Like many Amazon.com Inc. third-party sellers, Patrick Maioho depends heavily on factories in China to produce the kitchen and grilling products he sells online.
Through Michigan-based KitchenReady, a business owned with his wife, Maioho routinely imports a range of products made in China, including bristle-free grill brushes and extreme-heat oven gloves. While KitchenReady operates its own website, sales are handled entirely through Amazon.com and the e-commerce company's vast fulfillment network.
But as the deadly coronavirus spreads and manufacturing facilities in Asia have yet to fully reopen, Amazon sellers like Maioho are scrambling to stockpile goods from wholesalers in the U.S. and source products from other regions as they brace for an expected hit to sales in the coming months.
"It will definitely impact our business as Q2 is a good season for us in the grilling category," Maioho said.
While larger companies may have the wherewithal to withstand supply chain disruptions caused by the virus, independent entrepreneurs are ill-equipped to bounce back to normalcy even when factories are in full swing, experts say. Over the next several weeks, Amazon sellers will have to navigate through a web of uncertainty due to an epidemic that has already forced some major retailers to lower guidance in 2020, sparked fears of a global recession, pummeled U.S. stocks and disrupted global travel. The virus, which originated in Wuhan, China, in December 2019, has spread to dozens of other countries including the U.S. As of March 5, there were more than 95,000 confirmed cases of the coronavirus and more than 3,200 deaths, according to the World Health Organization.
"Even if everything is fine tomorrow, there's still a ripple effect," said R.J. Hottovy, an analyst with Morningstar who covers Amazon, in an interview. "I think, certainly, second- and third-quarter numbers are at risk for some of these sellers. Obviously if [the virus spreads] into the second half of the year, then the holiday season is impacted."
Amazon did not return inquiries for this story. But the Seattle-based company is reportedly stockpiling some of its own most popular products made in China in a bid to avoid supply chain disruptions, according to a Feb. 20 report by The New York Times. Experts say that, for the most part, Amazon is expected to leave its sellers to cope with the supply issues on their own.
Experts say Amazon third-party sellers are more vulnerable to supply chain disruptions associated with the coronavirus outbreak. A rendering of a microscopic view of the virus is pictured.
Source: U.S. Centers for Disease Control and Prevention
The outbreak could have an insidious effect on Amazon's third-party sellers at a time when those businesses are growing faster than Amazon's own retail operations, experts say. According to e-commerce intelligence firm Marketplace Pulse, sellers on Amazon sold $200 billion worth of products in 2019, compared with Amazon's own retail sales of $135 billion that year, for a total gross merchandise volume of $335 billion.
Third-party sellers have become the backbone of the company, with the percentage of physical gross merchandise sold by independent third-party merchants on Amazon's site growing from 3% in 1999 to 60% in 2019, said Juozas Kaziukenas, founder of Marketplace Pulse, in an interview.
If sellers find themselves out of stock, it will impact the bottom line for Amazon as a whole, Kaziukenas said. "They don't have as much experience, time or capital available to them to be able to all of the sudden shift their supply chain somewhere else," he said.
And when Chinese factories do fully resume production, they will focus on their largest clients first, such as Walmart Inc. in first-tier markets such as the U.S., creating more uncertainty for sellers that sell smaller volumes. "There is so much backlog in production they are going to have a hard time getting their products made for them," Kaziukenas said.
For Maioho of KitchenReady, the next few weeks will be uncertain. He said in an email interview that he is now looking at a five- to six-week delay in normal production from when factories originally planned to reopen at the beginning of February 2020. Exactly when factories reopen and how quickly they can get to full capacity will depend on which Chinese province the factory is located in and which provinces the workers are returning to, he said.
He said one of his suppliers in China has reopened but with 40% of the workforce. "My contact told me that he believes it may be another week or two before they are at full capacity," he said.
In the meantime, Maioho said he is monitoring sales every day and will be testing how much he can raise prices "in order to slow sales without running out of stock on what we have left in inventory."
Given what he knows now, Maioho expects sales to decline in the second quarter but it is unclear how much. "If we can get product in stock within the next six to eight weeks, we may be able to salvage Q2," he said. "Until we get a better handle on the production in China, we won't really know. One of our suppliers said they will be able to move me up in the production queue because they had retail packaging already in-house, plus leftover stock from my last order."
Amazon is not expected to come to the rescue of third-party suppliers like Maioho, as the company competes online with its own line of private-label goods.
"At the end of the day, capitalism wins out," said Shanton Wilcox, U.S. manufacturing lead at PA Consulting, in an interview. "Amazon is going to keep its private-label goods flowing as much as possible and not necessarily throwing a line [to the sellers]. If you look at it from Amazon's perspective, they want to make sure they have product in the categories. So if someone goes to their website, there is something in the category. If it's only their product, that's great."
If Amazon does not have a private label good in a category, it may help certain suppliers just to keep the product line available. "They don't want any customers going on the website and seeing out-of-stock notifications," Wilcox said. "It depends on the volume of the category and how much inventory the sellers are holding."
While some companies have shielded themselves from shortages by stockpiling to avoid tariffs from the U.S.-China trade war, smaller businesses have had less time to prepare and shift production due to the virus outbreak, said Joel Sutherland, managing director of the Supply Chain Management Institute at the University of San Diego School of Business, in an interview.
"With the trade war, you could say 'let's order more inventory before the tariffs hit,' so they were able to kind of weather that," Sutherland said. "This hit like a tsunami and they didn't have any time to adjust, to negotiate contracts. The longer this goes on, they are going to have shortages."
Maioho, of KitchenReady, said his company started scouting other regions for sourcing when the tariffs went into effect but noted that there is not a "quick fix." "China has a very strong manufacturing infrastructure for retail-ready products and in my experience, moving a product or project to another region takes time and is a challenge," he said.
Jonathan Goldman is the president of Quantum Networks, an Amazon seller based in New York City. The company mostly sells consumer electronics goods such as microphones and Bluetooth headsets. Goldman said in an interview that his company has unintentionally benefited from the tariffs as his brand suppliers shifted production to areas outside of China to avoid the higher duties.
Quantum Networks also benefited from stocking up more than usual before the Chinese New Year, a time when factories typically close for several weeks and ports are regularly congested, he said.
But the coronavirus impact is so severe that many domestic suppliers have approached Goldman and urged him to buy up inventory already in their warehouses.
"We're going to be aggressive to buy from those brands so that we can get ahead of it and in front of our competition," Goldman said, adding that his company is willing to take on the added cost of U.S. air shipments, which is far more expensive than importing products by sea from China.
"We'll have to make a game-time decision: Is it worth being out of stock or is it worth being in stock with less of a margin?" he said.
Like Maioho, Goldman is staying in constant contact with factory representatives in China who have been working from home until the factories reopen completely.
"My fear is that these guys go back to work because China is trying to boost the economy, and there are more issues if workers are still recovering," he said.