Amazon: An Existential Threat to Wholesale Brands

Battlefield Advice for Brand Managers

by Rob McGovern, CEO of PreciseTarget

I recently pointed my browser at Amazon and was greeted with a front-page promotion announcing a new line of wool sneakers named 206 Collective.  Initially I thought Amazon was selling Allbirds, given that the photo was clearly Allbirds wool sneakers. In reality, Amazon was promoting their new Allbirds knockoffs which are identical in every respect except for the logo. There was a time when brands worried about competing for attention within the vast Amazon assortment. That worry feels naïve now that Amazon’s long-game has been revealed. 

Over the past 5 years Amazon has introduced over 75 private label brands, addressing almost every category from apparel, to footwear, to cosmetics. The long-game is to hollow out the major brands with knockoff products. How big is the threat to your brand? Think NFL team stepping onto a peewee football field. They’re a team adept a trick plays, including not disclosing that the “Top Rated Brands” on the page is made by Amazon. Many customers may not realize that Good Threads, Button Down, Lark and Ro, Luna Collection, Peak Velocity, 28 Palms, and Starter are all Amazon brands. 

Armchair investors have lost many fortunes short-selling Amazon’s stock. Short sellers are investors who bet a stock will fall, and the old Amazon short thesis was based on Amazon’s large quarterly losses. In reality, the short-sellers became roadkill as Amazon stock rose progressively higher, now over $1,800 per share, valuing Amazon at over $1 trillion. Amazon trades at 75 times last year’s earnings, compared to Nordstrom which trades at 11X earnings and Macy’s at a paltry 5X earnings. What’s the story? Is this irrational market exuberance? If only. The markets have priced Amazon’s long game into their investment thesis. Wall street foresees significant profit increases at Amazon. 

Amazon’s profit strategy is pretty simple. They’re planning to hollow out the profits of wholesale product brands like yours. Amazon’s strategy closely parallels the Trader Joe’s model, which has propelled TJ’s to be the most profitable grocery chain in America. You might think of your local TJs as just a cute store down the street when in reality it’s a profit mint.  According to Freakonomics, Trader Joe’s revenues per square foot are 2X higher than Whole Foods and 3X higher than Walmart. A key strategic plank in Trader Joe’s strategy is private labeling, just like Amazon. The vast majority of TJ’s products are sold under the Trader Joe’s brand name, so instead of margins going to Heinz or Stouffer’s, they’re being deposited in Trader Joe’s bank account. 

Step one in Amazon’s hollow-out-the-brand strategy is to create knockoff products. We’re living in an era Goldman Sachs refers to as EaaS, which means Everything-as-a-Service. Goldman Sachs believes it’s now possible to outsource virtually every business function, from manufacturing to sales. In their analysis, they illustrate that Apple Corporation is really just a marketing layer resting on top of outsourced manufacturing.  Keep in mind that Apple has also figured out a way to outsource the software development too—for free. Virtually every byte of application code on your smartphone was created by independent app developers at no cost to Apple. 

In the EaaS world Amazon intends to use your designs, your factories, and the same raw materials. Your product designers are being co-opted by the folks in Seattle. The Amazon marketplace will give them significant scale advantage, enabling them to volume purchase materials at a far lower prices. The net will be identical products, sold for lower prices with free shipping, and a headache for your CFO. As a final insult, Wall Street is willing to fund Amazon’s predatory losses. The investors are participants in a macabre vision: Amazon hollowing out your profits. Wall Street is perfectly happy to fund Amazon’s Allbird knockoffs, which are 50% cheaper than the originals. 

Step two in Amazon’s strategy is to use your products as clickbait to sell their knockoffs. Amazon “uses” Nike, Levis, and Adidas products on their site as part of a sophisticated data strategy. They cross-sell consumers to their brands by using the established brands as clickbait. Here’s how it works: Amazon creates specialized landing pages for the established brands which are discovered by the Google content crawler. If a consumer Googles “Nike T-shirt,” the search results will include an Amazon page of Nike T-shirts. This special landing page will also include Amazon-branded knockoffs, which will carry an Amazon Choice heading or a separate heading “From Our Top-Rated Brands.” (Yes, your suspicions are correct: all Amazon brands earn the top-rated flag.)  And the final dagger…the Amazon-branded products will be priced 30 to 50% lower than your products.  If you’re thinking “this isn’t fair,” that’s the point. Amazon is maximizing for their profits, not yours.

Amazon’s private-label brands are an emerging threat facing brand managers. Here’s the advice we’re giving our wholesale brand partners:

  • Follow the lead of the smart brands and withdraw from selling on Amazon.  They don’t want your products; they want to bait your customers away from you.
  • Adopt a more sophisticated data-driven strategy for direct-to-consumer (DTC). In tomorrow’s retail environment there will be more data scientists than merchandisers.  The retail data market is still in its Wild West phase, although many brands are succeeding with sophisticated data strategies. You’ll need to be good at both data selection and deployment.
  • Extend your data-centric strategy to your co-op program. We’ve begun equipping brands with target audiences for co-op promotion use. Essentially, they provide the funding and the target audience for the retailer’s co-op campaign.
  • Beware wary when participating in the false economy offered by the social platforms. A path of least resistance is to turn your advertising over to Facebook and Instagram. We advise caution, given that they’re maximizing for their click revenue rather than your profits. Our customers are seeing $40 to $50 per conversion, and they’re giving up valuable data to an ad platform. 

As a final recommendation, we advise our wholesale brand customers to use velocity as a Weapon. We’re now living in the high-velocity era of programmatic retail. We advise our clients facing an Amazon knockoff threat to step on the gas. It takes time to build a product clone, and high velocity can force Amazon to always be one product generation behind you.