Amazon’s New Path to Monopoly Is Through Your Local Government (Episode 50)

Today is a frequent topic. We talk about Amazon a lot on this podcast. You can go back to episode six where we discussed a giant, comprehensive report on Amazon as well as episode 28 of this podcast feed where we talked about Amazon’s acquisition of Whole Foods. But this episode’s a little bit different. We’re going to be talking about some original research that we’ve done into a widely under-reported phenomenon about Amazon’s relationship with local procurement and some of the hidden things that they’re doing in our economy.

Before we get started I will introduce our two guests today. Stacy Mitchell is the frequent host of this very podcast and is the Co-Director of the Institute for Local Self-Reliance and the director of our independent business work. How’s it going, Stacy?

And then when we looked at it we realized that both in the process and in the particulars of how this contract works, it deviates from a lot of the norms that have been set up to protect the public interest in ways that local governments do their spending. Really, it brings up a lot of question about whether this is a good deal for local governments.

I think one more thing to add while we’re at the top of talking about this contract is that, one of the things that’s exciting about it is that is also gives this local level angle on Amazon. I think there is a lot of opportunity here for cities and for public officials to use this contract as a way to take a stand against Amazon.

So already what you’re looking at, you know, right off the bat there is that there are very few companies that can make an offer on that kind of proposal. Very few companies that specialize in all of these product areas, and it was office supplies, school supplies, kitchen equipment, kind of everything you can think of. The tenth category was miscellaneous, and that was everything else.

What we saw when we looked at that is that there were companies that had previously been able to compete for this big stream of public sector spending, and now here, just in how this proposal is written, they’re getting shut out of it.

What we found in talking to people who know a lot about public procurement is that you want to have a competitive bidding process and if you only have one company that effectively is bidding, that’s not really a competitive RFP. This is one of the first signs, right off the bat, that something was fishy and outside of the norm of public procurement with this contract.

That’s the idea behind these joint purchasing contracts. What we found here is something very different. Amazon didn’t actually compete on price to win this contract. Instead of offering a fixed guaranteed price in the contract, what they instead are saying is that they’re offering dynamic pricing. What this means is that when a buyer for a school or city logs on to the site under this contract, they’re going to be paying a fluctuating price. It could be fluctuating day to day, week to week. Amazon says, well, you’re going to get the lowest price because there are lots of sellers on the site and therefore it’s like a market and it’s going to naturally produce the lowest price.

We were a little skeptical of that idea simply for the fact that Amazon charges a fee for sellers to be on it’s site. So they’re getting this extra fee tacked on to the top, so how, given that and given Amazon’s control of the platform, is that really a market? Is that really something that is necessarily going to produce the lowest price. We went and asked a firm called OPSoftware, a guy named Rick Marlette there, he has this firm where his job is to track pricing in the office supply sector. He tracks pricing at Walmart, Staples, Amazon, Amazon Business, lots of independent office supply dealers across the country. He’s doing this on an ongoing basis and he provides this service. If you’re an office supply company, you can get his data and then you’re able to tell if your pricing is competitive. That’s what his company does.

So we said, can you run a pricing analysis for us. He used the actual purchasing history for a California school district over a two week period and found that if they had bought their supplies through this contract, through Amazon, during that two week period, they would have paid about ten to twelve percent more than they did going through their local supplier. So in fact not only does this contract have terms that don’t protect cities, but there is some evidence that in fact it is going to lead to higher prices.

Under this contract, Amazon isn’t actually offering a guaranteed delivery time. In order to get two-day delivery, cities have to sign up for Business Prime, in order to get guaranteed two-day delivery. Depending on how you account for that cost, that’s why we ended up with ten to twelve percent being the additional amount that this school district would have spent.

To your point, you’re absolutely right. I mean, this is a real risk at a time when budgets are being tightened. In fact, cities have less money in part because of Amazon’s impact on local economies. We really have to watch those dollars, and so the notion that this is a company that’s now coming in to siphon off that spending and doing so in a way that doesn’t make the best and most efficient use of those dollars is quite concerning.

In this case, that entity was a school district in Virginia. In this contract, Amazon, instead of how this would usually work, where that school district’s terms and conditions were adopted and then every other local government that signs on did the same thing with their terms and conditions. Instead of that, Amazon got the school district and US Communities to agree to just using Amazon’s regular terms and conditions. Then, also, went through and made a lot of changes to the school district’s terms and conditions as they’re applied in this contract.

