[Image of: RetailWire Logo and Tagline (for print)]

BUSINESS TIPS

ChannelAdvisor:
Online Selling Strategies
RR Donnelley:
In-Store Marketing
LoyaltyOne:
Enriching Customer Relationships
 
[17 comments]

Study: Amazon shifts to preferential treatment for brands

August 21, 2014

According to a new study, Amazon.com has set up a pay-to-play system for certain brands seeking more exclusivity and better positioning on the site.

The study, entitled Great White Shark, by L2, a subscription-based business intelligence service, examined 27,517 Amazon listings of 315 brands in six verticals: Beauty, Fashion, Hair Care & Color, Home Care, Personal Care and Watches & Jewelry.

It identified Levi's as one of the brands that benefited from a partnership with Amazon. Apparently due to better terms and greater access to its product range, Levi's gained improved visual merchandising and search performance on Amazon.com vs. its competitors.

Indicating perhaps a bigger benefit, a product search on Amazon.com found that no Levi's products were available from third-party re-sellers. Brands have complained that unauthorized sellers on the site are low-balling goods and devaluing their brands in the process. Gray-market sales are also an issue.

By comparison, Ralph Lauren, a brand, which reportedly doesn't have a partnership with Amazon, has over 9,000 items for sale on the site through third-party sellers.

According to Bloomberg, this marks a shift in Amazon's strategy of generally allowing third-party sales. Bloomberg wrote that CEO Jeff Bezos "has long nurtured the open-bazaar environment, yet there are now signs he's willing to sacrifice the increased selection for a more direct relationship with companies in categories like fashion and cosmetics where Amazon wants to increase its offerings."

A chart included in the report shows that brands that do not officially distribute on Amazon.com have a significantly greater number of listings being sold by third-party merchants.

In a video on L2's website, Scott Galloway, a marketing professor at NYU's Stern School of Business and co-founder of L2, said, "Amazon's worldwide network of third-party merchants all but ensures that brands have a presence on the platform, whether they want to or not."

In another example, the report noted that in the luxury space, few prestige brands officially distribute on Amazon. But Burberry's has "strategically traded the official distribution of a limited number of its SKUs in exchange for Amazon cleaning up third-party distribution of other Burberry products," the study states.

In the CPG space, L2 pointed to Procter & Gamble's agreement to let Amazon ship directly from its warehouses. L2's analysis further found that in addition to cross-bundling deals across P&G's portfolio listings, "more P&G products are eligible for Amazon's Prime Pantry and Subscribe & Save programs than any other CPG firm."

The study concluded that the shift is forcing brands to make concessions for preferential treatment. But also being affected are third-party sellers, including many retailers, which can no longer sell brands that strike deals to sell more exclusively through Amazon.

Amazon declined to comment on the study.

FINANCIALS:     [NASDAQ:AMZN] [ NYSE:PG] [ ]

Discussion Questions:

Does it make strategic business sense that Amazon is using improved site placement and enhanced control over third-party sales as leverage in vendor negotiations? Will promising to limit listings by third-party sellers be a positive or negative for Amazon's business over the long haul?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How much leverage does Amazon gain in offering brands some control over third-party sales?

Comments:

Trade promotion comes to online channels! For Amazon it makes sense, it just sounds like the traditional trade relationship model shifting online. I think it's another example of why CPG brands should not delude themselves into thinking Amazon offers a necessarily new path to growth and additional customers. If anything, over time this probably only makes it even more essential that brands create their own direct relationships and sales channels.

[Image of: View Braintrust Panelist button]
Gib Bassett, Global Program Director for Consumer Goods, Teradata Corp.

I'm surprised it's taken them this long to deploy what amounts to slotting fees. Like other retailers, Amazon needs to avoid the trap of selling what they buy instead of buying what they sell.

[Image of: View Braintrust Panelist button]
Ron Margulis, Managing Director, RAM Communications

It may make business sense, in terms of profitability, for Amazon to pursue this. However, if by doing so they relinquish their position as the (usual) low-price option with the best variety, someone else will fill that void.

[Image of: View Braintrust Panelist button]
Dr. Stephen Needel, Managing Partner, Advanced Simulations

It should come as no surprise that Amazon is giving preferential treatment to brands/manufacturers who are willing to pay for the privilege. Amazon is engaging in a practice that brick-and-mortar retailers have been doing for years.

The company has been under pressure from investors to raise its profits, rather than solely emphasizing growth. Amazon raised the price of Prime membership, increased the value of the order needed for free shipping, and is now charging what amounts to slotting fees.

This may hurt some small merchants, but has the potential to reap significant gains for Amazon's bottom line.

[Image of: View Braintrust Panelist button]
Max Goldberg, President, Max Goldberg & Associates

Amazon is becoming less of a retailer and more of an e-commerce platform worldwide. A healthy third-party marketplace will continue to be essential for Amazon's product diversity, and lowering Amazon's inventory costs.

Every major retailer leverages their strengths to negotiate better strategic concessions with large suppliers. Just ask any vendor who has sold Walmart. As the "Great White" of e-commerce, Amazon has many leverage points, including which third parties have access to sell. However, it becomes a major challenge to police every SKU that they sell.

At the end of the day, it is the consumer that gets to vote. If they can't find the products they want, they won't purchase and may not return.

[Image of: View Braintrust Panelist button]
Chris Petersen, PhD, President, Integrated Marketing Solutions

This story is all about brand image control, boosting revenues and protecting future profit pools.

