First Chapter : Controlling Your Brand in the Age of Amazon

Foreword

In 2012, when Jeff Bezos said, “Your margin is my opportunity,”[1] he and the rest of the Amazon company had already been planning, operating, and fine-tuning the Amazon online marketplace for almost a decade. In 2005, Amazon launched its Prime program, and offered it to third-party sellers in 2006.[2] Amazon Prime fundamentally changed the way consumers buy products, both online and in brick-and-mortar stores. In 2012, Amazon’s share of U.S. eCommerce sales was about 24%. In 2016, it was 33%. By 2018, it had jumped to 49%.[3] These numbers do not lie—Amazon’s popularity took off, and many brands were not prepared.

Part of Amazon’s success is that it runs open marketplaces, welcoming practically anyone to sell almost anything to Amazon customers. Amazon continues to add millions of third-party sellers to its Marketplaces[4] and hundreds of millions of items to its catalog.[5] But many of these sellers are not authorized by the manufacturer of the products they sell, and offer diverted products to unwitting consumers enticed by Amazon’s convenience, low price, and selection.

Brands of all sizes are feeling the impact of Amazon, especially if they are paying attention to their customers’ buying patterns, either because the brand itself sells via Amazon or an unknown and unauthorized third-party seller sells the brand’s products on Amazon—or both. This type of online sales structure on Amazon can disrupt a brand’s established distribution strategy, creating channel conflict and frustration for both the brand and its authorized brick-and-mortar sellers. As a result, brands can no longer ignore the fact that their products will find a way onto the Amazon Marketplaces, and other online marketplaces, where someone can sell the products in ways that do not align with the brands’ quality controls, customer service requirements, and other measures.

This book is for brand leaders who experience channel conflict and brand degradation and want to understand how to fix the problem, but do not know where to start. We pull back the curtains to reveal the combination of forces at play, as well as how the business and legal thinking of today’s brand leaders must evolve for those brands to remain in control of their distribution and brand image.

Brand leaders need to adjust to the new environment that the online marketplaces have created. The following chapters are a playbook for brand leaders who are ready to protect their brands, motivated to sell their products, and incentivized to align their existing distribution strategy with the new eCommerce age.

James Thomson and Whitney Gibson
February 2020

Introduction

A brand for a company is like a reputation for a person. You earn reputation by trying to do hard things well. — Jeff Bezos

Imagine that you are an eCommerce executive for a large consumer packaged goods manufacturer. One sunny spring morning at work, the phone rings, and it is one of your largest retailers calling. It is clear from his tone that he is not happy. He says he cannot compete with the prices that your products are being advertised at on Amazon. His brick-and-mortar customers have stopped buying your products and now, he is stuck with inventory that he just cannot sell.

This is confusing to you; a couple of weeks ago, your director of sales assured you that none of your retailers were allowed to sell your products on online channels like Amazon. Yet, when you search for your brand on Amazon, it appears. Who are these sellers selling your products using ugly pictures with incomplete, incorrect product information? You have never heard of these sellers, and when you ask your director of sales, she has not heard of them either.

Or maybe the call you received was from the CEO of your company. She told you that, while she was at a business summit with other brand leaders, she was congratulated by a colleague for opening up product sales in Europe. Now, your CEO is asking you to confirm that the international expansion plans you both discussed last year were still shelved, and you were not quietly starting to work with European distributors. You are just as surprised as she is to discover that your products are for sale in Europe on one of the Amazon Marketplaces. You assure your CEO that you will look into it.

The retail environment until 2000

Two decades ago, as a representative of your brand, you could decide when it was time to add new sales channels for your brand. You would organize your product catalogs and start calling on new retailers to carry your product. If you wanted to sell to Walmart or Bed, Bath, and Beyond, for example, you worked with a manufacturer representative or a consultant who could help get you in front of a buyer. You would make your pitch to the retailer’s buyer, who would then decide whether to test out your product in that retail channel.

