E-commerce Fulfillment up 50%

Amazon said its fulfillment service for merchants delivered more than 1 billion items to customers in 2015.

E-commerce giant Amazon handled the warehousing, packing, and shipping of 1 billion items last year for merchants that are part of its fulfillment program.

That detail, one of a number that Amazon revealed on Tuesday, shows the huge size of one of its lesser known services. Helping third party businesses sell in its online store generates extra fees and adds to the number of products available to shoppers beyond just what Amazon sells directly.

Over the past two years, the fulfillment program has seen a big growth spurt as more merchants join. The number of sellers using the service grew more than 50% in 2015 after a 65% rise a year earlier, according to Amazon AMZN 1.99% , which did not disclose the number of merchants involved.

In particular, Amazon said that international sales for third-party merchants in the fulfillment program has been gaining steam. Their cross border trade, which involved sellers in more than 100 countries sending orders to 185 countries, has more than doubled year-over-year.

The allure for merchants to sign up for the program, known as FBA, short for Fulfillment by Amazon, is to be able to sell to Amazon’s estimated 50 million Prime members. If not in the program, the merchants get no access to this group of heavy Amazon shoppers.

Prime members pay $99 annually to get anything from toilet paper to diapers to books delivered to them in two days or less. Increasingly, they are being delivered in a matter of hours through Amazon’s Prime Now service.

Amazon, of course, sells and stocks its own goods to sell online. But outside sellers now account for over 45% of total number of items sold on Amazon, a 5% increase since January, said the company.

It’s worth noting that the fulfillment business, which debuted in 2006, is costly for Amazon. In the third quarter, Amazon’s fulfillment expenses increased 22% to $3.2 billion. Sellers pay Amazon anywhere from $1.50 to $100 per order, depending on size and weight, for the service — plus a standard fee.

As more sellers flock to Amazon’s marketplace to reach its users, it can be difficult to distinguish their products. Amazon has been working on giving merchants in its marketplace more data to help lift their sales. Amazon added the ability for sellers to advertise their listings in 2012 in search and other places on Amazon’s website. But last year, it started letting merchants advertise in the first row or the first page of search results and within its mobile shopping app.

In 2015, the number of sellers using Amazon’s advertising service more than doubled, the company said. Those ads brought in $1.5 billion in direct sales.

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Amazon’s release of details about its fulfillment business comes a day after an analyst dropped his rating for the e-commerce giant over concerns about slower growth. Amazon’s shares fell nearly 6% on Monday after James Cakmak, with brokerage firm Monness Crespi Hardt, dropped Amazon’s rating from “buy” to “neutral,” citing concerns about the rising costs for its cloud computing business and for developing original shows to stream on its Prime subscription video service.

Amazon must prove to investors that it has multiple areas of high potential growth that will offset investments in cloud computing and premium content.

Soon, Amazon will put actual dollar numbers behind the performance of its business. Later this month, it will report fourth quarter earnings that include the all-important holiday season.


This Lesser-Known Amazon Business Is Growing Fast

Macy’s, Others Turn Stores Into Online Fulfillment Centers

A number of major retail chains are now expanding their capacity to fulfill online orders from stores, essentially turning their hundreds of retail locations into local distributions centers. The benefits include faster delivery of merchandise and the leveraging of existing store personnel.

In February, Macy’s announced it was expanding online fulfillment from 292 stores to 500 by the close of 2013 as part of its “omnichannel” push. It currently has a total of 840 Macy’s and Bloomingdale’s locations.

“We’re finding that customers don’t really care from where we pull the goods, as long as we fill the order accurately and the delivery is timely,” said Karen Hoguet, Macy’s CFO, in February on her firm’s fourth-quarter conference call. “We’ve built algorithms to help us determine from where to pull the inventory, and we are learning more each day about how we need to refine these formulas.”

She added, “We expect these fulfillment locations will be key to offering faster and even same-day delivery, and also will enable the customer to buy online and pick up in-store.”

The challenges come when an online order delivery leads to out of stocks at the store level. Readdressing commission structures is also an issue as many associates only see the website stealing sales from them.

“It’s totally an issue,” said Jason Merrick, director of e-commerce for Peter Glenn Ski and Sports, which operates 11 stores in Florida, Georgia and Virginia, in a statement. “We measure how much each store ships and communicate those metrics to the stores.”

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Algorithms help Peter Glenn’s web operation pull product from stores where the product is selling more slowly and avoid fulfilling from a store where the product is moving fast. Technology is also used to avoid the need for phone calls, faxes and having store associates constantly re-key web transfers into the point-of sale (POS) system.

Peter Glenn employs one staffer at each store to fulfill web orders, regularly keeps store managers up to date on the latest fulfillment techniques, and bases store managers’ bonuses in part on the accuracy of shipments from stores. Its headquarters’ web team monitors open orders.

Retailing experts discussing the trend on RetailWire.com generally saw a need for physical store retailers to take this route, if not to gain a competitive advantage, perhaps to avoid falling too far behind online giants, i.e., Amazon.com.

“It will change the mindset as retailers,” wrote professor and retail consultant Gene Detroyer. “Retailers must first evolve into primarily an online retailer with their brick and mortar locations becoming the showroom and pick-up locations.”

Other experts on the RetailWire BrainTrust panel addressed the fact that the cost per square foot at retail is much higher than warehouse space.

Kenneth Leung, a retail strategy manager at Cisco Systems, commented on the need for a proper balance between the two. “Pulling inventory from stores can be part of the overall customer strategy to decrease the lead time to delivery for online customers,” he said. “The challenge will be the data visibility needed and the decision support needed not to cause store out-of-stocks if there is a run on the item online.”

From another perspective, this may present a good excuse to reduce unnecessary retail floor space.

“In the omnichannel era, many big box stores are looking a little too roomy. Retailers are tightening assortments and reducing facings in an attempt to lower inventory carrying costs,” wrote retail consultant James Tenser on RetailWire. “This presents somewhat paradoxical consequences. First, it creates an opportunity to condense the selling area in some larger stores and allocate more space to the back room. Even if some of this space lies empty, it ties up much less capital compared with excess item facings on the shop floor.”