Why CPG Brands Should Partner With Third-Party Amazon Sellers
It has been said that a wise man gets more use from his worst enemy than a fool from his friends. While third-party sellers on Amazon might not exactly be a CPG brand’s worst enemy, many e-commerce professionals have viewed them that way in the war for the Buy Box. If wars were still won by whoever had the biggest army, CPG brands would be in trouble, as Amazon sellers have consistently sold more than half of the total units on Amazon for 10 straight quarters. Amazon’s CEO Jeff Bezos has even been quoted as saying, “Third-party sellers are kicking our first-party butt.” If arguably one of the most powerful people in the world is acknowledging their stronghold, maybe it’s time for your CPG brand to consider how to prioritize third-party sellers in your Amazon strategy.
Remixed Hybrid Model
If you are having trouble “rapping” your head around why you’d want to prioritize partnerships with third-party sellers on Amazon, it might be a good time to brush up on a heralded strategy from the hip-hop music industry. When an artist creates a hit song, they typically follow it up with a remixed version that contains fellow artists’ contributions. Similarly, CPG brands had their Amazon “hit song” with the hybrid selling model, which afforded them the benefits of both selling to Amazon as a first-party vendor and on Amazon as a third-party seller. But in 2018, Amazon restricted this practice, stating that “if any of the Brand’s products are sold by Amazon, the Brand may not also sell those products as a seller in the Amazon store.”
As a workaround to this new policy, CPG brands should take inspiration from hip-hop remixes and implement an alternative strategy that I started dubbing the Amazon Hybrid Model 2.0. This remixed hybrid model allows a brand to select a trusted, exclusive retail partner (or vertically-integrated distributor) to replace itself as the third-party seller. The Amazon Hybrid Model 2.0 could be structured in a manner to fully exercise the advantages of the original hybrid model while still complying with Amazon’s new policy.
In this article, I will discuss several reasons why this remixed hybrid selling model might actually be more beneficial than the original.
Out of Stock Insurance
During the back-half of March, shoppers engaged in extreme pantry-loading behaviors that left many physical and digital shelves without enough stock to fulfill total demand. In the face of an unprecedented global health pandemic, CPG brands broke the industry’s cardinal rule of never going out of stock. But is being out of stock at a few Whole Foods Market locations the same as being out of stock on Amazon? Are all stockout scenarios created equal?
In a recent OneSpace Lonely Learner Series session, e-commerce thought leader Chris Perry made the argument that being out of stock on the digital shelf is actually much worse than being out of stock on the physical shelf. Chris believes that getting back in stock on a retailer’s website should take priority over getting back in stock on physical shelves. This is because shelf space in stores is typically static until the next merchandising reset. Alternatively, when products go out of stock online, the listings lose traffic and search rankings. Losing search rankings is like losing your planogram slot in stores. The major difference is that your brand earned its search rankings, whereas physical shelf placement is something that is secured with a buyer for an allotted time period. Regaining search rankings on Amazon after a product has been out of stock can require months of spending disproportionately in order to spike traffic and conversions and get back into the good graces of the search algorithm.
When a CPG brand utilizes the Amazon Hybrid Model 2.0, it has a level of redundancy with inventory. While it might not be foolproof to handle extreme COVID-19 pantry-loading scenarios, it does offer an additional layer of insurance that can help sustain valuable non-branded search rankings.
Arguably the most sacred ethos of third-party sellers on Amazon is their adaptiveness. To successfully build their businesses on Amazon, third-party sellers have had to combat numerous marketplace evolutions over the years. These changes almost always strengthened Amazon and its vendors’ control on the platform.
Let us consider this real client example: A third-party partner became highly successful selling a SKU from a brand that did not previously have a vendor relationship with Amazon. After seeing this third-party sales activity, Amazon aggressively approached the brand and started a vendor relationship, which resulted in a massive loss of sales for the third-party partner. In response, this particular partner started selling new, attractive assortments with some of the brand’s top selling products. These assortments were not available on Amazon under the vendor relationship.
This level of creativity and adaptability by third-party sellers should offer CPG brands inspiration. While having the option for consumers to purchase larger pack sizes, bundles and variety packs is a key part of success on Amazon, it might be cost prohibitive or resource restrictive to handle the creation of these without outsourcing. This is a perfect case where partnerships with Amazon third-party sellers can be value accretive.
CRaP Doesn’t Happen
As I’ve mentioned in a previous article, CPG products are the most susceptible for landing on Amazon’s “CRaP” (“Can’t Realize a Profit”) list. This is due to their low per-unit prices and accompanied hefty shipping costs, which create a low to nonexistent margin environment. Amazon looks at profitability at the product level, which is different than most physical retail channels that consider profitability at the brand level. That small adjustment to accounting can cause huge problems for vendors, but third-party sellers live, breathe and dream about item-level profitability. They sometimes have thousands of SKUs from numerous different brands, which forces them to essentially treat each individual product as its own business.
Have you ever wondered how third-party sellers on Amazon can create tens or even hundreds of millions in revenue with lean operations? It is because they are masters of integrating technology advancements into their e-commerce operations to increase profitability through speed and efficiencies. For most CPG brands, that’s very different than mastering physical retail value-chain activities that have decades of established best practices. E-commerce is still a small proportion of large CPG brands’ total sales, which hurts the willingness to invest in the level of technology and automation needed to excel on Amazon. Third-party sellers understand these technological nuances, including pricing automation, keyword bidding, and demand modeling that keeps products in stock. Partnering with third-party sellers provides a great opportunity for brands to access these tools as they grow their Amazon sales to a level that justifies additional technological advancements.
Partnerships with Amazon third-party sellers can be hugely beneficial to improving the overall performance of a CPG brand that is new to the Amazon platform. They can also be useful to a savvy, veteran CPG brand looking for redundancies in their Amazon strategy. It really comes down to how well you can harness third-party sellers’ valuable powers. Love them or hate them, they are going to continue to be a huge presence on Amazon for years to come.