Amazon’s warehouse storage policy causes small businesses to run out of holiday products

Jason Lautenschleger’s novelty board game business has seen its sales skyrocket tenfold on Amazon this year as the coronavirus pandemic forced people indoors and they looked to stay entertained.

A few months ago, Lautenschleger launched two new game titles based on the popular comedy films “Anchorman: The Legend of Ron Burgundy” and “Bill & Ted’s Excellent Adventure.” With the coronavirus still raging and the holidays around the corner, he thought it would be the perfect time to release the new games.

“Apparently our timing could not have been worse and the reason is ridiculous,” Lautenschleger, co-founder of Barry & Jason Games, wrote in a blog post last month. 

Lautenschleger is one of several Amazon sellers who are up in arms over a recent policy change meant to help the company conserve space in its warehouses as it faces a pandemic-fueled surge in e-commerce demand alongside the peak holiday shopping season. 

In August, Amazon put in place stricter quantity limits on shipments from third-party sellers that use its fulfillment service to package and ship orders, known as Fulfillment by Amazon, or FBA. The limits apply to all product categories and differ on an item by item basis.

For Lautenschleger, it means he can only send in roughly 230 units per shipment of his fast-selling “Anchorman: The Game,” whereas he would’ve sent in thousands of units of a hot-selling item in years past.

With the Anchorman game out of stock, Lautenschleger said all he can do is send in more inventory and wait for it to arrive at FBA warehouses. In the meantime, he said he’s losing out on potential sales, which could have lasting consequences for his business, like determining how many new employees he can afford to hire in the new year.

“You have to sell the products to be able to send them in, but you have to have them in in order to sell them,” Lautenschleger said in an interview with CNBC. “So that’s the catch 22 that we find ourselves in now.”

When Amazon announced the policy in August, it said the quantity limits would help ensure all sellers using FBA have space to store their products. The initiative was also meant to prevent the kinds of supply chain bottlenecks and delivery delays Amazon experienced during the early months of the pandemic. 

Few periods are as important for Amazon to live up to its two-day delivery promise and reputation as the “Everything Store” than the holiday shopping season. This year is forecast to be busier than ever, with U.S. shoppers expected to spend $189 billion online in November and December, a 33% increase year over year, according to Adobe Analytics. 

It’s not just Amazon that is feeling the pressure this holiday season. Many retailers, including the National Retail Federation, have warned consumers to get their holiday shopping done early to avoid potential shipping chaos and to make sure they receive their gifts on time. Big-box retailers like Walmart and Target have pointed shoppers to curbside pickup in order to fulfill orders quickly, while on-demand delivery companies such as Postmates, Instacart and DoorDash have partnered up with companies like Sephora, Macy’s and Estee Lauder‘s Le Labo to get items to people’s homes.

There are also fears of a significant capacity shortfall among major shipping carriers FedEx, the U.S. Postal Service and UPS, which reportedly told its drivers on Cyber Monday to stop picking up packages from some of the largest U.S. retailers after they exceeded their allocated volumes.

Amazon has ramped up capacity since March, growing its warehouse footprint across the country at an unprecedented speed. Amazon expects to increase its network square footage, which includes fulfillment center space, along with sort centers and delivery stations, by 50% this year, up from 15% growth in 2019.

Even with the added capacity, Amazon still had to take steps to conserve space in its U.S. warehouses, by limiting storage of third-party sellers’ products and its own goods.

“I don’t think they’ve been quite able to get a grasp of the forecast,” said Cathy Morrow Roberson, founder of consulting firm Logistics Trends & Insights. “When they said back in the third quarter that they were going to have 50% more space, that may have been adequate at the beginning of this year, but because of Covid, it’s no longer adequate.”

Sellers say they understand why Amazon needed to limit the size of shipments into its warehouses, but they feel the policy puts them in a bind during a holiday that’s already proven challenging due to the pandemic. 

The inventory-related struggles come as Amazon has highlighted success of small businesses on its platform on this year’s pandemic-delayed Prime Day as well as on Black Friday and Cyber Monday.

