Amazon Is A Sales Machine – Markus Fost in Interview with Internet World (30 June, 2017)

In addition to their pricing, brands that wish to be successful on Amazon must have their content and processes under control, says Markus Fost, Managing Partner at FOSTEC & Company. Once they have accomplished this, highly profitable growth is possible.

From a dirty word to a source of hope: the topic of online marketplaces has undergone a complete change of image in the eyes of brands over the past 18 months. What’s more, this is not because Amazon, Zalando, Otto and Co have fundamentally changed, but because often, brands’ own online shops were not even coming close to fulfilling the sales and growth targets associated with the online marketplace channel.
Unless a brand is extremely strong, it is difficult for them to generate sufficient traffic for their own online flagship store. On the other hand, online marketplaces — which, putting the fashion trade aside, are represented primarily by Amazon – are overrun by customers. As a result, brands are beginning not only maintain a presence in marketplaces via their retail partners, but also to take sales into their own hands, utilising the potential of Amazon as a true sales machine that enables profitable growth and sales in the seven- to eight-figure region. Internetworld.de talked to e-commerce expert Markus Fost, Managing Partner at FOSTEC & Company, who advises brands on their Amazon strategy.

Internet World: Let’s kick off with the most common question asked at congress events. What’s better for brands – the Amazon seller programme, or the vendor programme?

Markus Fost: That depends on the brand’s distribution strategy. The vendor model has several advantages: the marketing programmes are more diverse, customers prefer to buy directly from Amazon, and the programme offers better forecasts and reporting. Brands looking to maximise sell-out have access to more options with the vendor programme, although it comes with lower revenue. Brands that have a direct sales strategy and for whom high price stability in the market is very important will be better served by the marketplace model. This eliminates the need to negotiate conditions with Amazon, and brands can control their product lines and prices themselves. In return for being able to do this, they forego benefits like AMS – one of the most efficient marketing programs on Amazon – and optimal content.

Internet World: Do you recommend to brands that they should put their entire product line on Amazon, or just parts of it?

Fost: As a general rule, I would recommend brands to put their complete product line on Amazon. Why? Because it serves the brand to have sovereignty over the quality of content on Amazon, and can also help with the negotiation of conditions. In addition to negotiating terms and conditions, it is the goal of every vendor manager on Amazon to steadily expand their product line. Those who can promise a full product line make themselves more attractive; however, a brand should consider whether it’s really best for them to make their complete product line accessible in the vendor model. It might make more sense to pursue a mixed strategy in which the short-tail product line is offered within the vendor model and the long-tail product line via the marketplace, to enable the brand to maintain sovereignty over their prices. Amazon broker models such as the Frankfurt-based eTrador act as e-commerce service providers and sell products on Amazon on behalf of brands. In the last few months, in particular, negotiations over conditions have been particularly hard-fought by Amazon – and those who do not fall in line are punished by decreases in visibility. Some brands generate over ten percent of their sales in Germany via Amazon, and are being noticeably exploited by Amazon in regard to their terms. A backup strategy based on the broker model help brands to feel more relaxed, since they know that the products will continue to be listed on the Amazon platform.

Internet World:  When we talk about the negotiation of conditions, is Amazon a friend or a foe?

Fost: Amazon is a profit machine. When a manufacturer or a vendor does Amazon “right”, it is the channel that can offer the strongest growth over time. We advise a number of brands who have able to achieve very profitable and sustainable growth via Amazon, and any blame for price erosion is usually attributable to the brand itself. In this regard, it’s important to recognise that Amazon generally tends to match sales prices — which we refer to as “online street prices” — across multiple channels. This gives rise to a costing logic that takes this “online street price” as a basis and budgets for a minimum 20 per cent margin on this price. However, when the regular RRP is 1,500 euros, the online street price is 850 euros and the goods are sold for 800 euros, this margin allowance is no longer sufficient. Despite this, Amazon continues to match sales prices and absorb the effects of a too-low contribution margin.
The consequence of this is that listings are pushed down the rankings, Amazon suggests products with apparently better reviews at the top of the screen, particular product variants are delisted or the AMS banners of competitors are placed above a brand’s own listing. The most extreme stage of “de-listing” is “Prime only”, which means that only Prime customers can buy the product. This can cause a brand to lose 60 percent of its sales. As an absolute final measure, the brand may be prevented from being sold within the vendor model. From Amazon’s point of view, this is logically and rationally astute move, since in the marketplace model, it receives approximately 15 percent VAT. If the margin is under 20 percent, it makes little commercial sense for Amazon to continue selling the products within the vendor model. In the end, it is the brand themselves that must take responsibility for this price dilemma. They must ask themselves why a product is sold for 850 euros instead of the RRP of 1,500 euros and develop a corresponding price strategy to prevent this happening in the future. One reason for these kinds of significant reductions in sales revenues is multi-level distribution models. Cross-border pricing issues are another problem. It goes without saying that Amazon pursues a cross-border sourcing policy. If the goods are cheaper to source in the UK and the price advantage compensates for the logistics costs, Amazon will order everything via the UK and deliver the goods to other EU countries. Because of this, we recommend our clients to deal with Amazon at a European level, as a global account.

Internet World: Are selective sales strategies an efficient way to increase price sovereignty?