If you were fortunate enough to get the offer to sell into that retail channel, the retailer would place a purchase order with you, which you would fill out. You would have negotiated some terms with the retailer around merchandising, promotions, discounting, and possibly retail pricing. You also had a good idea of what was going to happen to your product once it was shipped to the retailer because:

• you knew the name of the retailer;
  it would be put on the shelf of the retailer;
• if you shipped 1,000 units to the retailer, then 1,000 units were made available for sale by the retailer on its shelves;
• if your products were sold in individual units, then 1,000 units were offered to consumers;
• if the arrangement was for the retailer to sell the product in U.S. stores, then the product was sold in U.S. stores; and
• if your product was shipped in consumer packaging that was, for example, blue with a specific Universal Product Code (UPC) your brand had acquired from GS1 (the organization that provides the standards for UPCs), then the product the consumer saw would be in the same blue consumer packaging with the same UPC.

Over time, as your products became more popular in those retail channels, you would continue to build a relationship with the retailer, discussing how to add new selections and otherwise modify inventory.

If you sold your products through a distributor, the distributor’s job was to push your brand into new channels, and to negotiate on your behalf. The distributor would tell you when it had broken into a new retail channel, making both you and the distributor happy. There were a finite number of potential retailers for the distributor to pursue; this allowed the distributor to customize and focus its approach with each new retail channel.

The emergence of online marketplaces, like the Amazon Marketplace, suddenly brought both challenges and opportunities for brands, retailers, and distributors.

The retail environment from 2000

In 2000, Amazon launched the Amazon Marketplace, welcoming third-party sellers to sell products alongside Amazon in its online channel. It would take at least five years before Amazon gained enough traction to have a diverse offering of product categories. While eBay had been operational as an auction site longer than Amazon’s Marketplace, Amazon improved the customer experience through new technology and operational investments, including:

• buying A9.com, a product search technology company, in 2003;
• launching Amazon Prime, a two-day free delivery program, in 2005; and
• introducing Fulfillment By Amazon (FBA) to Amazon third-party sellers, making their products eligible for Amazon Prime as well, in 2006.

As Amazon added new features to the consumer shopping experience, the Marketplace grew in size—creating more customers, more sellers, and a much larger catalog of available products.

One of the key elements of the Marketplace was that Amazon allowed its online sellers to operate their stores under “Doing Business As” (DBA) names, making it easier for retailers to disguise their true identities. Importantly, Amazon did not—and does not—allow brands to decide who can sell their products.

As Amazon’s Marketplace rose in popularity, something notable happened to players in the traditional retail space: consumers shifted purchasing decisions to online channels, opening up new types of choices—and eventually new challenges—for retailers, distributors, and brands.

Retailers could build sales on the Amazon channel, whether or not they had permission from brands, as the retailers could easily sell under DBA names. If retailers used the FBA program, even a brand regularly conducting test buys would struggle to determine the true identity of the Amazon seller. For a retailer looking to supplement its sales and profits with sales through this nascent online channel, it would be easy to recruit a plethora of sellers to join the Amazon Marketplace.

Retailers who were early adopters of the Amazon Marketplace channel often faced long periods of little to no competition in this online channel. Most retailers offset the sales commission fees that they paid Amazon with a reduction or elimination of the normal store overhead and staffing costs that brick-and-mortar channel sales created. However, as more sellers joined the Marketplace, competition increased and retailers found competitors driving down prices below what the retailers usually advertised in brick-and-mortar channels.

Amazon was systematic in its efforts to recruit not only more online sellers, but specifically retailers that had products and brands that were previously unavailable on Amazon. It also recruited more sellers of popular items already on the Marketplace, and this addition of specific listings led to competition as each retailer sought to beat the others for the sale. As Amazon increased product offerings on the Marketplace, more and more consumers started purchasing their favorite brands online. Amazon customers found products they wanted at prices they liked, and the products were delivered quickly to them, which created a pleasant shopping experience (especially if the products were shipped through FBA, making them Prime eligible).

