Strategy and Operations

The Amazon Squeeze: You Choking Yet?

One painful moment will tell us when Amazon has devoured the world. As they continue to squeeze all the growth oxygen out of everybody’s lungs, at some point squeezing becomes choking. Then we’ll know we’ve been devoured and it will be too late to do anything about it. As usual, I exaggerate to make a point. But maybe not. This wake-up call is about Amazon’s latest squeeze on its third-party vendors.

In “The Godfather,” Marlon Brando famously said, “Keep your friends close and your enemies closer,” for the obvious reasons. Well I’m not sure who the enemy actually is: the third-party apparel sellers on Amazon’s marketplace or Amazon. There’s a great irony in these relationships. Most strong brands and retailers describe it as a love/hate relationship, one major retailer said, “…it’s like dancing with the devil.” But the reason they “dance” with this devil is because they can no longer ignore Amazon’s rapidly accelerating consumer traffic, in the millions daily. The irony lies in the “devil’s” ownership of all transaction data, giving Amazon real time information of consumers’ shopping behavior, what they like, what’s hot or not, and all other key details of the shopper’s journey. As a result, Amazon can quickly fill white spaces and knock off products in high demand for their own private branding program (for lower prices of course).

You get the idea. The third-party vendors are between a rock and a hard place. They are both friends and enemies with Amazon. Brands and retailers desperately need Amazon’s meteoric traffic growth, and Amazon leverages the meteoric increase in vendor’s consumer information into growing their own branded and retail businesses.

The Apparel Squeeze Just Got Worse

Now we learn from Business Insider that the Amazon squeeze has tightened around the throats of apparel and accessory third-party vendors. For items priced above $75, Amazon increased their commission squeeze from 15 percent to 17 percent on clothing and accessory sales and 15 percent to 18 percent on handbag and sunglasses sales. The squeeze remains the same currently in place for items under $75. For jewelry, Amazon will now take 20 percent of the initial $250 of a sale, after which it will take 5 percent.

Hey, how does that work for you Mr. Third Party? Are you starting to choke yet? The Godfather is not only requisitioning your consumer information to build their own business, they are charging you more to do so. I am scratching my head, but what are you going to do about it? Amazon’s mounting traffic becomes an opioid you are hooked on.

Here’s what’s worse, as Amazon demands higher fees, can you really pass the increase along to consumers through higher prices? I don’t think so. This is a world where everything is moving to free. On the other hand, Amazon can take the gain from your higher fee and pass it along to consumers in lower prices for Amazon products. After all, Wall Street measures Amazon’s success based on top line growth, not on profits. Don’t you wish you had this model?

A snapshot of Amazon’s power in the apparel space shows that they controlled an estimated 30 percent of online apparel sales in 2017, growing at about 25 percent a year. Cowen and Company estimated that Amazon’s total apparel sales would reach $52 billion by 2020.

A Growing Monopoly?

According to Wikipedia, “a monopoly is a situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products.”

Because Amazon’s business model is a vast marketplace including many different industries and millions of products, in the aggregate they could not be defined as a monopoly. In fact, ironically, rather than raising prices as a monopolist can, due to their control of the marketplace, Amazon continues to drive prices lower or at least controls the lowest price position.

Maybe their calculation is that if they continue to steal chunks of market share from everybody through the use of lower pricing, when Wall Street comes knocking for bottom line growth, Amazon will have gained enough aggregate share of market, that indeed, they will have monopoly-like control and can raise their prices. And by then (actually now), consumers simply trust Amazon for the lowest price, so will ironically accept their higher prices as best value.

Walmart Anybody??

Here’s an idea. Given Walmart’s meteoric moves to kill Amazon, or at least to become their biggest headache, they will cut Amazon off on the road to monopoly land. A better idea for Amazon’s third-party vendors who feel like they’re choking might be to leave the “devil” and join the non-predatory Walmart – Jet.com platform.

2
no comments
You might also like...
    • From the Archive: