The Inventory Explosion is Here, and Amazon 3P Can Help
Consumer Whipsaw: What The Hell Just Happened?
Most brand owners I talk to right now are in a pickle. The lessons they learned from last year no longer apply. What were the big lessons last year?
Container costs are high and rising. Having more inventory sooner will lower your costs.
Transit times are unpredictable. Having inventory sooner will allow your merchandising and marketing teams to have a stable season. The idea of just-in-time inventory seems quaint.
More inventory is better. Inventory is helpful, and retailers needed more as consumer demand returned to stores. Brands with in-stock inventory were rewarded with more frequent and larger purchase orders.
In short, last year, brands were taught one powerful lesson:
More Inventory Will Be Rewarded
Unfortunately, this lesson is exactly the opposite lesson that brands needed to survive this year.
Who this is for: This two-part series will introduce the inventory problem that brand owners are having, discuss the issues with Amazon First-Party (1P) sales, and finally outline how Amazon Third-Party (3P) sales can help brands. In particular, this series is designed for the thousands of brands out there with a multi-million dollar 1P business but, for one reason or another, have resisted Amazon 3P, and are now feeling squeezed.
People buy things they need, and they also buy things they want. Things that they need include items like groceries, medicine, pet supplies, and things for their kids and family. These are essentials or non-discretionary items.
Things that they want include new earrings, a new outfit, upgraded speakers for your stereo, that new electric toothbrush you’ve had your eye on — you get the picture. These are non-essentials or discretionary items.
What inflation has done in this economy is separate these two categories pretty dramatically. Unlike the government, households have fixed budgets up to a point. If the price of essentials is rising, then you have less money to spend on things that you want.
This is the opposite of the pandemic times. When you couldn’t travel and you couldn’t go out to eat, the average household saved a lot of money and made big home purchases.
Now, the situation is reversed. If groceries cost 20% more (it sure seems like they do!), then your clothing budget may get cut each month.
What Has This Done to the Relationship Between Retailers and Brands?
For the average retailer, this consumer whipsaw has meant they have a lot of inventory that consumers are not buying. This has led to heavy markdowns, liquidations, and overstuffed warehouses. Again, this is pretty much the opposite of the pandemic situation. Just a year or two ago, half of the stores were empty due to supply chain issues!
Now retailers are suffering from too much of the wrong type of inventory on their balance sheets and wondering what to do with it. If you are the average retail CFO or Chief Merchant, your “Open to Buy”(OTB) starts to narrow. Why take on more inventory if your turns are decreasing? It doesn’t make sense.
You can draw a straight line from a smaller OTB to fewer and smaller purchase orders flowing from a retailer to a brand.
In addition to, brands in my network are consistently reporting 20% reduced traffic to their websites (especially in discretionary categories), and brands are reporting that purchase order volumes have declined from retailers across the board.
Not only does this include traditional retailers like Walmart and Target, but also eCommerce retailers like Amazon, which has a healthy first-party business with many brands.
It’s this First-Party Amazon relationship that I’d like to focus on here.
Amazon is Not a Retailer - It’s a Technology Platform
A decline in purchase orders from Amazon leaves many of these traditional brands in the lurch. Here are a few common things I have heard recently from brands who are being squeezed right now by Amazon’s 1P business:
“Amazon keeps squeezing our margins. It takes months to get them to accept a price increase, and then begrudgingly.”
“Amazon keeps reducing the size of our orders.”
“Third-party Amazon doesn’t fit our business.”
“We can hardly get a hold of our vendor manager, and when we do, they are not helpful.”
“We don’t do any advertising on Amazon, there’s no margin for it.”
“We treat Amazon just like any other retailer.”
The last point, in particular, is a killer. Here’s a newsflash for these brands — in some ways, Amazon is like any other retailer, but in MOST OTHER WAYS is not.
Like any retailer, Amazon doesn’t want inventory that doesn’t sell and makes them a decent margin. Amazon has a term for these products: CRaP (“Can’t Realize a Profit”).
If you are dependent on Amazon’s vendor management team sending you purchase orders, you are not in control of your own destiny.
Brands have options, however. Unlike most retailers, Amazon has a robust and growing third-party business. The power of the third-party business was recently highlighted by the Amazon CFO on a recent earnings call when he said (paraphrasing):
“First-party is for price-competitiveness. Third-party is for selection.”
Once you understand this key fact, you start to look at Amazon in a new light. The Amazon third-party business lets you do a few things that the Amazon first-party business is not particularly good at:
How do you introduce new products quickly?
How do I pass along price increases to consumers?
How do I collect more data on all aspects of my business? (i.e., APIs)
How do I expand my seller network in the marketplace?
How do I easily create bundles virtually?
How do I run promotions? Social, BuyX get Y, etc.
How do you respond to Retail Business Support cases?
How do I keep Amazon from disposing of my items that are slow sellers and end up on Amazon’s warehouse storefront in the marketplace without getting paid for the items?
If you’re a brand that doesn’t understand how third-party (3P) works on Amazon, you have only a few levers to solve these problems. Either yell at your vendor manager (if you can get them on the phone), or stop selling your products to Amazon in the hopes that your negotiations will force them to accept your price increases begrudgingly.
3P on Amazon has these advantages:
You can create any SKU and start selling it the same day — no one needs to accept it.
You can change the price at any time.
You can advertise to boost your rankings, and control it on a per-SKU, per-channel basis.
You can decide how you want it fulfilled - through your own warehouse, through Amazon’s Fulfillment by Amazon (FBA), or through a network of authorized resellers.
Of course, 3P has these potential downsides to deal with:
Do I need to advertise? I thought Amazon was supposed to bring me buyers?!
How do I ship individual units directly to a consumer? Should I use FBA or can I ship it myself?
How do I set my prices appropriately?
How do I handle seller suspensions and competitive attacks?
What are my SKU-level contribution margins? Am I making any money?
So these issues are not simple, but we will talk about all of them!
Setting the Stage for Next Time ….
This article has focused on the current inventory situation that brands find themselves in and how traditional retail channels like Amazon 1P leave them unprepared to deal with it. In our next piece in this series, we will dive deep on Amazon Third-Party (3P) and outline the best strategies to set your 3P business up for success.
If you haven’t looked at the 3P business on Amazon in many years, this series should empower you to revisit and launch a new third-party program with more confidence. Our advice is simple — don’t throw out 1P! But treat 3P as another tool in your toolchest. Each Amazon program is designed for a specific purpose - to help grow your brand’s business through the platform.
About Rick
Rick Watson is the founder and CEO of RMW Commerce Consulting, a firm dedicated to optimizing eCommerce growth. If you’d like to have a conversation about your Amazon marketplace strategy, feel free to schedule a consultation.