Branded companies want to protect their prestige factor and price is a key signaling device.

Amazon wants to pivot its massive scaling mechanism to maximizing revenue and optimizing their website real estate, and simultaneously creating a strategic differentiation (and defense) from Alibaba.

Both want to protect future revenues and profits through an evolving partnership model.

All this activity is on the supply side of the equation, the consumer will have the final say (eventually).

[Image of: View Braintrust Panelist button]
Mohamed Amer, Vice President, Global Integrated Retail Unit, SAP

This should not surprise anyone on this site. Amazon is simply doing what traditional retailers have done forever.

I think what could be a game changer is when many big brands start to use Amazon as their distribution channel. Then what happens?

[Image of: View Braintrust Panelist button]
Zel Bianco, President, founder and CEO, Interactive Edge

The strength of Amazon in the market will make this another winner for them. After all, why go out shopping for an item when you can buy it online cheaper and faster? That alone will entice vendors to decide to work closer with Amazon on price points and availability.

[Image of: View Braintrust Panelist button]
Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

As many have pointed out, Amazon is adopting a digital version of trade practices that have been standard brick-and-mortar practices for 50 years. Amazon is far from the first to bring them to digital.

What is interesting/new is the amount of potential leverage Amazon has. Brick-and-mortar retailers have sourced "gray market" goods to get access to brands they weren't authorized to carry for years, but the scale was never very scary to brands. Amazon's Marketplace (which generates 41 percent of Amazons total sales volume) is a much more credible threat to brand erosion.

Ultimately, the customer will decide. Will shoppers take their business elsewhere as Amazon's search results get more synthetic and manipulated? Will marketplace sellers (the most profitable component of Amazons overall business) take their business to other platforms? Only time will tell.

[Image of: View Braintrust Panelist button]
Jason Goldberg, VP Commerce Strategy, Razorfish

It makes tons of sense that Amazon is using placement and display. And while some have likened it to slotting fees, my concern, is that as more and more stories come out about Amazons negotiations with vendors, it may leave a bad taste in the mouths of customers. While no one is going to feel too badly that Disney and Amazon are feuding, distribution deals that hurt small third-party sellers won't be looked upon so kindly.

[Image of: View Braintrust Panelist button]
Kelly Tackett, Research Director, Planet Retail

No surprise to find that Amazon is cutting trade deals and taking allowances from some vendors. If brands are paying then they must believe they gain a business benefit, or are at least fending off damage.

What's a bit troubling about this is its lack of transparency to shoppers. Amazon is famous for its recommendation engine that is supposedly based on understanding shopper preference based on past behavior. Do trade deals undermine the integrity of that system?

[Image of: View Braintrust Panelist button]
James Tenser, Principal, VSN Strategies

As time goes by and information technology becomes easier and faster for users, the e-commerce power sites will become less than a go-to need for consumers. Amazon knows this and is turning to manufactures and service providers as a means of keeping their future market significance. The lowering cost of web site development and the availability to access fulfillment alternatives will continue to erode Amazon's importance for the e-commerce industry. The IT market's bone yard is very large for such a new industry and has always enjoyed welcoming the industry giants with an amazing suddenness.

'gjarnoldjr'

I guess this was coming. I am little surprised Amazon took so long.

With about 20 million plus US households covered via Prime, Amazon cannot afford to not provide its customers what they want, i.e. good brands with a feeling of buying authentic stuff.

In my view, it makes complete sense for Amazon to work with brands. The question is how will they balance some of the conflicting needs of brands who want to protect their image and pricing vs the needs of the marketplace, who would like to trade and focus on lower pricing for higher inventory turns.

Interesting times ahead!

Mihir Kittur, Co-founder and Chief Innovation Officer, Ugam

I share other's comments that this move by Amazon should surprise no one. It was simply a matter of time. Although it may sound radical and be met with initial concern, soon it will become part of the normal course of getting online.

Limiting third-party sellers is a much bigger benefit. Especially in the over-the-counter medicine space which is much of our company's focus, safety is of utmost concern and some brands were being tarnished by less-than-legitimate third-party "partners."

[Image of: View Braintrust Panelist button]
Dave Wendland, Vice President, Hamacher Resource Group

This is no surprise. As a regular shopper on Amazon, it's been pretty obvious. The statement that Bezos "has long nurtured the open-bazaar environment" doesn't mean he won't be pressured to increase profits. My only concern is if the "open-bazaar environment" will now shift more to eBay and craigslist. But I think overall, this is a good strategic move. Web-based companies are all looking for ways to generate more income as they jockey for position and attempt to prove their stocks are worth the sky-rocketing prices.

[Image of: View Braintrust Panelist button]
Janet Dorenkott, VP & Co-owner, Relational Solutions, Inc.

Why not? A business decision, nothing more nothing less......

David Lubert, Industry Principal, Bridge-x Technologies

Not surprising at all. Investors have been pressuring Amazon to increase its profits. And Amazon is using a strategic business opportunity to do it. As for the long term impact, I would think generally beneficial as it legitimizes Amazon as a retailer for the promoted brands' goods.

[Image of: View Braintrust Panelist button]
Alexander Rink, CEO, 360pi

Search RetailWire
Follow Us...
[Image of:  Twitter Icon] [Image of:  Facebook Icon] [Image of:  LinkedIn Icon] [Image of:  RSS Icon]

RetailWire's
Getting Started video!

View this quick tutorial and learn all the essentials...

RetailWire Newsletters