Why I Wouldn't Start an Amazon FBA Business in 2019

Hey guys, Matt Paulson here. I want to talk a little bit about Amazon businesses and why I wouldn't start one in 2019. There were recently two posts on my Facebook group called Entrepreneurs at Sioux Falls from would be startup founders that wanted to start businesses that rely on Amazon FBA or Fulfillment by Amazon for their marketing and fulfillment. So I think we are starting to see some of that same interest that people had in Amazon businesses and other parts of the country 18 months to two years ago. I think that's starting to come to the Great Plains. So you hear stories on podcasts about people doing seven to eight figures in revenue on Amazon. You hear about exits from people that sold their Amazon businesses. For example, my friend Ryan Moran, he had an Amazon business in the supplement space, I think it was called Sheer Strength Nutrition that sold for north of $10 million. So you hear stories like this and say, huh, clearly there are people making some money on Amazon. Maybe that's something I should get into too. I want some of that easy Amazon money. But you know, honestly, I think that opportunity is maybe not the opportunity that you think it is. It's certainly not the opportunity that it was three years ago. Personally, I would not recommend anyone start a business that is primarily based through selling on Amazon in 2019. And I say this for three different reasons. First, I think the days of easy money by importing generic stuff on Amazon and, excuse me, importing generic stuff from China and having it sold through Amazon, I think those days have kind of come and gone. The reality is that all the things that are cheap and easy to import from China are already being imported by multiple distributors and they're all selling them on Amazon. So when you have five to 10 people with the same identical products in the same factory, the person that's going to get the buy box on Amazon, meaning the person that gets to fulfill the order and sell their product, is going to be the person that is willing to take the lowest profit margin. Eventually, competition on a product listing gets so tight that it's just not worth it to do it anymore because there's not enough profit in it. So if you think you're going to order spatulas or MP3 players or hoverboards from Chinese suppliers on Alibaba and stick them on Amazon and and be successful, hundreds of other people also had the same idea and they had that idea three years ago. So they're going to have better pricing than you are from your factory because they are ordering more than you have. They're going to have a better understanding of Amazon than you do. They're going to have established product listings and have reviews on their products that are going to be much harder for you to get than what they got. Because when they started you could do incentivized reviews and offer people really cheap products to review them, but you can't do that anymore. So it's just, it's very difficult to compete on generic products where other people have had a three year head start. You know, really to compete on Amazon today, you need to have developed a brand with a loyal following of customers that will order from anywhere you have your products listed, whether it's Amazon or your own website or ebay or wherever. I think Rxbar is a good example for this. I think they got acquired now, but for a long time they were a standalone healthy food company and they make these bars that are made out of whole food ingredients that are really good. I eat one for breakfast every morning. Now they sell peanut butter and I'm so brand loyal to that. It's like I don't really care if I order it off Amazon or order it off their website or go to Hy Vee and buy it. I want that specific brand. I don't care that it's peanut butter. I want their peanut butter. Not just peanut butter in general. But this is an entirely different model than just ordering something from China and putting it on Amazon. This is really a product development and sales business. And to do that, it's an entirely different model because you have to do product development and brand building and marketing and sales and fulfillment and all the stuff that comes with being a real company with real products. It's not a side hustle where you're ordering stuff and putting it on Amazon. It's a real business. It's much harder to do, but it will create a lot more sustainable business for you if you have developed a brand and built a following of customers and all that stuff. Because if it's harder for you to do, it's going to be harder for other people to copy and ultimately that will be better for you in the long run. The second reason I went start an Amazon FBA business today is that Amazon is a pretty unreliable business business partner first that your interest and their interest are not well aligned. Amazon's business goal is to sell the most stuff to the most people. Their goal is not to make you as a third party merchant the most money. If they see that you're doing really well selling something, they may just decide to go buy or build the same thing that you're selling for themselves, they might buy it from someone else or buy it from the factory that you're buying from it. And they just could cut you out of the equation and decide that they don't need you anymore. You really see they're already starting to do this with their Amazon Basics brand. That's kind of their own house brand of stuff that they sell. So you know, in Costco they have like