Retail Intimacy, Part 8: Adapting with Amazon

Amazon.com has a lot to learn about the grocery business; CPGs are probably the best teachersThe landing page for Amazon.com’s new Prime Pantry home delivery service has a rotating carousel of five ads. The first two depict products from multiple manufacturers. The other three present exclusive groups of brands from Procter & Gamble, Coca-Cola and Unilever.Launched in April, Prime Pantry is just one of the services that e-tailing giant Amazon is rolling out to accomplish in the packaged goods world what it has already done in books and other general merchandise categories: “achieve global domination,” to use a phrase offered only half-jokingly by Brian Cohen, executive vice president and general manager of Catapult eCommerce, Westport, Conn.A steadily growing presence on the U.S. retail scene for nearly two decades now, Amazon.com blatantly crashed the party in 2013 when its domestic sales – roughly $44 billion, according to Boston-based Kantar Retail – made it a top-10 retailer for the first time. An estimated 20% of all e-commerce transactions are taking place through Amazon.com.Granted, sales of food and beverages are just a sliver of that total. But the e-tailer already is a major player in at least a few non-food CPG categories. What’s more, in addition to steadily growing its own sales, Amazon has become the go-to place for shoppers to begin their information gathering: about one-third of all retail product searches start on Amazon.com, according to Forrester Research, New York. And 90% of those searchers are ultimately buying somewhere else, as even Amazon itself acknowledges.“The impact that Amazon has on the entire retail landscape is huge,” says Douglas Straton, the director of Englewood Cliffs, N.J.-based Unilever North America’s E-Commerce Center of Excellence. “At the brand level, it goes beyond the sales numbers. You have to begin understanding the true ROI that investments with Amazon – or any other online retailer – have on offline behavior.”“Amazon is one of the most-watched retailers in the world,” adds Cohen. “Its practices have widespread influence both online and offline.”Facing FactsSome industry practitioners also note, however, that Amazon can be an extremely difficult and frustrating customer because it:relentlessly works to deliver low prices, which can mean dropping prices on a SKU multiple times in a day (then later sending the manufacturer a chargeback). And it isn’t above playing hardball with suppliers that won’t play along. “It can cause a great deal of channel conflict,” says Wes Shepherd, chief executive officer at online price tracker Channel IQ, Chicago.isn’t inclined to police the actions of its Amazon Seller third-party vendors, the estimated 2 million “retailers” who account for about 40% of total site inventory – which all too often includes expired product, overseas diversions and flat-out fakes. “Amazon’s goal is profitability, and the third-party sellers help that,” Shepherd notes.doesn’t care which brands get bought and leaves most product marketers to fend for themselves on the site. “Everything they do is designed to ease shopping, and that entails the commoditization of products,” says Shepherd.While Amazon maintains some close vendor relationships, “they focus on working with well-known players in well-developed categories. It depends on how large you are and how much funding you have,” explains Angela Edwards, vice president of marketing at Catapult eCommerce. “But to Amazon, ultimately, every widget is just a widget.” Thus, top-selling categories may have more than one vendor manager – but many lesser categories don’t have any.Recently, Amazon has been looking harder at turning a profit at the behest of Wall Street, which, enamored of the company’s growing share and limitless potential, has long given the e-tailer a pass income-wise. That means it’s paying more attention to the SKUs that are being offered on the site.“This is a good thing in the long term because, obviously, Amazon needs to make a profit,” says Julie Fernandez, manager of sales support at Catapult eCommerce. “But in the short term, it makes things very difficult for our clients. Amazon wants higher-margin products, and they’re weeding out lower-margin SKUs.”On the positive side, Amazon does seem to be making strides as it continues building a plan for the CPG market. The company held its first-ever summits for health & beauty and grocery vendors in 2013; attendance there proved to be fruitful for ConAgra Foods because “it really allowed us to start making broader connections” within the e-tailer, says John Stichweh, director of digital and social shopper marketing at the Omaha, Neb.-based manufacturer.“If you’re expecting the typical [buyer-seller] discussions around data, you’re going to have a pretty tough time,” says Stichweh. “If you expand the conversation, we’ve found Amazon to be very collaborative. But they still act like a Silicon Valley startup, so you have to come in with a very different approach.”“Amazon is incredibly progressive, incredibly aggressive, and incredibly innovative,” says Straton. “The roadmap may not always be clear to others because they’re learning their way through it and the model is clearly different from traditional retail.”Learning the Grocery RopesBut the roadmap is forming, and seems to be offering more opportunities for brand collaboration. Among the key components:Prime Pantry: Extending the e-tailer’s entertainment-focused Prime platform (which costs $99 annually), Pantry lets subscribers select from about 2,000 SKUs of “household essentials” until they fill up a box of four cubic feet (or 45 pounds) for home delivery at a flat rate of $5.99.Amazon Fresh: For $299 annually (which includes all Prime benefits), subscribers get free same-day or next-day home delivery with $35-minimum orders of packaged and fresh groceries. Despite a flurry of expansion rumors, the service is still only available in the Seattle, San Francisco and Los Angeles markets.Subscribe & Save: Users save 15% off the total receipt if they order at least five non-food packaged goods for free monthly replenishment by mail.Niche clubs: Amazon Prime subgroups like Amazon Mom and Amazon Student add exclusive benefits for eligible shoppers.