To this day, many literature fans blame Amazon (NASDAQ: AMZN) for the fact that so many bookstores have shuttered over the past few decades. But while the online giant may have started out with a focus on books, these days, its product offerings are far more impressive. Not only has Amazon branched out to sell everything from clothing to household supplies to furniture, but it now has the potential to threaten supermarkets, pharmacies, and even hair salons.
But a recent ruling against Amazon could change the way it does business -- and limit its scope substantially. And that could actually be a great thing for physical retailers who have been losing business to Amazon for years.
Will Amazon need to alter its business model?
In 2015, an Amazon customer purchased a hoverboard from a third-party seller. That item later caught fire, and the customer sustained injuries as a result. She proceeded to sue the seller of that product as well as Amazon itself in California in 2016.
Amazon's defense was that the item in question was outside its chain of distribution for product liability purposes since it came from a third-party seller. And the court initially agreed.
But then, the customer appealed the decision, and now, a court has ruled that the case can go forward, which means Amazon may be deemed liable for a defect and injury caused by a third-party seller's product. And that could change the way the online retail giant does business going forward.
Too much liability?
Third-party sales accounted for 54% of Amazon's total net sales in 2020 and amounted to $386 billion. And this year alone, Amazon has been adding a whopping 3,700 new sellers a day.
But if Amazon is to be held responsible for injuries caused by products it doesn't sell directly or even distribute out of its own fulfillment centers, then it may reach a point when it can no longer afford that risk. And if Amazon makes the decision to sever ties with its third-party sellers, it could be a boon to physical retailers, who routinely lose customers to the lower prices available from Amazon or its network.
Of course, if physical retailers see their customer base grow, it could help prevent store closures. And that, in turn, would be great news for shopping centers and malls, both of which rely on those stores to keep paying rent.
Physical retailers have been battered by the online shopping boom for years, and the pandemic has exacerbated this threat. These days, even more customers are making purchases online and avoiding physical stores due to safety concerns, and sites like Amazon make digital shopping an easy and cost-effective option. But if Amazon dumps its network of third-party sellers, it won't be able to offer the same diverse inventory it has available today. And once it stops being a go-to source for just about everything, customers may not only run back to physical retailers but pledge their loyalty.
Of course, Amazon will no doubt fight this battle with its vast resources. The online giant has a lot to lose if it's forced to rethink its existing arrangement with third-party sellers. But if it doesn't manage to emerge victorious, physical retailers as well as real estate investors could benefit in a very meaningful way.