While the inventory restrictions aren’t limited to third-party sellers — Amazon has previously said it’s metering storage of its own products, too, in its warehouses — merchants said they felt like they had little say in how the limits are determined.

Several sellers who spoke to CNBC said they expect to finish out the year with sales up significantly from 2019, but that sales could be better if not for the inventory restrictions.

Steven Pope, who sells wine glasses on Amazon, expressed frustration over how the company determined the quantity limits. Pope and other sellers who spoke to CNBC said Amazon calculates how many units they can send in by looking at the last 90 days of sales for a particular product. For new products, it’s even more strict, since there’s a “hard cap” of 200 units, Pope said.

Merchants who sell holiday products told CNBC that they felt the company wasn’t taking seasonality into account when determining the quantity limits.

One Amazon seller, who asked to remain anonymous, told CNBC they offer a popular Christmas bag on Amazon and are able to send in 50 units per shipment. However, they sell about 40 units per day and only have 150 units left in stock. The seller said they’ll likely need to restock soon, but they’re concerned they won’t be able to ship it in time for the rest of the holiday shopping rush.

An Amazon spokesperson said the company does factor in seasonality, along with a seller’s historical sales, forecasted demand and the capacity available in its fulfillment centers, when setting quantity limits. The Amazon spokesperson didn’t answer specific questions around how far the company looks back when it assesses historical sales.

For new products, the company said it initially limits new shipments to 200 units until sellers build product sales history, but that it periodically evaluates and updates the minimum quantity so that a large majority of new products have enough units to establish a product sales history.

Back in August, Amazon told sellers if they sell all of their stock they could send in more inventory at any time. But sellers say it’s not that easy, since there are delays when they ship products to Amazon’s warehouses.

Jerry Kavesh, an Amazon merchant who sells cowboy boots, hats, belts and other items, said he’s been “sending in product like crazy,” but it has taken anywhere from 10 days to two weeks for it to enter FBA warehouses. Before, it would take only two to four days.

“We’re out of stock in our warehouse and I know I have 30 units at Amazon, but they’re being processed,” Kavesh said in a recent interview. “It’s been that way for five days. It’s killing us.”

The Amazon spokesperson said it checks in seller inventory, on average, within 3-5 days of its arrival at its warehouses. The company added that some sellers may experience longer inbound times based on the facility they’re shipping to.

Pope said one of the top wine glasses sold by his business, Momstir, is now very close to stocking out, at a time when he typically sees a 400% spike in sales between Black Friday and Christmas. It means he’ll likely lose out on a significant chunk of holiday sales this year.

“I was projecting I was going to probably do half a million just in December and now, realistically, I’m going to tap out at $310,000,” Pope said. “It’s depressing.”

Once an inventory limit is determined for a product, sellers can’t appeal to Amazon to ask that their limit be increased. A notice sent to sellers and viewed by CNBC says the company isn’t “accepting requests for higher quantity limits” and notes that “shipping a quantity above your limit may result in account suspension.”

Sellers are also concerned that if they run out of stock, their listing may be penalized in Amazon’s search ranking algorithms. Amazon will push listings down further in search results if it detects they are running low on inventory or are out of stock, sellers claim. An issue in the early months of the pandemic, some sellers previously raised prices on their products or cut back on advertising to avoid the same painful fate.

The amount of inventory sellers can send in this year is a far cry from what they’d usually have in stock. Lautenschleger, who helps run the novelty game business, said he’d typically send in 5,000 units in late summer, monitor sales in September and October, then send in another batch depending on feedback.

With FBA warehouses continuing to limit inventory shipments, some sellers have chosen to fulfill orders themselves or, like Lautenschleger’s businesses, have turned to third-party logistics providers to get products out the door in time for the holidays. Lautenschleger added that he considers his business to be “one of the lucky ones,” since it also sells products at Target and on its own website.

“My job is to come up with new games,” Lautenschleger said. “I’m trying to grow our company in so many other ways, that for me to suddenly have to take on a daily inventory watch job, that was not in the cards of an already busy year.”