Is now the right time for brands to embrace Amazon?
As Amazon’s growth continues at pace, with progress seemingly on track to becoming the world’s first trillion-dollar company, the most pressing question for brand owners is how to react. Without a coherent and considered strategy for partnering with Amazon (or not as the case may be), pressure on margin and market share will become increasingly difficult for brands to bear.
Amazon’s market share gains across many categories are unlikely to hit a ceiling any time soon, and if Prime membership reaches US levels in European markets, market share growth may accelerate (Amazon accounted for 43% of all US ecommerce sales in 2016). With Amazon Fresh, the Whole Foods acquisition and the development of Prime Wardrobe, for example, the ambition to infiltrate (and dominate) new categories is also apparent.
Why then, if Amazon is becoming a dominant player in many markets, is the answer not as simple as maximising sales through an increasingly important retail partner? There are three key reasons:
- Brand image and control
- Margin pressure
- Threat of Amazon share gain
First, let’s consider the potential impact on a brand from listing on Amazon. Amazon’s wide-ranging marketplace offer highlights two considerations – 1) the need for a brand to be presented in a suitable and on-message environment, and 2) the threat to the brand integrity presented by resellers on the marketplace (both from counterfeit and legitimately resold goods).
The first issue of image requires a decision by the brand owner – does the potential sales upside and reach justify the possible devaluation of the brand that listing on a relatively functional site might bring?
Clearly, the significance of this depends on a brand’s market position – for mass market brands, there is less risk than for more niche, premium brands. But for luxury brands, it is a crucial question to which the answer for many remains ‘no’ (Amazon’s share of this part of the market is relatively low).
The next, thornier issue around brand image centres on the easy accessibility of the Amazon marketplace to a large group of third party resellers.
This creates a fiercely competitive environment centred around ‘winning the buy box’.* More than 80% of an individual product’s sales go through the default seller (whoever has won the buy box), making it an important battle for brand owners to win. There are various influencing factors on the algorithm that determine the buy box winner (including price, availability, fulfilment method, customer feedback and ratings) but according to research, price is the most important. As a result, many resellers (and occasionally Amazon themselves) adopt algorithmic pricing practices to ensure that they offer the most competitive price, and therefore win the buy box as often as possible. For brand owners, this presents a difficulty – to win the buy box, it is sometimes necessary to operate a more flexible approach to pricing, which translates to margin compression.
Finally, some brand owners (particularly direct-to-consumer) would argue that Amazon itself is a competing retail channel, or even a competing brand owner (as it increasingly develops own label offers).
As a result, they are hesitant to encourage their customers to visit Amazon. This is a valid concern, and one which is likely to become stronger as Amazon’s market share and influence increases.
These challenges have been recognised by brand owners, who have reacted in ways which can be grouped broadly into three types:
- No engagement – no listing on Amazon
- Partial engagement – building a presence on Amazon, but with limitations
- Full engagement – seeking to maximise sales on Amazon
Type 1: No engagement
For some brands, the challenges above outweigh the potential benefits of a listing. They are typically at the more luxury end of their various markets, and often cite concerns over brand presentation on the Amazon site and a need to limit distribution in the market.
Whilst this is an understandable approach, it needs to be a strategic decision that is frequently reviewed as Amazon’s proposition and reach develops. The drawback of this approach is that the brand owner is not able to highlight, and have removed, any third-party sellers who may damage the integrity of its brand.
Type 2: Partial engagement
There is a growing cohort of brand owners that cannot continue to overlook Amazon as a sales channel. These brands are developing approaches that seek to take advantage of the opportunity, whilst mitigating the perceived drawbacks, with the added benefit of bringing under control a hitherto unregulated channel.
The announcement in June that Nike will begin selling products directly through Amazon is a prime example of a brand taking the first, cautious steps towards partnership. Nike’s wariness may be due to the expected pressure on the brand and its margins by Amazon’s functional, price and convenience-led proposition (as outlined above).
The brand is seeking to mitigate this risk by ranging only a curated selection of products (limiting the scope for price comparison) and by working proactively to build an environment that fits the brand. This development also enables Nike to take ownership of its brand on Amazon and clean up the resellers on the platform – ensuring that any Nike product on Amazon is genuine, and controlled by Nike. This also enables Nike to minimise the fight for the ‘buy box’, thereby giving Nike the best chance of maintaining margins.
