March 25, 2019 • Volume 34
Amazon’s Ad Experiment: Assault and Batteries
The Wall Street Journal recently discovered a new ‘feature’ that Amazon was testing on its app, where pop ups featuring Amazon private label products were laid on top of listings for competitive brands. In one example, a 24 pack of AAA Energizer batteries selling for $12.78 suffered the indignity of a pop-over suggestion from Amazon for a 36 pack of Amazon Basics AAA batteries for $8.99. The buyer had to click ‘no, thank you’ to make the Amazon Basics pop-over go away. To add insult to injury, Amazon was doing this, in some cases, over sponsored listings – space that brands had paid Amazon for. This wasn’t isolated to Amazon private label items – Amazon popped up suggestions for lower priced competing brands as well. Amazon says that it was doing this as a limited test with the intent of making consumers aware of lower priced offerings.
But I couldn’t imagine a more provocative test. This would be like Kroger charging Pampers for an endcap in a physical store, and then putting a Simple Truth brand bathroom tissue display right in front of the Pampers endcap.
How big a threat is the Amazon brand?
Brands have been justifiably concerned about Amazon’s recent moves into private label, armed with boatloads of consumer data around brand and pricing preferences. Our data has shown that there are instances where Amazon’s private label brands are currently making a dent against competing brands.
The disposable battery category is the cautionary tale that keeps brands awake at night, as Amazon Basics batteries lead all battery brands with 26 percent share in Spring 2018. But in reality, Amazon private label products are duds, in many cases. Bloomberg’s Spencer Soper addresses this here. We have found Amazon does well in private label where value is easily quantified and quality can be assumed to be roughly equivalent; a six foot charging cord versus another six foot charging cord, or a AAA battery for another AAA battery. Coffee, snack food, and khakis, not so much.
Aggressive posture puts Amazon in regulatory crosshairs
The timing of this revelation is unfortunate for Amazon, given presidential candidate, Elizabeth Warren’s recent proposal to limit companies that operate marketplaces from selling their own products on that marketplace. Amazon couldn’t have provided a more clear example to fuel the argument that Senator Warren’s draconian solution isn’t entirely crazy, in the interest of maintaining a properly functioning competitive environment. Moves like this by Amazon fuel fears that it will use every tool at its disposal to win in private label, despite generally tepid consumer interest.
Brands, for the most part, have little choice but to continue to play along despite Amazon’s aggressive posture toward them, given Amazon’s dominant role in e-commerce. They can, and do, cultivate Amazon competitors, but in most categories Amazon competitors trail significantly. They can sell direct to consumers, which many now do, but successful direct-to-consumer efforts by traditional brands are few and far between. Nike is the exception, not the rule.
Regulation of Big Tech is undoubtedly going to be one of the issues that all 2020 presidential candidates will feel they’ve got to weigh in on. With populist sentiment on the rise on both the left and right, Big Tech cannot count on the instinctive anti-regulatory support from Republicans that it could’ve taken for granted in the past. Democrats, who in the past have instinctively supported the consumer technology sector, are feeling less protective of Big Tech after Russian manipulation of social media platforms in 2016.
Big Tech be warned: 2020 has the potential to be a watershed moment for those that would like the US to follow a European technology industry regulatory path. Moves like this one from Amazon will provide fodder for presidential campaigns looking for dry timber to start populist movements at a time when natural allies might be less protective than ever before.
Delivery: How slow is fast enough?
In the five years that we’ve been tracking how quickly retailers deliver packages to consumers for online orders, we’ve seen dramatic improvements in speed. In 2018 alone the average package was delivered .9 days faster than in 2017. Many retailers feel that they have no choice but to offer fast, free shipping to compete with Amazon.
But do they?
To answer this question, we created a nifty scatter plot, pictured below. Allow me to explain:
- Each dot in the chart represents a retailer.
- The placement of each retailer’s dot is based upon their three-year compound annual growth rate [on the Y axis] and their click-to-door speed [the average amount of time, in days, between when consumers place their order and when the package arrives on their doorstep, on the X axis].
- We then bisect the X axis with median click-to-door speed [6 days] and the Y axis with median three- year compound annual sales growth [17 percent].
This leaves four segments: In the upper left, we have retailers that ship quickly and that are growing quickly [26 percent of retailers fall in this segment]. In the lower right we have retailers that ship slowly and that are growing slowly [28 percent]. It is not surprising that the majority of observations fall in the upper left and lower right because consumers would presumably reward retailers that ship quickly and punish those that ship slowly, all other things equal.
But what about the 45 percent of retailers that fall in the other two quadrants? There are many reasons [poor selection, poor pricing, reduced marketing spend, etc.] that those who ship quickly can experience weak sales growth. I’m especially interested in the 23 percent of retailers that manage to grow quickly despite relatively slow delivery.
This is an appealing group to be in, because they can get away with a combination of slower fulfillment center turnaround and/or slower delivery. Slower delivery is particularly appealing because it is so much less expensive. Five-day delivery costs about half as much as two-day delivery through major third party shippers. For many retailers, that can define the difference between profits and losses.
The Tortoise and the Hare?
So, what is it about these upper right hand corner retailers that are growing robustly despite slow shipping? We see a bunch of retailers that cater to very price-conscious shoppers, like Fingerhut, Dollar General, Dollar Tree, Cost Plus Market, and Wish. The other type of retailer that seems to pop up inordinately in the upper right-hand corner are merchants whose selection is difficult, or impossible to commoditize: Reverb [used musical equipment], Poshmark [used clothes], and TJ Maxx exemplify this. Reverb, Poshmark, and TJ Maxx hit both the low price and unique selection mark. The third type of company that we see are those that sell subscription-based offerings, where the retailer has plenty of time to fulfill an order because they can anticipate it. This includes Ipsy [beauty products] and Lola [feminine care products].
If it wasn’t clear before, it ought to be blindingly obvious now. Fulfillment of online orders isn’t an afterthought, it’s a key part of the equation for successful retailers; as important as marketing strategy, cost of goods, or a properly functioning website. Retailers that can get away with slower delivery are simply more resilient than those that need to keep up with Amazon’s world class [$34 billion] fulfillment operation.
Ken Cassar is vice president, principal analyst at Rakuten Intelligence, where he looks at trends in the e-commerce industry armed with Rakuten Intelligence's robust set of online sales data.
Ken brings a rich online retail background to Rakuten Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet.
Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Rakuten Intelligence's profile. He also has the appropriate jacket for every occasion.