To sell or not to sell...on Amazon?


Image source: https://media1.s-nbcnews.com/

Last July, David Kahan, CEO of Birkenstock, declared in an open letter to the brand's US retailers that never in his 25-year career had he seen such an “unacceptable” situation. He was in fact referring to Amazon soliciting Birkenstock US retailers for their Birkenstock’s inventory, although the brand does not sell to Amazon.


This episode is far from anecdotal. The company has been putting pressure on brands such as The North Face, Patagonia or Birkenstock to allow them offer their products on their website.


At first, consumer goods companies refused to sell to the e-commerce giant arguing that coupling traditional brick-and-mortar retailers with a website of their own was the most efficient strategy to reach customers. Traditional retail chains also allowed brands to keep a grip on pricing and distribution to an extent that was not possible when selling to Amazon.


However, the recent downfall of the retail industry in the US entailed a shift in the balance of power between brands and Amazon. Department stores like Macy’s or JC Penney, and chains such as Sports Authority Holdings are weakening. Amazon is now the preferred destination for customers which leaves many companies with the following strategic dilemma: should our company sell goods directly to Amazon or choose not to and still have products for sale on the marketplace through third party sellers?


Sporting goods companies were the first to endorse Amazon as a distributor after being skeptical for many years. Before 2017, Nike refused to have any direct collaboration with Amazon considering that the brand didn’t need the help of the e-commerce platform to sell its sneakers and sporting clothes. Despite Amazon not officially distributing Nike’s merchandise, the swoosh brand was still the most purchased apparel brand on the site according to the WSJ, with more than 70,000 third-party products being listed.

Third party sellers are a crucial tool for Amazon as their offer expands the site assortment while outsourcing merchandising. Sellers are enrolled in Amazon Market Place and can choose between Fulfill By Merchant (FBM) or Fulfill By Amazon (FBA). Most sellers choose the latter and therefore pay the company to store, pack and ship their goods. Early in 2017 Amazon disclosed that the number of active sellers using the fulfilment service grew by more than 70 percent during the past year. Furthermore, Chief Executive Jeff Bezos has declared that close to 50 percent of the units purchased on Amazon come from third-party vendors.


Percentage of paid units sold by third-party sellers on Amazon platform as of 3rd quarter 2017, Statista, 2017.


This strategy of fostering third party sales is especially risky for brands like Nike who found themselves exposed to a high reputational risk, since they will have no recourse if a seller provides a low-quality image or an erroneous product description of the brand on Amazon.


To avoid this risk Amazon has created an initiative: The Brand Registry program. This program offers brands the possibility to register as sole owner and control how their products are presented on the website. Nike has therefore agreed in July to add Amazon as a distributor and become part of the Brand registry program in exchange for a crackdown on third party sales.


Although partnering with Amazon allows consumer goods companies to benefit from the platform’s massive scale, numerous brands believe that the e-commerce giant and its way of marketing products are detrimental to brand building and therefore choose not to distribute their products through Amazon. In this way, the beauty industry is largely reluctant to adopt Amazon as most companies are skeptical on the possibilities offered by the platform.


Estée Lauder and L’Oréal, two of the largest actors in the industry, share this common trait: both companies have no business relationship with Amazon. Instead, their products are distributed through specialty retailers such as Ulta and Sephora. This type of distribution network is protected against e-commerce, for now, due to the strong appeal of in-store experiences among millennials. Furthermore, limited prestige brands often regard Amazon as not being high end enough to sell their products. However even in this industry, the balance of power has shifted. In August, luxury beauty purveyor Violet Grey forged a partnership with Amazon to sell directly prestige beauty brands such as Tom Ford, Chanel, Chantecaille on the website. Whether this partnership will have larger consequences in the industry remains to be seen but Amazon makes no secret of its ambition to sell even the most high-end products.


In conclusion, as Professor Scott Galloway, professor of marketing at NYU Stern, puts it “The implicit message from Amazon is: Work with us, or we will (mess) with you." As Amazon has been continuously growing, fewer brands and consumer companies will tomorrow be able to bypass the hulking e-commerce site.

 

WRITTEN BY GABRIEL NAGY FOR BESA

PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT


#Amazon #Ecommerce

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