“I think there’s great opportunity for collaboration with these new formats,” says Straton, because they’re taking Amazon and other e-tailers into uncharted waters. As an example, Unilever has been lending marketing support to Amazon Fresh’s expansion.Simply put, Amazon needs to start acting more like a grocer and find ways to increase trip frequency and basket size among a shopper base comprised of what Straton calls “spear fishers.” UK-based Research Farm quantifies that: The typical shopper places roughly six orders per year and buys about one item per order. In comparison, early Amazon Fresh adopters are buying 20 units per week.Finding Mutual BenefitA one-minute animated video running on Amazon.com in June plugged the e-tailer’s replenishment service thusly: “Just sign up for Amazon’s Subscribe & Save program for automatic delivery of your Gillette razor blades and you’ll never run out of blades again.” At the same time, display ads running across the site positioned various P&G products as “Campus Essentials,” while other ads touted the launch of Gillette Fusion ProGlide razors with Flexball technology.P&G treats Amazon like one of its key accounts, providing co-op advertising, paid search and exclusive packaging, among other tactics. Last fall, CoverGirl’s promotional tie-in to “The Hunger Games: Catching Fire” had five exclusive overlays: Walmart, Target, Walgreens, CVS/pharmacy and Amazon.Of course, key account activity normally doesn’t also involve dedicated space in distribution centers: Media reports last fall outlined a pilot project through which P&G lets Amazon ship orders directly from the manufacturer’s warehouses.P&G isn’t alone, of course. A growing number of top CPGs are busy finding ways to strengthen relations with Amazon. And the e-tailer knows that it needs help in such areas as “delivering the right experience” in key product categories like men’s grooming, or in building a site-wide coupon program for consumables, Zach Johnson, Amazon’s director of media partnerships for CPG and automotive, said last fall while speaking at the Shopper Marketing Expo. He also noted that Amazon Fresh’s recipe program was suggested by a CPG partner. (Amazon.com declined to be interviewed for this article.)“You need to find areas where Amazon is underdeveloped or bring them a concept that’s new,” says Stichweh. “If a sharp marketer can prove it has something of value to add, digital shopper marketing can be truly collaborative at Amazon and elsewhere,” adds Straton.Work on the BasicsThe first piece of advice for working with Amazon might be the most obvious, but it’s something that many old-school CPGs have found difficult to address: “Amazon has more digital and technical sophistication,” says Brian Christensen, director of e-commerce at Kimberly-Clark, Neenah, Wis. “It needs to be engaged on a technical level and not in the same way as brick-and-mortar customers.”That’s not necessarily bad, just different. “Managing the digital shelf and the pace of online innovation requires a different set of competencies than managing a brick-and-mortar business,” Christensen says. “Many of the annual brick-and-mortar processes are more fluid online,” where resetting the shelf just once per year would be downright archaic. “That said, we have many typical buyer-seller relationships. We work together to jointly grow the category and have pretty typical negotiations on typical issues.”Experienced marketers all agree that the most important action for a brand to take on Amazon.com is perfecting its own product pages. “It’s still all about the content in a lot of ways,” says Straton. “If you can get shoppers there and get them to interact with your product page, then you’ll do well.”A strong content strategy requires not only presenting all the right information but also gaining input from consumers themselves: research finds that even lackluster reviews on a product page (2 out of 5 stars) can dramatically increase purchase likelihood.Some suggest moving beyond the free, but restrictive, basic product page to pay for the “A+” program, which allows for a more customized brand experience. “The costs aren’t prohibitive and it shows your commitment,” says Stichweh.Amazon.com now also hosts roughly 500 “brand stores” (amazon.com/dove, for example), which can deliver an even stronger presence on the site. Costs range from zero up to $70,000, depending on how much work Amazon needs to do.Others recommend securing a Strategic Vendor Services contract, which costs a few hundred thousand dollars but earns the manufacturer a dedicated rep. “It’s critical for getting things done within the Amazon structure,” Christensen says. However, participating manufacturers must already be identified as a strategic partner, which means they’re already spending a lot more with the e-tailer. (And, if you’re a strategic partner, chances are Amazon came looking for you.)Such exclusivity makes developing the right content even more crucial because, for many CPGs right now, product pages are the only opportunity they have.“Amazon has indicated that it’s interested in more collaboration with CPGs, but it doesn’t necessarily have the corporate structure in place, or the culture, to do that,” says Edwards at Catapult eCommerce. The e-tailer still wants most product marketers to handle things largely on their own through the automated Vendor Central portal.Work on the Back EndBuilding a fruitful business partnership with Amazon isn’t all about the website, though. It also requires efficiency with packaging and distribution, which Stichweh calls “the secret to unlocking the relationship.” So a go-to supply chain member is just as important for the account team as the sales and marketing people. “You need that mind-shift internally,” Stichweh says.Attention to “e-commerce ready” packaging is twofold: making it easy and cost-efficient for Amazon to reship, and making it attractive for the shopper to buy. A good example of providing both is four SKUs shrink-wrapped together that can be sold and shipped just like that. “Amazon loves it when they can just get the box, slap a sticker on it and send it right back out,” explains Stichweh.