Amazon FBA in a RECESSION!

Aug 23, 2022

If you’re a frequent reader of the news, you probably won’t have missed the countless stories over the past few months talking about fact that much of the western world is expected to enter an economic recession by the end of 2022.

Unfortunately, these stories are starting to come true – last month the US published data that showed that it’s economy shrunk for a second quarter in a row, officially meaning that the USA is in a recession. 😔

Plenty of people believe that the UK is heading in the same direction due to the current cost of living crisis that the population are going through, fuelled by high levels of price inflation, which is a bit of a problem. To put it in simple terms, high levels of inflation over the past year has meant that that the average household’s income has shrunk by about 2.5% in real terms, because, whilst some people’s wages have increased, the amount that they’ve gone up by is still below the amount that prices have gone up on average which is currently around 11%.

Generally speaking, if things continue, people are going to have less cash to spend on non-essential items, because they’re going to be using more of their money to pay for essentials such as food and energy costs which are getting pretty expensive,.

If you’re thinking of becoming an Amazon FBA seller, then the impacts of the cost of living crisis and a global recession are things that you shouldn’t ignore, because if you do, the performance of your business is likely going to suffer.

I’m not saying that it’s the end of days and a global recession is going to cause Amazon and all of its sellers to go bust, getting rid of the Amazon FBA opportunity all together, but what I am saying is that it’s sensible to take a number of precautions and make various considerations in order to give yourself downside protection in the event that things really do turn sour.

Precaution 1: Ensuring The Product Isn't Too Expensive For Customers

The first precaution to take, is to consider whether the products that you’re looking to sell have a higher risk of soon becoming unaffordable if consumer’s wallets continue to be squeezed. For Amazon FBA Sellers that offer products in the £10-30 range, the risk that this price bracket becomes unaffordable for the general population is pretty low, but any higher than this and you may find that sales over time noticeably reduce. So my advice is to avoid selling products that that are priced above £30 or $35, because in the event of a recession, consumers are likely to have to think more carefully about whether their purchase at this level is really needed – especially if the item is less of a household item and more of a luxury one – and that’s going to negatively impact your conversion and total level of profitability.

Precaution 2: Checking The Product Isn't Discretionary

The category that your Amazon FBA products fits into is also going to be an important consideration if you want to be best prepared for the event of a recession and give yourself downside protection. Categories that more frequently have ‘non-essential or ‘luxury’ products are likely to see a fall in consumer demand if the cost of living crisis continues to worsen, with examples including gadgets and beauty. In my opinion, a better strategy for times like these is to target the categories and products that you think may benefit as a result of consumers being more conscious about where they spend their money.

In my opinion, categories that did well during the initial stages of pandemic when people were on furlough could see a resurgence in popularity, so products associated with DIY, exercise workouts, and home cooking for example. Essentially, you want to target the Amazon FBA categories that offer products that will allow the customer to save money by doing a certain activity themselves, instead of going to the shops or getting a professional to do it. 

Precaution 3: Only Selling Products With A Good Profit Margin

When assessing any product to sell with Amazon FBA, you should always target those that provide a profit margin of at least 30%, and that is going to be especially important in the event of a recession, because if you do find that customers are suddenly unwilling or unable to afford what you’re selling, it gives you enough headroom to be able to lower your price without running the risk of losing any money. In normal circumstances I’d probably be just about ok with selling a product that had a 20% margin and was fast selling, but in an environment where customers are becoming more and more cautious about how much they spend, this is a bit of a risky strategy and doesn’t leave you with enough headroom. So, before progressing with any product, always triple check your numbers and make sure your margins are hitting that 30% threshold at least.

Precaution 4: Selling In USD (If Possible)

As experts have become more and more convinced that much of the western world is going to fall into a recession by the end of 2022, investors have decided to exchange their cash into USD, which is seen as a safe haven. These actions have significantly strengthend the dollar, particularly against the Euro and the £, the latter of which has fallen 13% in value over the past year.

In simple terms, this means that people that are buying things in dollars using their pounds, are now paying 13% more than they were last year. And if you’re thinking well who does that? The answer is 1) people that go on holiday to America, and 2) amazon fba sellers, because typically suppliers based overseas expect to be paid in US dollars. This is a really important point to take note of, because it can have a huge impact on your profit margins – so if you haven’t calculated them for a while with the latest foreign exchange rate, make sure you do, because you may find that the amount of profit that you’re making is lower than expected.

Fortunately, many analysts don’t expect the $ to strengthen much more significantly against the £ which does provide some downside protection, but if that’s not reassuring enough for you, then a simple solution to solve this problem is to sell on Amazon’s US site, which means both your revenue and expenses are in the same currency, so you’re not as severely impacted by fluctuations in the foreign exchange rate.

Conclusion

The year ahead is certainly going to be a challenging one regardless of whether you’re an Amazon seller or not. Recessions generally impact pretty much every type of business that there is, so it’s important that if you’re currently an Amazon seller you prepare to mitigate any downside risk as much as possible, and if your’e not a seller and currently just rely on one income stream, you start making moves now to give yourself some form of additional income so that your quality of life doesn’t suffer if inflations continues to soar.

I hope you’ve enjoyed this topic and learnt from it, stay positive guys, see you next time!