Amazon’s been the subject of a lot of headlines lately. But while the company’s growing power in the consumer market has drawn scrutiny, Amazon’s move to capture another large stream of spending — the public sector’s — has gone largely unnoticed. Last year, Amazon quietly secured a national contract to provide cities, counties, and schools with office and classroom supplies, library books, electronics, and more. The contract was awarded by U.S. Communities, an organization that negotiates joint purchasing agreements for its members, many of which are local governments. It’s received virtually no media coverage, and yet it opens the way for billions of dollars in public spending to shift to Amazon.
As this report details, key aspects of both this contract and Amazon’s push into public purchasing should alarm citizens and elected officials. To begin with, the terms of Amazon’s contract with U.S. Communities depart in striking ways from established norms in public procurement, favoring Amazon at the expense of the public. The contract lacks standard safeguards to protect public dollars, and puts cities, counties, and schools at risk of spending more and getting less.
The contract also poses a broader threat. Amazon is using the contract to position itself as the gatekeeper between local businesses and local governments. As it does so, it’s undermining competition and fortifying its position as the dominant platform for online commerce.
In a written statement, Amazon notes that it won the contract through a process “subject to full and open competition.” Yet, our analysis, which is based on a review of the contract documents, including materials and emails obtained by public information request, finds that the request for proposals was written in a way that favored Amazon and precluded competing offers. Among those shut out were independent office supply companies, such as Guernsey. This Virginia-based company employs more than 200 people and is part of a national cooperative of independent dealers that put together the winning offer for the last U.S. Communities office supply contract, in 2010. “We looked at [the request for proposals] and said, there’s just no place for us,” says David Guernsey, the company’s founder.
Amazon is leveraging its growing relationship with local governments to induce more businesses to join its Marketplace, thus fortifying its position as the dominant platform for online commerce.
As Amazon markets its contract with U.S. Communities, it’s telling public officials that they can continue to buy from these local suppliers, because these businesses can become third-party sellers on Amazon’s platform. In other words, Amazon is leveraging its growing relationship with local governments to induce more businesses to join its Marketplace.
For businesses that do so, however, the costs are steep: Amazon takes a 15 percent cut of their revenue and sets the terms by which they’re allowed to operate on the platform, all while competing against them. Meanwhile, as cities shift their spending away from local office supply companies, or from chains that have local locations, and to Amazon, they’re contributing to the erosion of their own tax base. While Amazon lacks a physical location in many of the places where it does business, locally headquartered companies employ dozens of people, and pay the property, sales, and income taxes on which cities, counties, and school districts depend.
Already, more than 1,500 jurisdictions have adopted the contract, and more are deciding whether to sign on. But as we’ll show, other cities have rejected Amazon’s deal. The evidence in this report suggests they’re smart to do so. Specifically, we find:
A core tenet of government procurement is to write an RFP in such a way that it attracts multiple competitive offers. In the case of this RFP, our analysis suggests that it was tailor-made to favor a single company, Amazon. Only five companies were able to put together offers deemed even minimally responsive to the RFP’s requirements. Of these, four received very low scores in the evaluation process, ranging from 2.5 to 36.7 points, out of 100. The final offer, from Amazon, won 91.3 points.
We found that Amazon won the U.S. Communities contract without having to compete on price, and without providing a volume discount for the $5.5 billion in sales the contract is expected to generate over 11 years. This is a remarkable departure from standard practice. For routine goods like office supplies, local governments typically develop a list of hundreds of their highest-volume items, and then solicit a contract that calls for a fixed price on those items. This approach enables cities to make apples-to-apples price comparisons of competing proposals.
In contrast, Amazon’s contract with U.S. Communities does not guarantee prices for any items. Instead, the contract adopts Amazon’s dynamic pricing — the constantly changing prices available on Amazon Business. The company asserts that because Amazon Business is a “marketplace” that hosts multiple sellers, its platform naturally produces the lowest prices. Yet, Amazon’s control of the platform and the fees it charges sellers raise doubts about the validity of this assertion.
To evaluate pricing on Amazon Business, we asked OPSoftware, a firm that tracks office supply pricing across multiple retailers, to run a price comparison. Using the purchasing history of a California school system, OPSoftware found that the district would have paid 10 to 12 percent more had it purchased the same supplies on Amazon Business, rather than through its established local supplier. Another recent study by the Naval Postgraduate School examined options for federal buyers and similarly found that Amazon Business is not the cheapest option.
As Amazon sells the contract, it’s told public officials that they can still shop with their local businesses but just do so through Amazon’s platform. Independent businesses that have a track record of winning government contracts are in turn being pitched to join the Amazon Marketplace by both Amazon and, in some cases, public officials. With this strategy Amazon is following an approach that it’s already used with consumer goods: Positioning itself to be not just the retailer selling goods to public agencies, but the platform through which its competitors have to go to reach their buyers. This enables Amazon, through the fees that it charges sellers, to collect a private tax on their sales.
