Before flattening out in July, inflation in the U.S. topped 9.1% on an annualized basis in June 2022. Understandably, most of the public attention has been on the effect of inflation on consumers, especially those with low incomes, as they struggle to pay for gas and food.
An important story that gets lost in this narrative about consumers is what’s happening to two other groups in the economy: small businesses and the giant gatekeeper corporations that control small businesses’ access to markets. In the past six months, three such gatekeepers -- Amazon, Wal-Mart, and Etsy -- have used inflation to increase the pressure on millions of small businesses through junk fees they called “fuel surcharges,” supposedly to offset the rising cost of fuel.
But the average price of gas has dropped almost a dollar since mid-June, and falling oil prices suggest relief will continue. Guess what? Did Amazon, Wal-Mart and Etsy drop their “surcharges?” Nope. These gatekeepers probably think no one is paying attention, but we are.
Inflation squeezes small businesses between a rock and a hard place. They face rising prices from their suppliers, but have limited power to increase prices on customers, for fear of losing them.
That is exactly what it’s like for businesswoman Lisa Lane. Three years ago, she invented a patented shower attachment called Rinseroo. It directs water toward soapy pets – a small but vital innovation! She sells it and other items on Amazon, generating more than $1 million a year.
That puts her in the very elite of the approximately 2 million active Amazon sellers; only about 225,000 sellers worldwide had sales of even more than $100,000, according to Amazon.
In response to inflation, Lane increased the price of her Rinseroo by $1, to $25.99. Her biggest struggle has been with the explosion of shipping costs from China. They climbed from $6,000 for a 40-foot container to $20,000. She is also paying higher tariffs at U.S. ports.
Then, she got hit with a surprise sting from Amazon: a 5% surcharge on the fulfillment fee she pays to the gatekeeper.
“Aren’t there enough profits already?” said Lane. “I call Amazon Oz. You have to be a little scared of what they’ll do next.” Usually, the fulfillment fee is about $3.50 on a small item; the surcharge adds about 18 cents per item. That doesn’t sound like much, but it equals about $25,000 a year. “That could be what I spend to hire an accountant to help me,” she said.
But ninety percent of her sales come through Amazon, and they always have. She’s an expert at navigating the complicated platform. But even if she wanted to move, where would she go? “My business wouldn’t exist without Amazon,” she said.
Lane’s difficult experience with inflation contrasts sharply with Amazon’s.
Amazon levied its new fuel fee starting in April, in response to what it said was an unexpected increase in costs. Though the retailer called it a “fuel surcharge,” gas prices have since fallen, and the surcharge hasn’t gone away.
Moreover, the gatekeeper’s second quarter results were surprisingly positive to Wall Street, as the company reaped $2 billion more in revenue than expected. The increased profits weren’t based on its own retail sales, however, but on the money it extracts from small businesses on its platform via fulfillment and advertising.
According to Lane, “Amazon will rank sellers on multiple metrics, the higher the seller ranks on metrics, the more their products are featured and ranked at the top of search results.”
Amazon gives small businesses a better score if it uses the company’s fulfillment services, Lane says. The conflict of interest is obvious here, as is Amazon’s market power: A small business which doesn’t use Amazon’s fulfillment services will rank lower in Amazon algorithms, and therefore need to pay more for advertising space to reach customers.
At the same time, according to a small business consultant we also spoke to, the company is also increasing the amounts it charges to small businesses for storing goods in Amazon warehouses.
Do Amazon executives worry that increasing prices and fees will drive small businesses away? It doesn’t need to. Once a small business is on the platform, it’s next to impossible to leave. It would take such an investment of time to set up and run a viable business independently of the platform that it most small businesses are stuck. The complex webs of advertising, shipping and fulfillment services mean a small business would need, in many cases, to reinvent its entire business model on another platform.
So, rather than pressuring Amazon, an inflationary environment gives it cover to ratchet up the fees it charges to small businesses. And it’s not the only gatekeeper taking this action. Wal-Mart quietly levied a 5% surcharge on its sellers starting Aug. 1. Etsy increased its transaction fee by 5% this spring, to 6.5%, adding to an already dizzying array of nickel-and-dimed junk fees that it charges the seven million sellers on its platform. That increase prompted a seller’s strike, which might be a harbinger of times to come as the millions of small businesses start to wonder whether they have the power to pull the curtain back on these Wizards of Oz.
For the past four decades, lawmakers have focused on consumers when they thought about antitrust concerns, and regulators have adhered to a consumer welfare standard. But in protecting consumers alone, they fail to recognize that big businesses seek to milk profits from everyone. Not just consumers, but independent business owners are also targets of profit extraction and are therefore also in need of protection from the predatory practices of gatekeepers.
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