As part of this report, through a Freedom of Information Act request, we took a look at a lot of the emails that were exchanged between Amazon and this school district as they were kind of hammering out the details of the contract. There are some pretty amazing emails. There’s one that begins, “Good morning Tony, attached are Amazon’s consolidated red lines to the general terms and conditions.” Then in the attachment you see where Amazon’s team of lawyers went through and crossed things out, made additions, insertions. These additions cover a lot of different things, but one of the notable ones are the changes that Amazon made to Freedom of Information Act requests and the part of the school district’s terms and conditions that say, this is a public record and people can request this information.

In that part of the terms and conditions, Amazon said, when citizens, anyone, any member of the public makes a request for this information, Amazon has the right to get notified before the local government responds and Amazon gave itself the power to intercede. To say, don’t respond, we want this to be exempted or redacted in this way. That’s an example of Amazon stepping in in a way that is really beneficial to Amazon and not to the public, which ties back to a lot of the concerns that we have with this contract in general.

Part of this report is talking about some of the broader implications that this has for Amazon’s market power and the kinds of different industries and sectors they’re getting into. We’re going to talk about that and go a little bit broader after the break.

Thank you so much for tuning into this episode of the Building Local Power Podcast. This is the part of a podcast where you usually hear about a mattress company, issuing spaceship loans for audiobooks or something. But that’s not quite how it works here ILSR. We’re a national organization that supports local economies, which means we don’t accept national advertising. Please consider making a donation to ILSR. Not only does your support underwrite this podcast, but it also helps us produce all the research and resources we make available for free on our website, like the one we’re discussing today. Please take a minute and go to ILSR.org/donate and any amount is welcome and sincerely appreciated. That’s ILSR.org/donate. Thank you so much. And now, back to Stacy and Olivia.

Getting into the way that Amazon is targeting this public sector spending, how does that really impact the relationship that local governments and school districts and other kind of public entities have with their local business community?

Cities often have had relationships with those suppliers for a long time, and what’s happening in the case of this contract is that Amazon is saying to local governments, well you can still buy from those local suppliers because they can become sellers on our platform. In some cases, the office supply dealers are hearing both from Amazon saying, come on and become a seller if you still want to do business with governments. But they’re also hearing from their local governments, why don’t you just join Amazon’s platform and we’ll buy from you that way?

There’s so many problems with this. It means, for a local office supply dealer, that suddenly you’re having to give fifteen percent of your revenue right off the top to Amazon, to one of your biggest competitors. It means that they now control your ability to reach the market. They control how you show up on the platform, the terms by which you can sell things on the platform. They can cut you off at any point. Essentially, you’re at their mercy. This is a problem that we’ve been talking about throughout our work with Amazon, is this notion that this isn’t just a big retailer, this is a company that wants to control the underlying infrastructure of the economy and require all of these other businesses to use their platform in order to reach their customers. Incredibly problematic from a competition standpoint. What we’ve found is that this contract is yet another tool for Amazon to do that, and particularly to use local governments in a way to facilitate that market power even further.

In what way are cities fighting back against this? It seems like this US Communities contract is a really good example of ways that cities are subject to this sort of pressure from Amazon, from a larger contract. But are all cities a part of this US Communities thing? Are there similar things happening? And maybe if they don’t want to be a part of this larger contract, what can they do?

The first is, fifteen hundred local governments around the country have already adopted this contract, and more are signing on. Amazon is out selling this contract, pitching it to local officials. I think the first way that cities can decide not to buy this deal that Amazon is selling is, if they have signed on to the contract, to look at what it’s getting them. One of the public officials we talked to for this report is the Controller of the City of Pittsburgh. Pittsburgh has signed on to the contract and the City Controller who is kind of the watchdog over city finances, not every city has one, just so listeners know what a Controller does. He was looking at this contract and saying, I’m actually developing some doubts around this. Since signing onto the contract, Pittsburgh has started an audit of it’s processes around these group contracts. Certainly other cities that have signed on to this contract can not use it, or put a lot of checks on the way that it does use it.

