Amazon sellers brace for layoffs and worse after coronavirus-related products get priority

Key Points
  • Amazon sellers are worried their businesses will be hit hard by the company's decision to prioritize shipments of household products and medical supplies at its warehouses. 
  • Some sellers who sell products not related to the coronavirus told CNBC the decision forced them to cut costs and furlough employees, while others are bracing for potential layoffs. 
  • Third-party merchants have already been hit hard by the coronavirus, as many factories in China remain offline.
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Amazon sellers are expecting the worst after the company said this week it will prioritize shipments of household staples, medical supplies and other coronavirus-related products over everything else.

In addition to household staples and medical supplies, Amazon told sellers it's prioritizing categories such as baby products, health and household, beauty and personal care, grocery, industrial and scientific and pet supplies. The change went into effect on Tuesday and is expected to last through April 5.

Amazon's decision will help serve shoppers who need to buy toilet paper, disinfectant wipes and other necessities, but it threatens to put third-party sellers who don't offer those products in a major bind for at least the next few weeks. Many small retailers rely on Amazon to sell their products online, and the hit to sales has caused some to furlough or lay off employees to soften the blow.

Third-party merchants can still sell products that fall outside the categories prioritized by Amazon. But they won't be able to lean on Fulfilled by Amazon, or FBA, the service that lets sellers ship their products to an Amazon warehouse, where the company stores the inventory and ships orders out to customers, in exchange for Amazon taking a commission from each sale. 

Amazon will hire 100,000 warehouse and delivery workers
Amazon will hire 100,000 warehouse and delivery workers

FBA also enables sellers to take advantage of Amazon's two-day Prime shipping, making it a useful service for sellers. Of the top 10,000 sellers on Amazon's marketplace, 87% of them use FBA services, while 13% ship products on their own, according to research firm Marketplace Pulse.

Without FBA, sellers will have to manage new inventory themselves and ship their own orders. However, merchant-fulfilled orders aren't Prime eligible, so shoppers won't be able to receive two-day free shipping for those items. Sellers will also have to charge for shipping, which is normally free for Prime members.

An Amazon spokesperson told CNBC the company is temporarily prioritizing shipments of household staples and medical supplies in response to increased demand, which caused many of these products to run out of stock. The surge in demand has prompted Amazon to hire an additional 100,000 warehouse and delivery workers.

Amazon said it will continue to ship out merchants' existing inventory in its warehouses, as well as any shipments created before March 17.

"We understand this is a change for our selling partners and appreciate their understanding as we temporarily prioritize these products for customers," the spokesperson added.

Furloughed employees and potential layoffs 

Like many big and small businesses around the country, the third-party merchants that make up Amazon's sprawling online marketplace have been hit hard by the coronavirus outbreak.

The virus had already threatened to throw many of their businesses into a tailspin, as some factories in China shut down amid the outbreak, disrupting the supply chain. Now that the coronavirus has spread to the U.S., sellers are responding to even greater demand from online shoppers and taking extra steps to manage their inventory.

Amazon's announcement on Tuesday has generated fresh concerns for many sellers. Users in Amazon's Seller Central forum said they were concerned about how the restrictions might hurt their businesses.

Jerry Kavesh, an Amazon merchant who sells cowboy boots, hats, belts and other items, said in an interview with CNBC that he has enough remaining stock in Amazon's warehouses to last him three weeks, but after that, he expects to run out of stock of several popular items. 

Kavesh also said he was worried that Amazon could extend the restrictions beyond April 5, which could make it harder for him to get products to customers, since he primarily uses FBA to ship items. 

"Then it starts to become very critical," Kavesh said. "All of us, we owe people money because of the cost of doing business. We have to pay suppliers, brands, rent, employees. That doesn't stop."

Other Amazon sellers said they've been looking to cut costs in response to the coronavirus. Last month, that meant slashing ad spend and considering raising prices to reduce demand on certain listings.

Amazon has also advised sellers on how to manage the impact of the coronavirus on their businesses. The company advised sellers to put their businesses in "vacation status" to protect their listings from being demoted in search results. Kavesh and other sellers told CNBC they're concerned that their products will lose valuable ranking placement as inventory fluctuates, which will be hard to recover once the crisis blows over. 

As the coronavirus outbreak has worsened, sellers have taken more serious steps to protect their businesses. Kavesh said he has halted new hiring, put capital expenditures on hold and is looking to cut any other unnecessary expenses. If the situation continues to worsen, Kavesh said he may be forced to lay off employees.

"Everything is on my mind, and everything has to be considered," Kavesh said. "There are no sacred cows at this point."

Stephen Roney, CEO of Roney Innovations, told CNBC he could also be looking at layoffs if he continues to run out of stock of the goods he sells on Amazon. Roney Innovations will still be able to send to FBA warehouses the food, health and beauty and medical supplies that it offers on Amazon. But other items, such as gaming keyboards, can't be restocked while the restrictions are in place. 

Joe Stefani, president of Desert Cactus, said his business, which sells college-themed merchandise on Amazon, has been hit with a double whammy in recent weeks. Stefani said his sales have been cut in half on Amazon, as consumers stock up on essentials and less on "products that aren't necessities," like his company's sorority merchandise. Then, when colleges and universities shut down due to the virus, Stefani's business was hit even harder.

"We got hit with almost a 100% decrease of brick-and-mortar store wholesale business and even had stores coming back to us asking to do returns," Stefani said. "Usually we have orders coming in from bookstores until the middle of April."

Stefani said he had to furlough a "handful" of Desert Cactus employees that manage outbound shipments to Amazon warehouses after the company announced the new restrictions on Tuesday. The furloughed employees include two full-time and four part-time employees in the U.S., as well as four full-time employees outside the U.S. 

Other sellers are made vulnerable by virtue of the fact that they are a one-person business, or "solopreneurs," as Amazon seller Lisa Abel calls herself. Abel told CNBC the new restrictions are "debilitating" to her business, which offers classroom materials on Amazon. She just re-upped her inventory out of fear that her U.S. suppliers would shut down due to the virus and now has "thousands of dollars in stock sitting and waiting." 

"As a small business owner, these moments are deal breakers," Abel said. "This entire situation has me very, very worried."

Abel said she's considering fulfilling her own orders for the time being, but finding a third-party warehouse that can store and ship out the orders will likely be expensive. "I don't want to bring pallets into my garage," she added. 

Chris McCabe, a former Amazon employee who now helps sellers get reinstated and stay compliant with Amazon's selling rules, said the FBA restrictions and the coronavirus outbreak have the potential to impact Prime Day, Amazon's multiday sale event that takes place in July. 

Sellers typically prepare for Prime Day several months in advance by ordering extra inventory. While the FBA restrictions are expected to end in April, they've created uncertainty for sellers, who are unsure whether they should stock up, lest they get stuck with extra product. 

"People are worried about making it day to day vs. doubling or tripling their inventory and having it ready for Prime Day," McCabe said. "So if this takes two to three months to sort out, and Prime Day is four months away, it's just a ripple effect."

Shoppers stockpile supplies as sellers price gouge amid coronavirus outbreak
Shoppers stockpile supplies as sellers price gouge amid coronavirus outbreak