Amazon and Walmart are in an all-out price war that is terrifying America’s biggest brands
Amazon and Walmart are in an all-out price war that is
terrifying America’s biggest brands
Grocery suppliers are feeling the squeeze — big-time.
BY JASON DEL REY@DELREY
MAR 30, 2017, 1:44PM EDT
Last month, Walmart gathered some of America’s biggest
household brands near its Arkansas headquarters for a tough talk. For years,
Walmart had dominated the retail landscape on the back of its “Everyday Low
Price” guarantee. But now, Walmart was too often getting beaten on price.
So company executives were there, in part, to reset
expectations with Walmart’s suppliers — the consumer brands whose chips, sodas
and diapers line the shelves of its Supercenters and its website.
Walmart wants to have the lowest price on 80 percent of
its sales, according to a presentation the company made at the summit, which
Recode reviewed.
To accomplish that, the brands that sell their goods
through Walmart would have to cut their wholesale prices or make other cost
adjustments to shave at least 15 percent off. In some cases, vendors say they
would lose money on each sale if they met Walmart’s demands.
Brands that agree to play ball with Walmart could expect
better distribution and more strategic help from the giant retailer. And to
those that didn’t? Walmart said it would limit their distribution and create
its own branded products to directly challenge its own suppliers.
“Once every three or four years, Walmart tells you to
take the money you’re spending on [marketing] initiatives and invest it in
lower prices,” said Jason Goldberg, the head of the commerce practice at
SapientRazorfish, a digital agency that works with large brands and retailers.
“They sweep all the chips off the table and drill you down on price.”
But this time around, Walmart’s renewed focus on its
“Everyday Low Price” promise coincides with Amazon’s increased aggressiveness
in its own pricing of the packaged goods that are found on supermarket shelves
and are core to Walmart’s success, industry executives and consultants say.
The result in recent months has been a high-stakes race
to the bottom between Walmart and Amazon that seems great for shoppers, but has
consumer packaged goods brands feeling the pressure.
The pricing crackdown also comes in the wake of Walmart’s
$3 billion acquisition of Jet.com and its CEO Marc Lore. Lore now runs
Walmart.com and has said one of his mandates is to create new ways for the
retailer to beat everyone else on price, including Amazon.
The pricing pressure has ignited intense wargaming inside
the largest CPG companies, according to people familiar with discussions at
Procter & Gamble, Unilever, PepsiCo, Mondelez and Kimberly-Clark. There is
no one-size-fits-all solution.
“It’s dominating the conversation every week,” said an
executive at one of these companies.
Representatives for these companies either declined to
comment or failed to respond to requests for comment. Executives inside these
companies would only speak on a condition of anonymity because negotiations
with retailers are confidential.
An Amazon spokesperson said in an email: “At Amazon we
protect low prices for our customers, every single day — nothing has changed in
terms of our focus or how we operate.”
Walmart did not provide a comment.
Amazon algorithm
One piece of the battle, executives say, is an Amazon
algorithm that works to match or beat prices from other websites and stores.
Former Amazon employees say it finds the lowest price per unit or per ounce for
a given product — even if it’s in a huge bulk-size pack at Costco — and applies
it across the same type of good on Amazon, even when the pack size is much
smaller.
So let’s imagine Costco is selling a pack of 10 bags of
Doritos for $10 — or $1 per bag. Amazon’s algorithm notes that one bag is $1 at
Costco and, in turn, lowers the price on Amazon of a single bag of Doritos to
$1.
That is a great deal for customers — something that is
likely driving the decision at Amazon, where an obsession with customer value
dominates its strategy.
But now, Amazon is selling individual items at Costco
prices while not getting the same wholesale price that Costco enjoys. In short,
it’s going to be really hard for Amazon to turn a profit on those goods.
When Walmart sees this, it freaks out on the supplier,
industry executives say. And it doesn’t matter to Walmart that Amazon may not
be getting the same wholesale price that retailers like Costco or other
membership clubs receive. In other words, even if Amazon isn’t profiting from
its extremely low prices, Walmart is still demanding the same bulk-rate
discount applied to individual items.
“Walmart has had it explained to them by myself and
others,” said one industry insider who asked for anonymity talking about
private discussions. “My conclusion has been that they beat all suppliers up
regardless because they need it to be a problem at the senior levels of these
companies.”
In some instances, Amazon is willing to lose money for
some period of time on a product it feels it has to have. Jeff Bezos’s company
knows, after all, that it has to continue to increase its selection in
non-perishable grocery goods if it is going to really challenge Walmart in the
$800 billion category.
But, more so than in the past, Amazon is ratcheting up
the pressure on manufacturers of goods that the online retailer is unable to
sell for a profit, executives say. Separate from the algorithm, brands are also
facing the realization that their products that are sold profitably in stores
may become unprofitable online when shipping costs are factored in.
