Predictive Analytics

Quality Collateral at Amazon FBA Represents Growth Opportunity

prescriptive analysis

In Q&A with ABL Advisor, appraisal chief Ryan Davis dispels several misconceptions about the risks of loans to FBA sellers, but also stresses industrywide need for more data-driven valuations

Fulfillment by Amazon (FBA) could be the next frontier for asset-based lenders seeking to grow their portfolios—but they need to grasp the unique challenges and risks of loaning to sellers utilizing the fast-growing ecommerce channel, advises Ryan Davis, Managing Director of Valuation Services at Tiger Group, in a Q&A with ABL Advisor.

“Inventory quality at FBA is excellent,” Davis says in the May 4 feature article. “However, assessing borrower health and Net Orderly Liquidation Value (NOLV) in this space requires stepped-up capabilities in data analytics. There are also a lot of misconceptions out there that need to be dispelled.”

In the Q&A (“Tiger’s Appraisal Chief Sees Prime ABL Opportunities at Amazon FBA”), Davis points to the crucial distinction between FBA and the Marketplace model. In the former, a company sends its inventory to Amazon’s warehouses and Amazon handles all fulfilment; in the latter, a company sells through Amazon but fulfills orders out of its own warehouse.

“I believe that a lot of the fears in our industry stem from that Marketplace model, wherein the seller has control over its own fulfillment,” Davis explained. “It is absolutely true that these sellers face a substantial risk of being shut down by Amazon in a liquidation, because they’re more likely to run afoul of Amazon’s exacting standards for timely order fulfillment and returns. We’d recommend approaching such deals with caution.”

But where Tiger sees massive opportunity for ABLs is Amazon’s FBA model, Davis clarifies. “With FBA, the sellers physically send inventory to Amazon’s warehouses and, by doing so, basically eradicate operations risks,” he notes. “That’s because Amazon uses its own infrastructure, expertise and personnel to handle the ordering and fulfillment end of things.”

Quizzed by ABL Advisor about prevailing misconceptions in the industry, Davis explains that many lenders still believe Amazon will suspend or cancel the borrower’s account if the borrower discounts too much. “It is very well-documented that Amazon does not interfere in pricing,” Davis says.

Lenders have also asked whether manufacturers can prevent FBA sellers from selling below MSRP/MAP. “The answer is ‘no’—the biggest threat a vendor can hold over a reseller is to prevent the reseller from buying more,” Davis explains, “but they can’t take any punitive action for selling below a certain price.”

He dispels similar concerns that Amazon forbids running liquidation sales on FBA (or use of the term “liquidation”); that the cost of returns undermines the viability of liquidating FBA inventory; and that seller accounts will be shut down if inventories fall below certain thresholds.

But Davis, who led  the Tiger team that liquidated $20 million of inventory primarily through Amazon FBA, does acknowledge the unique challenges of running a liquidation  through FBA.

“For traditional retail liquidations, it takes an experienced merchant to know how consumers will respond to discounts and sale language,” he says. “An Amazon FBA liquidation is more about objective data and pure price than subjective merchandising and marketing creativity. What you need to make good predictions is lots and lots of data as well as a great analytics engine, and the right analysts.”

The Amazon world also changes much faster than brick-and-mortar retail, which is why Tiger has been building its predictive analytics model for years, he notes. “Since we appraise so many FBA operators, we can keep our finger on the pulse of both the latest Amazon policies and also the data trends, which keeps us ahead of the curve,” Davis told the publication.

In conclusion, he explains why the FBA business model, with its low fixed costs, is better able to absorb marketplace shifts, making many of these borrowers quite resilient. “Just like yesterday’s brick-and-mortar retailers, FBA sellers are hungry for the capital they need to grow,” Davis says.

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