For many brands in the CPG sector, Walmart’s omnipresence in the U.S. marketplace is a cautionary tale. Although the big box retailer has become a key channel for many of these companies, the pressure it exerts on their product lines and profit margins can be extreme.
With the rise of online shopping and Amazon, it’s fair to say that CPG brands would prefer to avoid the same fate in the digital space.
Given its decades-long dominance over the physical retail sector, it should come as no surprise that Walmart has a record of squeezing CPG companies for all it can get. From favorable and elongated payment terms to exclusive product lines at a lower cost than competing retailers, Walmart is not shy about getting what it wants from any brand allowed to grace its shelves.
This could all pale in comparison to the (not so) new kid on the block, however, as Amazon’s shadow looms large over the online retail space.
How Much of the CPG Lunch Will Amazon Eat?
For all its flaws in the eyes of CPG companies, Walmart is undeniably more attentive to its chosen brands than Amazon.
The former is unlikely to neglect key sales factors or put in play home-grown strategies to cannibalize a brand’s business, for example, whereas Bezos and co. have shown this to be something they do exceedingly well.
Furthermore, CPG brands tend to be a greater part of Walmart’s retail proposition than they are to Amazon’s vast selection of products and services.
Put another way, if you’re making money with Walmart, they have a vested interest in keeping you around. Amazon might feel the same or they might simply use what they know about your brand to start their own line and eat your brand’s lunch while you watch.
The question for CPG companies to answer is whether or not selling through Amazon is worth the risk?
Learning the Walmart Lesson (and Why Amazon Will Be Worse)
The takeaway for CPGs from their experience with Walmart is fairly straightforward: a lifeline can quickly become a noose around your brand’s neck if it gets too tight.
And where Walmart never threatened to kick the platform out from under the feet of CPG companies, you get the feeling that Amazon would have no qualms doing so if it feels there’s money to be made.
Furthermore, Amazon has access to far more market data than Walmart ever did. By selling on Amazon, brands essentially hand vast swathes of competitive information over to the king of eCommerce.
Take, for example, a seemingly benign report from Axios that in fact shows just how insidious Amazon’s underlying access to data can be.
In this case, customers unexpectedly receive samples of products that they regularly purchase. So far, so standard, but consider this move from the perspective of the brand they usually buy: Amazon sends your customers a competing product, on the house, presumably in an attempt to either get them to switch. This could be for a number of reasons, from new product launches and temporary discounts to preferred provider agreements, which can run dangerously close to an abuse of its near-monopoly status in eCommerce.
The issue becomes exponentially worse when the substitute product is Amazon’s own creation.
Increasingly, we are seeing Amazon steer customers to its own private label products. If this doesn’t seem so outlandish, remember that the company has access to the data of every retailer using its platform and all of the products they sell, as well as which customers are buying them.
This is a powerful place to be. Imagine if you could see all of that information about your immediate competitors. If Jeff Bezos chooses to enter a new market with an offering from his company’s private labels, that’s exactly what’s happening for CPG brands who already sell similar products via Amazon.
Analysts believe that unexpected samples will play a significant role in opening up new market opportunities for Amazon when it wants to get into a new consumer packaged goods category. Given the company’s rapid expansion into categories as competitive as groceries and pharmaceuticals, it should go without saying that Amazon can and will do whatever it takes to dominate markets in which established CPG brands have worked to build trust over many decades.
More Reasons to Go Direct
A quick look at the success of DTC brands in multiple different sectors, set alongside the immediate competitive threat of selling via Amazon, should give every CPG brand cause to take a long hard look at their sales strategy for the next 5-10 years.
On the one hand, an opportunity exists to build new, direct relationships with customers. These are connections that will forge stronger ties and give fans every reason to stick with the brand, even when times get tough or competitors come calling. Partnerships with experienced companies in the fulfillment and service sectors will only serve to strengthen those ties and enhance CPG brands that develop them.
On the other hand, the quick sales and instant exposure of an enormous eCommerce platform like Amazon
In reality, this is not such a binary decision. There are alternative approaches, such as integrating the Fulfillment By Merchant (FBM) or Seller Fulfilled Prime (SFP) models, that leverage some of the many Amazon benefits without giving away the keys to your eCommerce kingdom.
However, the lesson of interactions with Walmart over the last couple of decades should ring loud and clear alarm bells for CPG brands. By comparison, Amazon’s entrance into every sector it can find stands to make the era of big box stores look like a much simpler time.
Does your online retail strategy factor in the potential threat of selling on Amazon?
Does it embrace the idea of DTC eCommerce?
Capacity’s Director of Strategic Accounts, Kevin Hall, is an experienced voice in this sector. He has an extensive backgroud working with CPG companies and delivers regular lectures to educate business students on repeating the mistakes made with WalMart, as well as the pitfalls of dealing with Amazon.