Kirkland Signature and at Sam's Club they have like member's mark. Amazon has their own brand too with Amazon Basics. So they sell, you know, it's amazing if you look at all the stuff they sell, they sell like batteries and dinnerware and closet organizers and generic MP3 players and notebooks. A lot of the stuff where people that, where people kind of got started importing stuff from China and putting it on Amazon, Amazon does those things themselves. So if Amazon thinks they can make more money selling their own version of something versus having you send it to them and then them selling it and them paying you, if they think they can make more money doing it themselves, they will. Second, along with that, Amazon isn't a great business partner because their customer support for their suppliers is not very good or for the merchants they work with is just not very good. Customer support is usually often overseas based, not the most reliable. And a lot of times their perception of reality is just messed up and they get stuff wrong. Like I've seen people get accused of faking reviews when they didn't fake reviews. One guy I know had his account shut down because they thought his account was associated with some other account that wasn't his, that was misbehaving. So they thought he had two accounts and one account was doing dirty stuff that wasn't supposed to. So they shut down his actual account. Turns out it wasn't his account or anything like that. It was just a big mess. Had other people get kicked off Amazon because Amazon decided they didn't want to sell that item anymore. And there's a lot of stuff like that that happens and it's just really not the type of company that I want to do business because you don't know that they're going to be there. You. And that's probably the most troubling thing. They're not willing to actually look into a situation. It's just we decided something and now you have to deal with it and it just doesn't work out well for you as a merchant. Third reason I would start an Amazon FBA business in 2019 is that a lot of people that own them are selling them. I think these business owners are seeing that the writing on the wall that their profitability is likely going to decline in the future or they're just going to keep having more problems with Amazon. So a lot of these are for sale as of January 19th. I looked at the data from Centurica Market Watch. Centrica is kind of one of the sources of information for Internet businesses that are for sale. It looks like right now there are 278 online e commerce businesses for sale and 76 of them sell exclusively through Amazon. So that's maybe a fourth of all kind of Internet businesses that are for sale that do E commerce sell exclusively through FBA. I don't know many industries where I have 76 different potential businesses that I could buy to choose from. Honestly, I think that's a large number that are for sale. And I think the reason they're for sale is because there is weakness in that market. I think we can also see kind of the weakness in the opportunity from the multiples that these businesses are getting listed at on Centurica Market Watch. And it's actually through different online business brokers that then funnel into Centurica marketwatch. But if you look at the multiple that these are getting listed at, so typically these Internet businesses will get sold for a multiple of their annual profit. And the kind of range of profits that Amazon FBA businesses are selling for, the cheapest one is about 1.6 times annual earnings. And the most expensive ones are kind of in that three and a half times annual earnings. So if you had an Amazon business that netted $100,000 a year, the range that somebody would be willing to pay for it is between 160,000 and 350,000. I think if Amazon FBA businesses were really hot online businesses, the average multiple that they listed for would be closer to 4x4 times earnings, not the 2 to 2 and a half times earnings earnings that most of them are listed for. So that, you know, I think the relatively low multiple show perceived risk in the industry, both on the part of buyers and on the part of sellers. Because if these were super stable businesses that had a clear and bright future ahead of them, they would just sell for higher multiples than they do. You know, the reason they sell for lower multiples is because there's a real perception of risk and a perception that the, the earnings that you're buying a business off there won't be there in the future. So Those are the three reasons I went sell on Amazon in 2019. Number one, the opportunity to import stuff cheaply from China and put it up without a lot of other work is largely counting on. Second, Amazon is not a reliable business partner, their interests are not aligned with yours and the support just isn't that good. And third, many of these are Amazon FBA businesses are for sale and they're selling not for great multiples. So certainly not the type of business I personally want to get into. I probably point people in other directions toward businesses that are a little bit harder to build but are ultimately more sustainable moving forward. So what type of business should you start in 2019? Well, maybe I'll cover that in another video coming soon but if you enjoyed this video please press the thumbs up button on YouTube. Press the subscribe button if you would like to get my future videos and if you're really all in on my YouTube channel, feel free to tell a couple people about it as well. I think that's it for this video. Thanks.