presence is required, but a simple economic presence may be enough to establish nexus, and force sales taxes to be collected in those states.
It's crucial for companies to understand their nexus footprint, especially concerning your FBA activities. In addition, consider the following questions for further assessment and preparation:
- When was the last time you performed a nexus analysis?
- What states are your employees or sales force visiting? In which states are they conducting business?
- What activities do those employees and sales force perform in each state?
- Where is your inventory (FBA and other)?
- How much are your sales and services sold into each state (FBA and other)?
- What products and services do you sell? Items and services in one state may be exempt from the sales and use tax, and taxable in another.
- Where do you currently collect sales taxes?
While FBA can be a vital strategy for middle market consumer products companies, helping you scale your business, reach more customers and grow your profits, there are foundational elements that must be assessed and aligned prior to launch, or as soon as possible if you are already using FBA. Evaluating business, financial and tax considerations—particularly around nexus standards—is key to your success.
For further readiness considerations, note the following related to your FBA strategy:
- Compile an inventory of all potential products for FBA consideration and determine whether they are e-commerce ready (Amazon can provide help with preparation)
- Consider buyer journey to gauge product life cycle and plan accordingly with FBA strategy
- Determine cost of contract and all FBA fees
- Determine nexus footprint and address sales tax issues
- Consider specific business scenarios (i.e., using FBA just for the holiday sales season) and plan accordingly
- Determine real estate spend on inventory storage and square footage costs
- Evaluate back office, financial reporting and controls and optimize procedures to coincide with FBA launch
- Upon launch, evaluate successes and areas of improvement
- Evaluate customer feedback to determine changes in your FBA strategy
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South Dakota v. Wayfair could have significant implications for the sales and use taxability and compliance of remote transactions.