Understanding FBA Long Term Storage Fees – Part 1

Fulfillment By Amazon (FBA), the program that lets Amazon third party sellers send their inventory to Amazon.com warehouses where it is stored and shipped by Amazon, has proved to be wildly successful. So much so that last fall,Amazon instituted a new Long Term Storage fee for FBA sellers.

In fact, Amazon has put in place a number of fees and fulfillment practices that may make FBA less profitable in some instances.  Until recently, FBA storage fees were so low that warehousing everything with Amazon was not only financially feasible — it was financially smart.

When Amazon ran out of warehouse space in the middle of the 2010 Christmas rush, they decided that something had to change.

Long Term Storage fees were Amazon’s first effort to alter FBA seller habits. These fees are meant to discourage sellers from sending large quantities of slow moving merchandise to Amazon, where it gathers dust but rarely generates sales.

Twice a year, on February 15 and August 15, Amazon assesses a fee on any item that has been in their warehouse for more than 365 days. The amount of the fee is based on the volume of the merchandise, including packaging — that is, the amount of warehouse space an item takes up. The fee is billed semi-annually at $22.50 per cubic foot. This fee will be charged in February and again in August.

UNDERSTANDING THE LONG TERM STORAGE FEE

There are a few details to Long Term Storage fees worth noting:

  • These fees are in addition to the normal monthly FBA storage fee.
  • The fees are calculated based on the size of the item, not the number of items.
  • There is no charge for a single item kept in inventory. The fee only kicks in when a seller has 2 or more of the same non-selling items in an FBA warehouse.
  • Amazon operates on a FIFO inventory system.
  • The fee does not begin on the 365th day that an item has been warehoused. Only items that are 365 days old or older and on the shelves on Feb 15 or Aug 15 will be penalized.

Let’s break that down.

Amazon charges a small storage fee for every item that has been in an Amazon fulfillment center for more than 30 days. From January through September, the regular fee is $0.45 per cubic foot. It is higher during the holiday season. From October through December, the fee is $0.60 per cubic foot.

The Long Term Storage fee is an additional, semi-annual fee. It is also calculated per cubic foot — not per item.

This is important because it has a much greater financial impact on larger (generally non-media) items. For instance, Amazon estimates that the average long term storage fee on a typical book will be $0.63. But the long term storage fee on a toy in a box 11″ x 8″ x 2″ (roughly the size of a game or puzzle) will be $2.29.

Amazon wants to have a depth of inventory. No matter how obscure the item, Amazon wants buyers to assume they can find it at amazon.com. In fact, Amazon makes a large percentage of its profits from just such long-tail merchandise. Therefore, Amazon encourages third party sellers to keep one copy of an item — as designated by an ASIN (Amazon Standard Item Number) – with FBA. No matter how long this single product sits on the shelf, you will not be charged a long term storage fee (although you will pay the normal monthly storage fee).

The other thing you need to allow for is Amazon’s use of FIFO (First In First Out)accounting. Amazon says:

“Only the Units that have been in our fulfillment centers for at least 365 days will be assessed a Long-Term Storage Fee. Units of the ASIN that have been in our fulfillment centers for less than 365 days won’t be charged a Long-Term Storage Fee.

“FBA accounts for inventory on a FIFO basis across our entire fulfillment network. This means that for the purpose of determining how long inventory has been in our fulfillment centers, we will account for a sale or removal of a Unit by deducting it from the inventory that has been in our fulfillment network the longest, regardless of which physical unit was actually shipped or removed.”

In practice this works like this: You have a dozen copies of a particular book listed with FBA. The books were sent to the Amazon warehouse in Jan., 2011. In the first six months, you sold 10 of those books and decided to replenish your stock by adding 5 more.

Unfortunately, you never sold another copy of that particular book.

In Feb., 2012, you have 7 copies of the book (all with the same ASIN) in an FBA warehouse. But the Long Term Storage fees will be assessed only against the two books that have been in the warehouse for more than 365 days — that is, the ones that were part of the original January 2011 shipment. The five additional books won’t be in jeopardy of long term storage fees until August, 2012.

REMOVING ITEMS TO AVOID THE FEES

Retail trends change rapidly, and even the savviest sellers can find themselves with dead stock. Perhaps you used to sell CDs and DVDs quite successfully, and have hundreds or even thousands of them with FBA.

But iTunes and streaming video have taken a heavy toll on this market. While CDs and DVDs still sell, they sell at nowhere near the volume or prices they used to command. And now Amazon is ready to slap an additional fee on top of your already shrinking margins.

What can you do to avoid the fees?

There are three ways to get an item out of an Amazon warehouse:

  • Sell it
  • Destroy it
  • Have it returned to you

If a product hasn’t sold, you may be able to clear it out by lowering the price. Some sellers drastically reduce the prices of slow moving merchandise to avoid the long term storage fee. They figure that just breaking even is better than paying for removal — and they reprice their stock accordingly.

Alternately, you can ask Amazon to just destroy unsellable or unsold merchandise. They charge a mere $0.15 per standard sized or $0.30 per oversized item for this service, less than the regular Pick & Pack fee. Amazon makes a point of emphasizing that destroyed means destroyed. Your inventory will not be resold to a liquidator or moved to another Amazon selling channel, such as Amazon Warehouse. If you ask for items to be destroyed, they will never see the light of day again.

Finally, you can have the items returned to you. This is the best choice if you think the product might be sellable on another venue, such as eBay. For instance, you might be able to bundle similar CDs together and sell them on eBay at a profit. Or you might decide to just relist your products as Merchant Fulfilled on Amazon while also listing them on eBay or Bonanza or Etsy, etc. To return merchandise to a seller, Amazon charges $0.50 per standard sized item or $0.60 per oversized item.

For the moment, while FBA sellers get used to the new inventory regime, Amazon is charging the Pick and Pack fees only. There is no shipping charge if you ask to have your products returned. Whether a box weighs 5 pounds or 50 pounds, it will be shipped to you for free.

In short, while long term storage fees can eat away at your margins, the removal fees will probably make only a small dent in your bottom line.

Next in Part 2 — How To Create A Removal Order