You’ve only got to listen to the news, or read the business headlines, to hear that UK retail isn’t in the best of places right now. In the same breath, you’ll also hear about the growth of online, the challenges posed by business rates, minimum wages, decreasing high street footfall and you’ll almost certainly hear the word Amazon.
Love them or hate them (consumers typically love them), they are now the dominant force in UK retail, a threat to many businesses and an opportunity to them also.
Retailers are often perplexed when looking at the role Amazon should play in their ecommerce business – should they resist their dominance and take a competitive stance, should they embrace it and sell on Amazon, and if they do; how should they approach it strategically?
The size of the Amazon opportunity
Official sales data from Amazon UK is hard to come by, but in 2018 Coresight Research reported that Amazon’s UK revenues came in at around £10.9 billion, which would make them the UK’s 5th largest retail business, only beaten by the four major grocers – Tesco, Sainsbury’s, ASDA and Morrisons.
Looking at their online market share Amazon is the clear market leader, with 10x the traffic of Argos at position number two. Amazon is the second most visited website in the UK capturing 3.4% of all UK web traffic in 2018 – only beaten by Google.
The next closest retailer to Amazon is Argos who attract just 10% of the traffic that Amazon gets to their website.
Amazon has become synonymous with ecommerce with 56% of US, UK, German and French shoppers start their online shopping journey on Amazon – not a search engine.
In our work and research for clients across various product categories (kidswear, homes and interiors, novelty gifting, beauty…) Amazon has always come out as the clear market leader – often with twice the market share of the second place player.
With all of this power and dominance, Amazon is obviously a concern to many brands and retailers.
Due to the uniqueness of Amazon’s model (typically many sellers of a single product, with an incentive to reduce their prices and win the buy box), prices often come under heavy downward pressure.
For the consumer, this is great, however for a brand owner, or retailer, this is a big challenge when you’re looking to protect both your margin and brand position in the market.
Many brands and retailers also fear a loss of control over their product in the market. Will selling through Amazon ultimately lead to them losing control of their distribution and the perception of their brand?
With selling on Amazon, you also don’t own the customer. The customer buys from Amazon and regardless of the model you sell through Amazon on, the brand/retailer never owns, or has access to, customer marketing data.
Perhaps one of the biggest concerns, is that ultimately, you’re providing Amazon with all of your sales data and in some instances even your buy price data. This makes even the most open-minded of brands think twice about dealing with Amazon – and rightly so.
Why should you include Amazon in your strategy?
This may seem a bit of a blunt statement, but Amazon should be a part of every brand and retailer’s ecommerce strategy.
That doesn’t mean you have to sell on Amazon, but strategically every business should have a clear and shared vision on what role Amazon plays in the future of their business.
It is OK for the strategy for Amazon to be “Do not sell on Amazon”, but we’d argue that no brand can afford to simply discount it and not debate and consider its role in their business.
Reasons you should include Amazon in your strategy, as a sales channel include:
- Sales generation – As the largest ecommerce retailer in the UK, and the fifth largest overall retail business, Amazon presents a great sales growth opportunity to any brand. Even accounting for possible cannibalisation of sales through other channels, we have only ever seen Amazon drive incremental sales if approached strategically and correctly.
- Increasing profit margins – There are various ways of selling on Amazon each of which works differently from an operational perspective and has differing impacts on your unit economics. For brand and product owners, selling on Amazon almost always offers a deeper net margin opportunity when compared to typical sales channels of wholesale, distribution or retail. Couple this with an increased turnover and this is a nice double-hit.
- Brand protection – Brands are quite rightly concerned with their brand image and reputation when their products appear on Amazon. By taking control of Amazon as a sales channel, and making it a core part of your strategy this can be flipped so that Amazon becomes somewhere you are confident that your brand is protected and well represented.
- Price point management – With no clear and well-implemented strategy, Amazon quickly becomes a race to the bottom, diminishing your price point and de-valuing your brand. Not just on Amazon, but on every sales channel you operate in. With Amazon being so dominant and widely used, a price drop on Amazon so often results in customers in all your other sales channels frustrated that they can’t compete and asking for price support. This isn’t good business for anyone.
This isn’t about price fixing or collusion – it’s about ensuring that as a brand you run a healthy business that is respectful to your margin requirements, respectful to your customers across your other channels and fair for consumers.
Approaches to selling on Amazon
There are three ways in which you as a brand can sell through Amazon
- Amazon Vendor – For brands who are used to a traditional B2B model (selling large quantities to wholesalers/distributors for example) Amazon Vendor often makes the most sense. You sell to Amazon, and they sell to their customers.
When you register as a vendor, Amazon becomes a full-time distributor of your products. They buy and store the inventory, and take care of everything from shipping and pricing to customer service and returns.Although this is often attractive from an operational perspective, it is limiting in that you are still selling at trade prices and don’t have any control over the retail price that Amazon sells your products at.Vendor works well where you have limited operational capability and ecommerce knowledge in the business, but want to take advantage of the sales opportunity that Amazon presents.
- Amazon Seller (FBM/FBA) – On the Amazon Seller model, you are selling to Amazon’s customers via Amazon’s website. Amazon charges you a commission for the privilege and you are responsible for getting the goods to the customer.
You retain control of the listing, pricing and imagery – but you may share the product listing on Amazon with other sellers of the same items (if other sellers exist) and this is where control of your distribution becomes critical. There are two different flavours of Amazon seller. Fulfilled by Merchant (FBM) where you hold all the stock and handle all the shipping or returns and Fulfilled by Amazon (FBA) where Amazon will hold your stock and ship it for you for a small fee. FBA has additional advantages in that your products become eligible for Amazon Prime and this typically adds up to 15% to your sales volume.Seller works well where you have the internal capability to create and manage your Amazon listings (we can help here) and handle some elements of the fulfilment. FBA is typically preferred by most of our clients as it takes the day to day fulfilment capability away from the business and grows sales quicker, because customers prefer it.Seller gives you more control over your sales growth, profit margins and brand protection if implemented correctly.
- Through a third party – an option that is often overlooked is working with a third party to create and run your Amazon channel for you. This could be a partner like Venture Forge or one of your existing wholesale or distribution customers who have a strong capability in this area.
What role could Amazon play in your strategy?
Amazon needs to be in your strategy. They’re too big to simply ignore and they’re not going away any time soon.
All too often we hear “I don’t really know” when we ask what role Amazon plays, but the more worrying scenarios we see are the businesses that are discounting Amazon based on fear or brand/price erosion or poorly thought through strategies.
A manufacturer of car accessories wouldn’t rule Halfords out of their strategy without careful and educated consideration, just as a producer of fruit and veg wouldn’t rule out Sainsbury’s. With Amazon’s dominance and clear market lead across most UK retail categories, no brand can afford to discount them entirely.
Whether your strategy is to avoid or embrace them, is a decision you have to make. And if you decide to embrace them, quite how you do this needs some serious thought.
Venture Forge creates Amazon strategies for growth and runs the Amazon channel on behalf of our clients. Can we help you understand how and where Amazon fits into your business? Why not get in touch.