Unprofitable items are known inside Amazon as CRaP
products — the acronym stands for “Can’t Realize a Profit.” And Amazon is not
afraid to kick off big and small brands alike.
Case in point: On a Friday afternoon last month, all
Pampers diapers sold by Amazon were unavailable on the site. Industry
speculation was that Amazon may have kicked Pampers off the site as part of a
negotiation over prices.
Neither Amazon nor Pampers parent company Procter &
Gamble would comment on whether this was the case. But the bigger point may be
that senior industry executives thought such a move was even a legitimate
possibility.
“I’m very concerned,” one of them said. “Do all CPG goods
get commoditized to 40 percent below where they’re used to being? The long-term
implication is you just don’t know where the bottom is at.”
Get the CRaP out
When Amazon warns suppliers that a product is pre-CRaP,
meaning it’s in jeopardy of being kicked off the site for profitability issues,
it makes demands. Oftentimes, to lower wholesale prices. But that doesn’t
always work, especially if a brand has the leverage of also selling into
Walmart, which is still the biggest retail customer for many manufacturers.
In these instances, Amazon may transfer the product to
Amazon Pantry, a smaller catalogue of goods restricted to Prime Members. All
Pantry orders come with a $5.99 shipping fee per box, which helps cover
Amazon’s costs, if fewer than five items are ordered at one time.
Another Amazon tactic is to prohibit some brands from
buying ads within the site for a product that Amazon can’t make profitable on a
standalone basis. Like paying for prominent placement in a store, a brand can
buy ads within Amazon to promote their products. Blocking these ads is another
way of burying a product.
“They are playing Jekyll and Hyde,” said an executive at
a large grocery goods manufacturer. “At times, it’s all about growth; at times,
it’s all about profitability. They keep switching back and forth.”
Another factor: As Amazon Prime becomes a bigger part of
Amazon’s business, Amazon ships more orders that consist of just one item.
These orders can typically be tougher to make profitable than multi-item orders
— a trend that could explain the renewed focus on profitability.
“Amazon realizes Walmart is serious,” the executive said,
“and is basically asking manufacturers to subsidize their unprofitable shipping
costs for them.”
No easy solution
What is a brand to do? There is no one-size-fits-all
solution. Some do give in and offer Amazon a better price if they can afford
it.
Some push Amazon to keep the unprofitable product, but
give them a better deal on a more profitable item.
Another strategy is to stop selling to Amazon as a
wholesaler and instead sell directly, or through resellers, on Amazon’s
marketplace. Amazon cannot control the price of an item sold by marketplace
sellers, though it can make it harder to find items that aren’t priced
aggressively.
The longest-term solution, however, is perhaps the most
difficult: Reimagining how a product should be designed and packaged from the
ground up, specifically for e-commerce sales. That often means cutting the
weight of low-price goods since shipping costs tend to eat into a product’s
profitability. (Amazon, in fact, is trying to capitalize on this potential
shift by asking brands to reformulate their packaging to make it easier to ship
— all done via Amazon, of course.)
Big brands, however, have been doing more talk than
action when it comes to pursuing this solution — a fact that you can be sure
Amazon has noticed.
But Andrea Leigh, an ex-Amazon general manager who now
runs her own brand consultancy, has come across a few examples of brands
redesigning goods for e-commerce. One of them, from the brand Celsius, is an
energy drink that has been transformed into powdered packets that the customer
mixes with water at home.
Then there’s the brand Green Works, which has sold
household cleaners in concentrate form, along with an empty spray container.
“If competitors go away and you can live it out, it
presents you with an opportunity where you can steal share in a relatively easy
way,” she said. “Figuring out how to do online better and not getting CRaP-ed
out, that’s a huge opportunity.”
The rise of direct to consumer?
Perhaps the toughest part of being a traditional consumer
packaged goods brand today is that you don’t know who your customer is because
you sell to them via a middleman: Retailers like Amazon and Walmart. And if you
try to sell direct through your own website — which requires a different set of
skills — retailers often raise hell. Yes, the same retail partners that are
putting the squeeze on wholesale prices.
So some of these multinational companies are dabbling
with diversifying their sales channels through acquisition. Unilever, the owner
of brands like Dove and Hellmann's, last year purchased the subscription razor
startup Dollar Shave Club for $1 billion. The vast majority of Dollar Shave
Club’s sales come through its own website.
Venture capitalists are betting that that deal will be
the first of many acquisitions of digital-first brands that would traditionally
sell their goods on supermarket shelves — though no major ones have yet
followed. If they’re right long-term, however, this pricing pressure from
Amazon and Walmart may be partly to blame — or thank.
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