Amazon's Third-Party Sales Are Exploding

Amazon (NASDAQ: AMZN) CEO Jeff Bezos revealed some interesting data about third-party sellers on Amazon's marketplace in his annual letter to shareholders this year. Last year, third-party sellers accounted for 58% of all physical goods sold through Amazon. Bezos also provided the percentage of sales from third parties dating all the way back to 1999, when they were just 3% of Amazon's retail operations.

Amazon third-party merchants sold $160 billion worth of goods on its marketplace last year, dwarfing eBay's (NASDAQ: EBAY) $95 billion in gross merchandise volume for 2018. What's more, Bezos' bread crumbs allow investors to get a good idea of how much third-party sellers have grown on Amazon in absolute terms. Interestingly, over the last four years, Amazon's gross merchandise volume from third parties grew by about $95 billion.

In other words, Amazon added an eBay to its business in four years.

Meanwhile, eBay has struggled recently to grow gross merchandise volume. Amazon's third-party sales have grown at a compound annual growth rate around 25% over the four-year period.

Here's how Amazon has managed to stop eBay in its tracks and completely dominate the growth in third-party selling.

Improving the customer experience

Amazon has made significant investments in providing a superior online shopping experience. That starts with Prime, which offers two-day shipping on over 100 million items on Amazon's marketplace for a flat fee of $119 per year. (Prime also comes with a boatload of other perks.)

Amazon has over 100 million Prime members worldwide. eBay, for reference, had 179 million active buyers in 2018, who spent an average of $530 last year. That's actually comparable to estimates for what non-Prime members spend in the U.S. Non-members spent an average of about $600 last year, according to Consumer Intelligence Research Partners. But Prime members in the U.S. spend more than twice as much -- $1,400 -- showing the power of the loyalty program.

Amazon has rapidly expanded Prime benefits to third-party merchants through its Fulfillment by Amazon (FBA) program. Amazon will store and ship items for sellers on its platform in exchange for a small fee. Not only is the program convenient for sellers, it instills trust in customers that the item will arrive quickly and was stored appropriately.

Amazon's massive investments in warehouses and shipping facilities haven't always made shareholders happy, but it's hard to complain with the results over the long term. That's especially true compared to the results at eBay, which has struggled to attract merchants. Instead of providing services and tools to make selling easier, eBay has increased the pressure on sellers to fulfill orders more quickly themselves. While it's a capital-light model for eBay, it hasn't created much in the way of capital gains for shareholders.

What's next for Amazon?

Amazon continues to provide new tools for third-party sellers to help manage their businesses. Bezos points out the company's tools allow sellers to "manage inventory, process payments, track shipments, create reports, and sell across borders." Since the start of the year, Amazon has released 50 new tools and services for sellers including brand analytics, global registration for selling in multiple markets worldwide, and e-learning content to help sellers improve their businesses. It's also waived FBA fees for new products.

But one thing that could further increase the amount sold by third-party sellers on Amazon's platform is if the company moved further into offering its own shipping service. Discounted Prime shipping for Amazon's third-party sellers would make even more products Prime-eligible while potentially cutting down on shipping expenses for merchants that don't use Fulfillment by Amazon. The company has hinted at its intentions already, and it's building out infrastructure to do so.

Providing sellers with more than just a marketplace has been the key to Amazon's success in attracting and growing sales from third-party merchants. Amazon collects a fee from those sellers and the scale of its operations enables it to turn a nice profit. It's no wonder analysts value the company's third-party marketplace at more than twice the value of its own retail operations.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.