Distributors quickly recognized two main advantages of the Amazon Marketplace channel:

1. they could become online retailers themselves, and
2. they could start supplying a new breed of online-only retailer that was capitalizing on the growth of this channel.

As online retailers themselves, the distributors had a cost advantage over any retailer to whom they might be wholesaling products. This cost advantage made the Amazon channel potentially very profitable if the distributor captured retail margins selling directly to consumers. Because the distributor could set up a DBA operation, it too could go undetected by a brand that did not want to be sold on Amazon. Often, distributors did not have to inform brands about how much volume they were selling to each retailer.

At the same time, online-only retailers started popping up looking for inventory to sell. They found distributors with products and purchased these products at wholesale prices. With little to none of the standard brick-and-mortar overhead, these online-only retailers made decent margins. If they used the FBA program for individual-order fulfillment, the online retailer might never have to handle any inventory and instead could ask the distributor to direct-ship products to Amazon’s fulfillment centers. Distributors could capitalize on healthy volume discount programs that brands offered, so there was an incentive for distributors to buy more product than normal from the brand. They could divert excess to online retailers or their own third-party seller accounts on Amazon.

Brands also needed to adjust to the advent of the Amazon Marketplace. Successful brands recognized the unique opportunities the channel offered them: access to consumer data, opportunities to test out new products, and the possibilities of attractive margins (either wholesale margins on product sales to Amazon, or retail margins on product sales done through the brands’ own third-party seller accounts). However, in the intervening period, most brands have not made the adjustments necessitated by the Amazon Marketplace, which is where we find ourselves today.

Most brands have not evolved. They have not adjusted their distribution strategies nor their work with retailers. They do not know how to survive in this new world of retail, one where 5 percent of product sales may be through the Amazon channel, but 80 percent of the brand’s distribution challenges and questions surface from Amazon. To be clear: the Amazon channel is not so much the cause of the brand’s distribution problem as it is where the brand’s ineffective distribution efforts become apparent. We like to say that, Amazon is where a brand’s distribution sins surface.

In today’s world of retail, most brands:

• do not know the identity of their online resellers;
• do not know where these online resellers sourced inventory of the brand;
• do not know what proportion of inventory going through distributors is redirected to online channels;
• do not adequately police activities involving resellers that offer the brand’s products in new multipack quantities defined by the reseller (rather than by the brand);
• cannot figure out how its brand is sold in countries where the brand does not yet have a distribution program of its own; and
• are not managing the branding, packaging and UPC labeling of online products adequately to ensure consistency between online and brick-and-mortar inventory.

What does it take for a brand to survive in this new environment? What controls need to be put in place? What existing sales and operational processes need to change? In the chapters that follow, we answer these questions.

Chapter 1 outlines the root of the problems brands face because of the rise of online marketplaces. In Chapter 2, we examine what strategy Amazon uses to pursue growth, and how this strategy complicates a company’s brand control efforts. In Chapter 3, we look at product diversion forces outside Amazon that complicate brand control efforts. Starting with Chapter 4, we transition from addressing problems to discussing solutions. We begin in Chapter 4 by introducing the Marketplace Flywheel™ model that we have developed to show how a comprehensive brand governance strategy requires multiple, interconnected activities. Chapters 5 and 6 address specific actions brands can take to develop channel governance, while Chapter 7 examines catalog governance solutions and counterfeiting issues. In Chapter 8, we look at product diversion and brand control in the European market. Finally, in Chapter 9, we synthesize all of these concepts and urge brands to “sell upward.”

Our book focuses on brands selling on marketplaces in the U.S. and the European Economic Area. As legal protections for brands differ around the world, we have chosen to focus on these specific markets where legal protections for brands are well established. For readers interested in applying brand control worldwide, we encourage them to seek legal guidance for each and every country where they plan to incorporate some form of distribution control and legal enforcement into their brand control efforts.

Throughout the book, we include some case studies of brands that have tackled these issues using a range of techniques, with varying levels of success and setback.

Let us begin tackling these challenges together.

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