Amazon is often credited with setting new expectations for the speed of orders, but the delivery terms in its contract with U.S. Communities are a step down for cities. That’s because office supply dealers established next-day delivery as the norm in their industry several decades ago. When Independent Stationers, a cooperative of independent office products dealers, won the U.S. Communities contract for office supplies in 2010, its terms included free next-day delivery. In contrast, Amazon’s contract does not provide guaranteed delivery times, and while contract users can access free two-day shipping through 2018, that benefit is only available on certain items and is set to expire, after which point buyers will need to pay for Business Prime.
The final contract contains terms and conditions that were largely rewritten by Amazon’s legal team. As a stream of emails and red-lined documents show, Amazon altered provisions governing issues such as payment terms and opportunities for minority subcontractors, and added new sections, including one that provides an umbrella deferral to Amazon’s prevailing account terms in the case of inconsistencies.
Amazon’s changes also include a section that covers Freedom of Information Act requests for documents related to the contract. The revised terms require that Amazon be informed when a request is made, and they give Amazon the right to intercede and lobby that the information not be disclosed. This change violates the spirit of public information laws, and it goes against the principle that, when it comes to government spending, citizens should be able to see what’s going on.
Securing the U.S. Communities contract didn’t come out of nowhere. Over the last two years, Amazon has made capturing public sector spending part of its growth strategy. Amazon first signaled the scope of its ambitions in the fall of 2016, when it hired Anne Rung to lead its government division. Rung spent most of the Obama Administration in top roles in federal procurement. In the months since, Amazon has made deep inroads into defense contracting and other federal spending, including with the passage this year of legislation directing the General Services Administration to solicit contracts for “e-commerce portal providers” to supply federal agencies with commercial goods. In positioning itself to win this business, Amazon’s been making some of the same assertions that’s it’s made at the local level, including that its role as a gatekeeper will be good for its competitors. In a recent interview with Bloomberg, Rung framed the portal law as especially benefitting smaller-sized businesses.
Government employees have been increasingly turning to Amazon for the odds and ends they need to do their jobs. Most of this spending has occurred not through formal contracts, but through smaller, impromptu purchases. To better understand the scope of this spending, we gathered data from 60 cities, counties, and school districts about their spending with Amazon in 2016, the year before the U.S. Communities contract was signed. The data reveal wide variation, but, on average, the school districts in our sample spent $0.93 per capita with Amazon, while cities spent $0.32 and counties $0.10, for a total of $1.35 per person across these three types of jurisdictions. The Denver Public School District topped the list in total spent, spending $1.6 million with Amazon in 2016.
While it’s too early to say how Amazon’s share of public spending will grow under the contract, initial indications suggest the effect might be sizable. Take, for example, the Denver Public School District, which, as a member of the U.S. Communities Advisory Board, commits to utilizing its contracts. The district’s spending with Amazon rose to $2.8 million in 2017, a jump of 77 percent from 2016.
As Amazon pushes into the public sector, some cities are pushing back. Pittsburgh signed on to the contract last year, but the city’s controller, Michael Lamb, has since developed doubts about using it. “There are reasons why certain checks are in our system,” says Lamb. “One of those is to make sure we’re getting the best price, and another is to make sure that we’re treating everyone fairly. With Amazon, we just don’t know that that’s the case.”
Some jurisdictions recognize that, while Amazon may at times offer the most convenient option, their policies need to account for the full costs of shifting spending to the company. Virginia Commonwealth University, for example, has this policy for off-contract spending: “While not expressly prohibited, departments that order through Amazon are accountable for compliance with the following requirements and must take into account the negative impact the purchase(s) have on the university.” Those impacts reflect the university’s interest in securing discounted pricing and supporting competition.
The city of Phoenix offers another example. Phoenix’s purchasing records show that the city spent just $700 with Amazon in 2016. That’s in part owing to a policy that prioritizes local businesses for small off-contract purchases. Another reason is that the city’s competitively bid contract for office supplies was won by a locally owned company, Wist Office Products. The contract has special features that the city negotiated, like desktop delivery.
As the discussion about Amazon’s growing economic and political power has become increasingly loud, that discussion has largely centered around the federal level.
Now, as Amazon pushes into public sector purchasing, local governments also have the opportunity to take action. They will face a choice: Whether to use public money to further Amazon’s monopoly power, or to take steps to limit their spending with the company and instead cultivate a diverse economy. With this report, we urge cities, counties, and school boards to closely examine both the full costs and the broader stakes as they decide how to respond to Amazon’s pursuit of the public sector.
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