Amazon.com Inc. has placed new restrictions on its third-party sellers that will force the merchants to scramble for shipping alternatives and absorb higher costs, experts say, as the e-commerce retailer preps for the holiday season early and works to keep one-day Prime shipping on time.

Historically, Amazon sets limits on inventory around the holidays to handle higher volumes during the busiest time of year for retailers. But experts say Amazon had little time to plan ahead for a coronavirus-induced spike in demand, which caused more supply chain challenges and difficulty getting products to customers on time.

As a result, the company told sellers over the summer it is enforcing quantity limits on inventory at Amazon's U.S. warehouses to ensure space for only the fastest-selling goods this holiday season. Amazon is also requiring merchants that handle their own Prime shipments to increase shipping speeds and provide Saturday delivery, starting in February 2021. Sellers participating in Amazon's "seller-fulfilled Prime" program are not currently required to operate on weekends.

An Amazon spokesperson said these measures will help the company increase storage efficiency as the company preps earlier than usual for the holiday season while providing the fast, consistent delivery service that Prime customers expect.

The new rules mark the second blow in a one-two combination targeting sellers at a time when many have experienced sales declines during the pandemic. In March, Amazon temporarily halted shipping for non-essential goods, leading some Amazon merchants to search for new logistics solutions as they saw sales slide as much as 75%.

The restrictions are designed to help Amazon absorb even higher demand during the holiday season, along with the company's Prime Day sales event, which was pushed from July to October, said Andrew Lipsman, principal analyst with eMarketer, in an interview. "It sets up what was already going to be a much heavier than average e-commerce holiday season," he said.

But they may come at a cost to sellers that make up the majority of sales on Amazon's site. "Amazon has a lot of inventory costs; this is a way for them to off-load those costs back to the sellers," Lipsman said.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Amazon is instituting the new rules as it invests billions of dollars in its logistics network to increase capacity. The company's worldwide shipping costs reached $37.95 billion in 2019, more than tripling from $11.54 billion in 2015, according to data compiled by S&P Global Market Intelligence. And Amazon is on pace to surpass 2019 figures, with shipping costs reaching $24.59 billion during the first and second quarters of 2020 combined.

The company is also facing increasing competition from brick-and-mortar rival Walmart Inc., which announced plans to rollout its paid membership program across the U.S. on Sept. 15. The program, called Walmart+, will offer members unlimited free delivery as well as same-day delivery at 2,700 stores for $98 per year.

"Amazon is saying 'even though we've added 66 new warehouses this year, we still can't keep up with demand for Prime-eligible products,'" said James Thomson, a former Amazon executive and partner with Buy Box Experts, in an interview. "So what we're going to do is slow down how quickly slow-moving products get replenished in our warehouse."

New rules

Amazon's new inventory rules could be particularly detrimental for sellers of goods in non-essential categories, like apparel and footwear that have seen sales fall as consumer preferences shifted away from those products during the pandemic, experts say. Most sellers ship through the Fulfillment By Amazon program, which handles packing and shipping for products and makes those goods eligible for Prime one-and two-day shipping options.

This holiday season, Amazon is limiting inventory by measuring a product's "turn rate," or how quickly inventory sells, based on data down to the stock-keeping unit (sku) level, Thomson said. If demand for particular items is low, Amazon will devote shelf space to something that sells faster. "Amazon has to pick the fastest-moving, highest demand products and make sure that's what they pick, and everything else will have to wait another time," he said.

Sellers that don't meet the company's stricter inventory thresholds will be forced to handle their own shipping during a peak time, said Steven Yates, CEO of management consultancy Prime Guidance, in an interview. They will also lose out on having their goods designated as Prime eligible, Yates said, meaning sales on some items could decline by as much as half.

Any declines sellers see this holiday season will come on top of drops that some merchants saw of between 25% and 75% when Amazon temporarily halted shipping for non-essential goods in March, he said. "It was probably a month of those severe declines," Yates said, adding that categories in areas such as fashion and footwear were impacted the most.

Consider Jerry Kavesh, a seller on Amazon whose company Western Outlets is considered non-essential and sells items including cowboy boots, hats and jackets.

Kavesh said he is concerned about these new requirements, especially after his company's sales saw a "drop of 75% immediately" when Amazon temporarily halted shipping for non-essential goods.

"They really hurt us with some of the decisions they made," Kavesh said in an interview. "We've gone from having a relatively good inventory score to now an inventory score that is not good."

Kavesh said Western Outlets will still rely heavily on Amazon's Fulfillment By Amazon program for shipping as well as some regional seller-fulfilled Prime locations.

But Kavesh will also be shipping more goods out of his own warehouses, meaning those products won't be Prime eligible, which will lead to lower sales, he said.

"They had to make decisions that they thought were overall best for Amazon, and my category happened to be a casualty of those decisions," Kavesh said.

Prime time

Meanwhile, Amazon's move to require merchants enrolled in its seller-fulfilled Prime program to support Saturday delivery and pickups is being implemented at a time when the company has been unable to bring Prime delivery standards back to pre-pandemic levels. Amazon CFO Brian Olsavsky said during a second-quarter earnings call that the company's one-day shipping program has improved, but "we're not back to where we were pre-COVID."

Amazon is implementing the new rules because most sellers in the program delivered products late. Before the pandemic, less than 16% of seller-fulfilled Prime orders met the company's two-day delivery promise, largely because many sellers take weekends off, according to the company.

Ethan McAfee, CEO of Amify, a company that helps brands grow on Amazon, said less than 1% of Amazon's more than 2 million sellers are enrolled in the program. But those that remain will have to step up their shipping game and take on more costs to get products to Prime consumers quicker.

"So what Amazon basically said is 'if you are going to do seller-fulfilled Prime, you need to ship the product out of your warehouse within a day or two," he said.

The new rule may be a way for Amazon to phase out the program entirely, Thomson said. "I think they can very publicly come back and say 'we raised the standards and most sellers couldn't meet the standards and so we are doing away with the program,'" he said. "Either sellers decide they don't want to do it because of the increased cost of one-day shipping or the logistics of making that happen simply don't work."