As brands like Nike strike these agreements with Amazon, there will be material repercussions for other retail partners that will pose some pressing questions (the share price of Foot Locker Inc. declined by as much as 11% on the back of the Nike/Amazon news).
For brands that are nervous about engaging with Amazon, a Nike-style approach represents a good compromise and will enable further manoeuvring as the Amazon proposition, and its impact, develops.
For smaller brand owners, a partial listing on Amazon can also serve to increase reach and awareness. Amazon’s extensive traffic can be leveraged by brands if a small, subset of products are listed as a ‘teaser’, which in turn drives traffic to the full range on an owned website.
Type 3: Full engagement
For the final group of brands, for whom the Amazon sales opportunity is persuasive enough to outweigh the risks articulated above, there are three key levers available to maximise sales and engagement, with the primary activities highlighted in the checklist below:
1 Internal resource
Amazon is a demanding partner – it operates ways of working that are distinct from other retail partners (specific media opportunities, content demands, commercial requirements) – and as such, if a brand owner is to optimise performance, the team dealing with it should be of sufficient scale to manage those demands.
For any brand looking to punch at, or above, its weight on Amazon, dedicated account management resource is a must. Key responsibilities include appropriate content that is suited to the nuances of Amazon, aligning trade and media spend in an optimised way, and ensuring a smooth supply chain. In addition to these account manager roles, allocated resource in supporting functions, such as data analysis, logistics and manufacturing to support specific Amazon requests, are beginning to emerge.
2 Optimised content
Ensuring that products are listed with engaging content is a core focus of ‘e-business’ account teams the world over, but in Amazon’s ultra-competitive environment, differentiation is all the more important. Developing ‘A+ content’ (multimedia, high quality images etc.) can have real impact on conversion rates and investing in this type of content is recommended.
Additionally, ensuring that both copy and content are well optimised to the specificities of Amazon’s search engine (as opposed to Google) is vital. Amazon’s engine gives credit for sales and conversion primarily (as opposed to click through rate on Google), creating something of a virtuous circle when sellers get it right – if search visibility is strong, conversion will improve and further increase prominence in search visibility.
Other, more subtle differences from the Google algorithm also impact on results. For example, whilst the Google algorithm looks at ‘keyphrases’, Amazon is more focused on individual keywords (and their combinations) and as such brands do not need to submit multiple phrases with repeated keywords.
Ensuring that content owners are well-versed in the nuances of the Amazon algorithm is key to optimising performance. In addition, these nuances will be compounded as mobile and voice search gain traction.
Unsurprisingly for an increasingly influential retail partner, Amazon looks to monetise its growing market share beyond simple retail sales – it allows (and encourages) brand owners to invest in order to drive an improved offering on the site.
Indeed, Amazon is encouraging this investment by having a tiering system in place, where benefits are delivered depending on a supplier’s level of spend. For brand groups, it is particularly important to negotiate at group level rather than brand level, to gain full recognition for investment across all brands.
There are three areas of investment available – the Vine programme (consumer reviews are displayed alongside product listings), Amazon Media Group (banner and display ads, and paid search support), and Amazon Retail Analytics (vendors can analyse sales, stock and operations at a basic level, plus competitor performance and further customer insights at the premium level).
For brands adopting this approach, first mover advantage is a real possibility. Many brands have not aligned themselves to Amazon’s requirements and are falling behind the most advanced players.
Despite Amazon’s recent and likely growth, all three of the engagement approaches outlined above are legitimate strategic choices – the question for brand owners, is which of the approaches is most suitable? To answer this, brands need to consider the following:
- What share of your addressable market is Amazon forecast to take?
- What is the affinity between your shoppers and Amazon?
- How well suited is your organisation (people, processes and systems) to Amazon’s way of working?
- How much investment might you need to make in ‘getting fit for Amazon’, and for what potential return?
For further reading on this topic, read Accenture’s report Tailoring your multi-brand apparel strategy.
*‘Winning the buy box’ is a phrase which denotes gaining the status of default seller on a product page, so that when a customer clicks on the buy button, the default seller is the one which registers the sale. This only applies to products where multiple sellers are competing on the same product.