How pet suppliers can improve their profit margins with Amazon
Successful e-commerce using the tech giant requires a carefully planned long-term strategy. That means looking at the benefits for each product you sell on the platform.
Amazon has introduced a rigorous margin focus for companies operating as their wholesale suppliers (the so-called first-party or ‘1P’ suppliers). The result is tense retail negotiations and an increasing number of cost price reductions and cost support requests that are squeezing the bottom line of manufacturers, large and small.
Unsurprisingly, 57% of 1P suppliers say they are having more difficult trade negotiations with Amazon compared with last year, according to recent research.
Locating the cause of low margins
It’s no secret that tech companies are focused on profit margins right now. And Amazon is no different.
The e-commerce giant increased its operating income by a staggering 202% in 2023. For its retail division, earnings before interest and taxes increased by an estimated 102%.
You could point fingers and say that Amazon is the bad guy among online retailers. But when Amazon Vendor Managers ask for margin improvements from suppliers, it’s often due more to structural defects than appears at first glance.
Manufacturers might not want to hear this, but low selling prices, suppressed offers or the delisting of products are all symptoms of a failed Amazon strategy. They originate from the fact that most brands – in the pet sector, too – treat Amazon like any other retailer, often because of organizational legacy and fractional profit and loss (P&L) ownership structures. This means that different functions in an organization own only part of the customer P&L, but none of them has a 360-degree overview of the total cost-to-serve for Amazon.
Look beyond the short term
Some businesses plan their investments with a relatively short-term 12-month horizon, listing products initially designed for the physical shelf and leaving the commercial account ownership to their local teams.
This lack of distribution control leads Amazon to source products from EU markets with the lowest cost, price- matching competing retailers, and undermining the brand’s distribution set-up and price positioning.
Margin challenges tend to be considered one-off issues that can be addressed by investing in cost price reduction or trade terms support. This lets you approach the investment ceiling with no real strategy to address the underlying lack of distribution and assortment control that caused the weak margin position in the first place.
To escape this vicious cycle, leadership teams must realize that most of the Amazon margin challenges are structural. So brands must start focusing on the long- term development of their Amazon business.
Focus on key areas
Improving vendor margins requires a focus on 2 key areas: distribution control and channel-specific assortment. This requires careful planning that goes beyond the short term. And it must be coordinated at a regional level to ensure that it doesn’t undermine trade across markets.
Distribution control
Amazon is a price follower, selling products at high discounts to wholesalers and distributors, who may be selling on Amazon. This creates a downward spiral in price that increases the pressure on a brand’s price positioning. That’s because Amazon reflects the brand’s distribution strategy.
You can address this issue by reviewing existing incentive structures with trade customers who may purchase larger volumes than Amazon. But more realistically, vendors need to create a clear framework for deciding which products they list on Amazon in the first place. While having every product listed on Amazon can be tempting, it’s a surefire way to lose the battle for healthier vendor margins.
Instead, you need to think of the role of each item you list with Amazon. Will it drive new customers to your brand? Is it intended as a loss leader? Or is its role to improve the margin mix of your Amazon portfolio? If you’re unclear about the role of the products you list with Amazon, they probably shouldn’t be listed in the first place. This approach is a good indicator to evaluate whether your commercial ambitions and growth activation strategies align with each other.
Channel-specific selection
It’s no secret that most brands automatically list their offline retailer selection with Amazon. The problem is that these products were designed to appeal to shoppers on the physical shelf in an in-store environment. That is achieved with oversized product packaging or premium packaging material that is more expensive to ship when sold online.
As customers make their purchasing decisions based on the content of the product detail page on Amazon, pet suppliers can realize cost savings by developing compressed, channel-optimized packaging that reduces packaging waste, storage and shipping costs for them and Amazon.
Action vs inaction
In February, the e-commerce giant launched an initiative to offer discounts to third-party sellers (known as ‘3P’) for products that can be shipped in their own packaging. This offers 1P vendors the opportunity to request a similar discount for qualifying items as part of their annual vendor negotiations.
But what about the steep upfront costs to develop this channel-exclusive packaging? Pet firms are advised to factor in the opportunity cost of inaction: not launching efficient online packaging increases the pressure on vendor margins for Amazon. And it will lead Vendor Managers to request investments in cost support, higher trade terms or cost price decreases with no real value exchange for the brand.
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