“Brown boxes are OK and often preferred,” says Christensen. “In some cases, we can save costs in packaging, and in some cases it can cost more if we need to over-box. [And] all of this must be done in the context of not proliferating SKUs.”“Not everyone has these capabilities right now,” notes Fallon Schmitt, associate manager at Catapult eCommerce. “But they need to start having the conversations internally because this is the future.”Meanwhile, optimizing the supply chain “is probably even more critical than it is with other retailers, “ says Stichweh, because of the need to keep delivery periods short. And managing the demands of the Pantry and Fresh programs “presents new challenges,” Christensen says, especially since their initial scale is so low.“Amazon’s forecasting is always behind and their ordering system is clunky. You need to provide extra guidance and support, especially with a hot product,” says Catapult eCommerce’s Fernandez. “The ordering system is automated and takes place weekly – and they want vendors to compress lead times accordingly. So you have to work to stay ahead.”“In a rapidly growing business, it’s hard to just rely on historical tools to accurately predict volume – especially since it’s hard to predict when social media or some blogger will pick up a promotion and drive significant lift,” Christensen says. “But we’re learning together how to do that better.”Work on the Front EndElsewhere, marketers who’ve been working in the Amazon trenches strongly recommend buying ads through the Amazon Media Group (AMG). “Amazon’s holistic evaluation of partner profitability includes the buy,” explains Schmitt. Buying media also can help a manufacturer earn strategic partner status, a designation that gets factored into the site’s search algorithm (which also considers product sales, conversion rates, page views and content quality) and opens other doors as well.Advertising at the category-page level and deeper on the site is the domain of Amazon’s vendor management group. All “higher” pages are handled by AMG and are treated as a straightforward media platform with impressions, click-throughs and purchase consideration as the success metrics, not sales. (Since Amazon.com drew 122.5 million unique visitors in April 2014, according to comScore Inc., the site isn’t a bad option as far as national buys go.) AMG also manages an off-site network of ads on consumer sites (like People.com) to drive traffic.Promotionally, “Amazon is still very new to the game, so everything is basically price-based right now,” says Fernandez. “There’s a lot of ‘test and learn’ taking place. But they are trying to develop best-in-class programs.”Aside from the tactics already mentioned, marketers point to other programs such as Amazon Vine, which puts product samples into the hands of a by-invitation group of star reviewers from the site. And there have been a few cases of manufacturers uniting for cross-merchandising programs, although getting two Amazon vendor managers working together is even harder than aligning a pair of Walmart buyers. (Trying to get AMG and vendor management together on a program can be just as hard, by the way.)Bringing unique, account-specific ideas that meet Amazon’s needs “show that they’re top of mind with you,” says Stichweh, who notes that ConAgra has had success with programs built around football and other traditional programming themes. Marketers also should consider off-site efforts that drive traffic to Amazon in general and their own product pages specifically.The More Things ChangeSome marketers are sanguine about the pricing issues and see keeping Amazon itself in plentiful stock as a solution. “You have to get in there to become the best possible provider of your own products,” says Stichweh.“It’s hard for smaller players to offer a lower price point if Amazon has the scale,” agrees Channel IQ’s Shepherd, who also recommends taking a “carrots and stick” approach to negotiations: Since “Amazon demands heavy margins,” marketers should be willing to provide returns allowances, co-op dollars and other funding that will incentivize them to not reduce prices later on.Some also are hopeful that the third-party issues will gradually improve. “Amazon is starting to move on that front, but they’re still mostly looking at sensitive categories like medications,” says Shepherd.“It does impact the customer experience, and that’s something Amazon is concerned about,” says Schmitt. “It’s funny: If a customer complained about a product, Amazon would probably shut it down immediately.”Ultimately, winning at Amazon.com requires “finding the optimal mix of media, shopper marketing and digital savvy,” summarizes Straton. That means, despite all its obvious differences, Amazon might not be so unique after all.“It’s just like with any other retailer,” Stichweh says. “If you can get the relationships going, things will start to flow.”About the SponsorCatapult eCommerce provides a wide range of services to help clients understand, navigate and lead in the global online retail marketplace. In the ever-changing e-commerce ecosystem, Catapult eCommerce can help sales and marketing teams better understand the opportunities and the risks of selling online. Their consulting, research and analytic services combined with marketing and sales activation strategies are helping a growing number of brands build a presence and drive conversion online.

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