Fost: Of course. However, in practice, price stability in the market is generally achieved through declines in sales of ten to 25 percent in the context of the protracted, long-winded introduction of a selective agreement. This is not possible for brands operated by private equity investors, because it contravenes the shareholder value approach. In addition, it usually takes 1.5 to 2 years for such a model to be fully implemented, during which time brands also lose visibility as brick-and-mortar operations. In order to eliminate the “low-quality, high-volume” vendors who distribute products on online marketplaces for low margins, criteria must thus be set so high that even some small brick-and-mortar retailers cannot satisfy them.

Internet World: What, apart from erroneous pricing strategies, are the greatest mistakes brands make on Amazon?

Fost: The most important success factor for highly coveted brands such as Apple is good visibility along with good product information. In an ideal case, brands will monitor how visible their products are and whether their market shares on Amazon correspond to their market shares in the overall market. The actual entity responsible for the supply chain — whether the manufacturer or the wholesale retailer — is, in the first instance, of secondary importance; however, those who leave everything to wholesale retailer will generally not be well served in terms of content and visibility. The only exception to this rule is the category of consumer electronics, since most items are sold via wholesale retailers. Brands who are prepared to splurge and invest 250,000 to 400,000 euros per year get a vendor account whereby the brand is responsible for marketing and content and the vendors assume responsibility for distribution. This “manufacturer account” is not an official Amazon model, but is very widespread in the CE segment. The competitive intensity of brands in this field is extremely high, which means that brands like Lenovo or HP simply cannot afford to present themselves with poorly optimised content. This would mean losing market shares on Amazon.

Internet World: Do the brands have any room for manoeuvre in negotiations with Amazon?

Fost: Actually, yes. Those who have a very high market share in their category on Amazon have a little leeway. One option is to come to an arrangement whereby Amazon is obligated to maintain availability of the core product line in return for adherence to a certain condition. If Amazon begins to delist products, this condition also becomes void. In addition, we recommend to major brands to negotiate chargebacks into their contracts — that is, penalty payments for process errors. We have clients who pay six-figure fines to Amazon each month for failing to comply with delivery windows or for packaging that does not meet Amazon’s requirements. Certainly, these kind of extraordinary expenses do not look good in businesses cases, which is why it’s necessary to try to prevent them (or at least to mitigate them via flat-rate models). Ultimately, it is the brand’s responsibility to clarify, as part of the business case, whether cooperation with Amazon will mean significantly more effort than cooperation with other customers. Essentially, the vendor model is a purely self-service platform this is provided for vendors to use. The vendor themselves is responsible for content, order processing and EDI automation. The costs of a content agency or of complex account handling must be taken into account at the stage of the condition negotiations — and the effort involved is significant, since the brand is constantly required to track whether articles are still being ordered by Amazon, whether they are still listed. The “replenishment code” in the Vendor Central Portal can give information in this regard.
Yet even if all this sounds horrifying initially, the truth is that in practice, Amazon offers the most profitable business cases with the shortest ROIs in e-commerce. For known brands, extreme rates of growth are possible. The more B2C-heavy the product line, the more important Amazon is as a sales channel. In the B2B field, Amazon Business is just starting out, but we expect very high growth rates in the coming 24 months. In the year 2016, Amazon account for 55 percent of e-commerce sales in Germany. It is only for FMCG brands and food manufacturers who produce single-variety B2B shipments on a pallet-by-pallet basis that delivery by Amazon can be a challenge in terms of costs.

Internet World: Which tasks do brands tend to accomplish in-house, and what do they outsource?

Fost: I don’t recommend 100 percent outsourcing, because this doesn’t allow brands to build their own know-how. For content marketing, however, it makes sense to invest in external skills. For brands who have 300 to 400 SKUs in their product line and are required to carry out content marketing in five or six languages, it is hard to accomplish this profitably in-house. In-house content marketing can make sense in cases of 1,500 SKUs and more; however, it presents a great procedural challenge from one company to the next, not least because it’s difficult to find good staff with an understanding for Amazon. In our experience, 80% of brands have a problem with the issue of content. All of them want to have a good content, but none of their employees want to generate content themselves. We often observe that brands attempt initially to solve the problem in-house, with the result that projects become hugely delayed. Only then do they look for external providers. Content marketing can also be a challenge for those lacking the necessary tools to monitor whether the content is actually live on Amazon: due to constant synchronisations and the large number of vendors feeding in content, Amazon regularly loses or overwrites content on the platform, although in theory, vendors have the highest write permissions and cannot be overwritten by marketplace retailers.
A further problem is that “traditional” sales employees — that, is those who are accustomed to travelling to customers, talking to them about the product line and negotiating deals, are no longer required in the Amazon context. The only task remaining for sales employees is to constantly produce content and to conduct marketing and create smart product bundles on the basis of analytical indicators, with an annual meeting held once per year. All other processes are administered as self-service processes on the Amazon side. The key account managers of brands are not accustomed to this type of distribution, and often lack the necessary online know-how. Amazon uses this to its advantage by offering brands the opportunity to purchase Strategic Vendor Services; a half-time employee working with Amazon costs 90,000 euros per year, while a full-time employee costs 180,000 euros. Amazon itself pays these employees around 50,000 euros – and one employees will look after an average of eight to twelve customers. This is a lucrative programme for Amazon and a rather unattractive one for brands — yet they have no choice, since they have no desire to do the work themselves.