Amazon Is Hiding This One Simple Trick!

The e-commerce giant was always poised to end up this big

If you Google “When was Amazon founded?”, the Wikipedia result claims July 5th, 1994 - meaning we’re just a few weeks away from their 30th anniversary! In 30 years, Amazon built and scaled the world’s largest online e-commerce platform, organized a logistics company to support it, and even went after the tech giants by establishing the number one cloud computing platform available today.

At $1.9 trillion, Amazon quadrupled Walmart’s valuation in what is essentially half the time. Given the company’s size today, it’s quite unimaginable to hear the crazy startup stories that Bezos and company went through. For example, back when Amazon was just an online bookstore, the company was often strapped for cash. Whenever someone placed an order, Amazon had to source that order from book distributors who required that retailers order 10 books at a time. But they found a loophole - Amazon realized that while they were required to order 10 books, they didn’t need to receive that many. To work around the situation, Amazon would fill up the order with a bunch of books that were out of stock, meaning they never got charged!

Then there are the classic stories about the team working minimum 60 hours a week, sleeping in their cars, using Bezos’s garage, and choosing between names like Cadabra and Relentless before landing on Amazon.

During its journey, Amazon’s retail business has always been a substantial revenue driver for the business. Last year the company recorded revenue of $574 billion, with retail revenue making up the vast majority. “Online Stores” sales made up $232 billion, “Third-Party Seller Services” accounted for $140 billion, “Advertising” revenue was at $47 billion, and “Subscription” sales amounted to $40 billion.

Growing to the second largest company by revenue in 30 years is no easy feat, but in hindsight, I’m pretty sure that the company was no stranger to the “up and to the right” trajectory it has seen. You see, Amazon built its business in a very intentional way - enabling themselves to grow with little added capital.

Growth Capital at No Cost

If you wanna grow your company faster than revenue allows you to do so, you have a few options. Either you can issue shares through venture capital or public offerings or you can finance yourself through debt. Pretty basic stuff. Well, retail-platforms are structured in a way that opens the possibility for another channel of capital.

For the most part, e-commerce and retail joints like Amazon, Walmart, or Costco have built their business by providing a place for consumers to buy goods from third-party sellers. While they do have their own brands, third-party sales dominate. In 2024, 60% of sales on Amazon’s platform came from third-party sellers!

So as a platform, you typically buy some goods and sell them to consumers. Once someone buys a product, it’s your job to deliver it and pay back the third-party involved. Here’s the catch. Compared to other retailers, Amazon structures these payments vastly differently. Amazon pays their sellers 38 days after a customer purchases something. This is huge. This means that the company has a $1 billion daily cash pile completely interest-free! 

In accounting, there’s this term called working capital. Working capital is the amount of cash or assets available for a company to use for their day-to-day operations. If companies need to increase their cash pile, it is because they want to have more working capital in the business. The more cash you have, the more working capital you have (in most cases).

But if your Amazon and your inventory is sold months before you pay your vendors, your vendors literally finance your business. No need for selling shares or raising debt, every sales cycle you are sitting on a boatload of cash that you know you’ll be able to cover by the next sale cycle. But how did Amazon end up in this situation?

Third-Party Sellers

Unlike Walmart or Costco, Amazon does not rely on a select few suppliers. Costco has the lowest amount of products at around 4,000 unique SKUs and Walmart’s stores climb up to 140,000 SKUs. But because Amazon is primarily a web platform, they’ve created a low barrier to entry for suppliers that want to sell goods on the platform. Consequently, it's not surprising to hear that they have 600 million products on the platform.

It’s more than just having an e-commerce platform. In comparison to Amazon, Walmart spends enormous time and resources selecting and negotiating with their vendors. The company has long been known for having the cheapest retail goods. Since the Sam Walton days, Walmart has achieved this by putting suppliers through the wringer. Walmart is notorious for aggressive negotiations with suppliers and regularly has vendors travel all the way to the HQ in Bentonville to experience a negotiation of a lifetime.

Obviously, this takes time and resources. Walmart’s supply managers spend considerable time and effort to choose which products to stock. Once chosen, each supplier has to go through contract negotiations. All of this adds overhead to the business. And that is where Amazon is different.

Amazon is infamous for being a deathmatch for sellers. For years, Amazon has been known to be a gulag with sellers fighting each other for rankings on Amazon. Sellers have long been known to sabotage their competitors with manufactured five-star reviews, counterfeits, defacements, or even fake fires. 

You’ve probably seen all those dropshipping videos on YouTube that claim to make you a millionaire in a month - well they are all courses on Amazon’s Fulfillment by Amazon (FBA) program. Amazon’s FBA program allows anyone to sell goods on Amazon’s platform while not taking any responsibility for the logistical nightmare of storing and shipping goods to customers.

Remember the revenue breakdown from the introduction? A quintessential seller will likely find themselves contributing to each and every one of those line items. First, you sign up for Amazon’s FBA, typically a 20-35% fee off the cost of every product. Then of course you still have a transaction fee that directly comes from each product - about 8-15%. But once you list your product, selling it is no easy feat. Products compete against each other through reviews, popularity, and even paid advertising. Estimates put advertising at around 15%. By the end of it, Amazon is taking nearly 50% of each sale!

Engulfing the size of Walmart in half the time isn’t a happy accident. If they were simply an e-commerce platform, Amazon would likely be much smaller than it is today. Look at eBay - much less revenue but also only worth $26 billion. Creating a huge power dynamic between the platform and its third-party sellers means Amazon can create its own reality. They can push back payments to create more working capital ($1 billion daily!). They can bid up top spots on search for free cash, and they can even turn around and charge customers for faster shipping (Prime). Over time, this means the more they grow their platform, the better they can set themselves up for the future.

That’s all for this one folks! If you’re interested in more content about how companies take advantage of accounting magic, let me know by liking this post or dropping a comment. If you enjoyed reading, please feel free to share with your friends. Reach out to us by replying to this email if you have any insider takes or leave a comment on our Substack page!

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