Another way that cities can go down a different path with their spending is by adopting local purchasing policies. These are tools that we see in cities and other types of local governments around the country that are really about using all of the money that cities and local governments spend also as economic development, and also as a way to grow the local economy with that public spending. One good example here is the city of Phoenix. One of the reasons that Phoenix’s policy stands out is that it’s about kind of small dollar purchases. So purchases that aren’t the kind of big contracts that would go out through an RFP or a bid process, but just the kind of small stuff that city employees might have to buy everyday, and the kind of stuff that is sort of vulnerable to shifting to Amazon. But Amazon has this policy that says, even for those kind of small procurements, it encourages city employees to go through a database of local companies first.

There are a lot of places that have some kind of local purchasing policy, and we have resources on our website that break down what these different policies look like. In particular, this Phoenix policy for small dollar purchases is a really useful one when we’re talking about city spending shifting to Amazon.

That’s another example of how cities can build up the benefits of purchasing locally and then they can also institute checks like this that explicitly call out purchasing on Amazon isn’t in our best interest or the public interest.

But there is a scale to which a community, local government, school district, a university like you said, can really hurt Amazon by coming out against it in this way. I think that that’s a really useful point to maybe give our listeners some hope in saying, if you convince your community to sign onto a local procurement policy, or if you even just give them the options, Amazon does this, XYZ to your tax base and they kill all of these local jobs, and it’s not good for our community, then it’s really useful and tangible way for citizens to kind of get involved and say, we don’t want this giant monopoly monster in our community.

Along with our report, which for a report I think it’s pretty good reading and would urge listeners to check it out, but we also have released an action sheet that breaks down, here are some steps people can take, here are some places to start. That’s up on our website, too.

As we turn to the end of the show, I apologize I’m springing this on the two of you, but I think this will be useful to kind of clarify and bring wider this conversation on monopoly. What is the most galling example of monopoly power that you can think of within the last couple weeks? It could be a piece that you read that was really interesting that kind of brought something to light. It could be certain companies really tone deaf way to announce a new thing in the economy that just was a very blatant demonstration of their monopoly power. What do you think?

Just to tell a little bit of history of what happened in Portland, Maine, a Whole Foods opened probably about eight years or so ago here. When they came in, they knocked out one local public market that sold a lot of local foods, and then they bought the independent natural foods store and closed it when they bought it. When Whole Foods came in, they did a lot around, we’re going to carry all these local suppliers, we’re going to be great for farmers and so on. To some degree, they did, to a certain degree. It was also a little bit of wall paper in that there were ways in which they sort of featured local suppliers but because of the pricing structure, they often priced those products quite high. Higher than they should have been priced, and then sold their 365 Whole Foods brand at a lower price point. There was a way in which they used local suppliers almost as a marketing thing, but what people really ended up buying was Whole Foods’ own brand products.

That was even better than what we’re now seeing with this sort of further monopolization, if I can put it that way in terms of Amazon’s role in the food system which is that they are now offering discounts to Prime members. It’s been uncovered that those discounts are being entirely paid for by suppliers, so there’s this squeeze on suppliers. They’ve also gotten rid of the buyers that worked with local producers, so they’re doing more and more of their sourcing nationally.

It’s really, I think, a good example of something that we’ve talked about before on this show which is that there’s a lot of passion for having a local and regional food system, and sort of reviving our food production locally and a lot of people really want to eat that way and really believe in that as an economic tool. But if we don’t have a retail sector where there’s diversity and where there are lots of locally owned retail stores to sell those products, then we don’t really have a local food system. It really speaks to why consolidation in retail is such a big deal and why we should be concerned about it.

And by the way, for anyone who wants to know more about what Amazon is doing with Whole Foods and suppliers, there’s a great story in the New Food Economy, which is an online magazine about the food system that’s fairly new and really worth checking out if you haven’t.

I’m glad that you had such cogent, amazing answers to this question I just decided to spring on you. Thank you so much to both of you for being here and discussing this new report, this was really fascinating.

Once again, please help us out by rating this podcast and sharing it with your friends on iTunes or wherever you get your podcasts. This show is produced by Lisa Gonzalez and me, Nick Stumo-Langer. Our theme music is Funk Interlude by Dysfunction_AL. For the Institute for Local Self-Reliance, I’m Nick Stumo-Langerer, and I hope you’ll join us again in two weeks for the next episode of Building Local Power.