This article was written by Podean Global CEO Travis Johnson and originally published on The Drum on August 2, 2021. Full article can be found here.
As Amazon focuses on profits over growth, brands need to shift their focus from growth to increased market share, writes Travis Johnson, global president of marketplace consultancy Podean. Based on Amazon’s latest earnings, he examines the eight challenges brands must navigate to succeed.
Amazon just released its second quarter results and they tell an interesting story. Most companies would be thrilled with 24% sales growth but the market expected more, and as a result the stock price dropped around 7% in response to the news. Online store sales grew only 13%, a sharp decline from approximately 40% growth seen in the previous five quarters.
For brands, working within Amazon’s ecosystem is becoming more challenging than ever, but the company still dominates ecommerce in the US and most parts of the world, so participation is non-negotiable.
There used to be a straightforward formula for driving growth on Amazon: list your products and be exposed to a large and growing audience, ship stock to Fulfillment by Amazon (FBA) or sell to Amazon as a vendor, optimize your product pages and run some media to support.
Now, each of those core pillars are facing challenges that brands must navigate to succeed. Here are some of the key hurdles.
It’s inconsistent and for many categories shows little growth or declines year-on-year. This is likely due to an uptick in brick-and-mortar shopping as markets reopen, combined with intense competition from direct-to-consumer websites and rivals Walmart and Target. In a bold move, Amazon is now incentivizing brands to drive more traffic to its site.
Amazon is taking longer to set up accounts and approve products for sale. In some countries, pages can literally take weeks to be updated with correct titles and descriptions.
Brands have noted that this year’s vendor negotiations have been particularly brutal with Amazon asking for large fee increases and not accepting necessary price increases (even if the retail price increases in tandem and Amazon’s margin remains constant). This has led to some brands having a stand-off and refusing to sell their full range of products to Amazon as they cannot absorb the additional costs and margin dilution.
Amazon seller accounts are taking weeks to receive approval as Amazon clamps down on unscrupulous sellers. They’re also inundated with applications from new companies and companies that need to shift to a “hybrid” selling model because of aforementioned vendor pressures. Interestingly, the quarterly financial results indicate that Amazon seller services increased by 34%, eclipsing the growth of the vendor side of the business. The spike suggests that the trend toward marketplace selling will continue.
Advertising revenue grew 83% in Q2, driven by an influx of brands selling and advertising paired with higher advertising costs. Data from PacVue, a leading advertising optimization platform, revealed that the cost-per-clicks for sponsored product ads rose 36% in cost, and sponsored brand ads rose 18% in Q2. In addition to using a raft of technologies to power media experts, brands need to consider off-Amazon tactics to drive traffic and brand awareness. Amazon just last week launched a program to rebate advertisers some of their selling fee if they drive external traffic to Amazon via Google or Facebook ads, for example.
Marketplace Pulse research estimates the number of individual sellers will increase 45% year-on-year. Brands need to have the strongest content, competitively priced products, great reviews and efficient media to win. It’s labor-intensive and requires many skill sets to succeed.
FBA rates went up an average of about 20% this month, further impacting margins. Brands should consider physical-virtual bundles and investigate alternative fulfillment options.
Amazon simply doesn’t have enough capacity to store and deliver all the items they need to. In late April, Amazon instituted a new policy whereby the volume of items that can be shifted into their warehouses is capped at the brand level. The algorithm is supposed to consider sales momentum and increase the capacity allowed, but it’s just not working for many brands, leading to out-of-stock events and lower-than-expected revenues. If you’re a new brand to Amazon, it’s even harder. Even large brands that see massive sales volumes through other channels are subject to inventory caps that restrict product volumes and impede growth. A third-party logistics company or seller-fulfilled delivery model is a prudent backup plan while Amazon continues to struggle with capacity.
If all of this sounds pretty hard, you’re right. And it’s only getting harder.
But with Amazon entrenched in our lives — not just the website, but also physical stores and a thriving media ecosystem — consumers rely on the ecommerce giant for a large share of their purchases.
As a brand seller, operational excellence across all facets is critical — as is an understanding that when working with Amazon, things often change without notice, and such changes are rarely to the advantage of the seller.
For the year ahead, and as the dust settles after Covid, brands should focus on maintaining and growing share against key competitors in the US rather than simply achieving growth. But if you’re looking for absolute growth, then it’s worth noting Amazon is growing faster outside the US. By creating a carefully tailored strategy and working with trustworthy partners in key regions, a brand can grow profitability in the US and swiftly introduce its products to international markets to drive growth.
This article was written by Podean Global CEO Travis Johnson and originally published on The Drum on August 2, 2021. Full article can be found here.