Amazon Is Pressuring Walmart into a Price War That Will Change the CPG World Forever

Quite the bombshell story at Recode:

Last month, Walmart gathered some of America’s biggest household brands near its Arkansas headquarters for a tough talk. […]

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. […]

[…]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 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.

​On Amazon’s side, the algorithm that is matching (or beating) prices from other websites and stores is fueling this fight. One problem for competitors: Amazon is matching the price for the same type of product even if the package size at Amazon is smaller. Pity, if you’re Costco. (This is similar to the price tracking software that did Quidsi/Diapers.com in.)

For Amazon, this means not making a profit on some goods or even taking a loss “for the greater good”: Being perceived by customers as overall the best place to shop. This makes you the default shopping engine.

Amazon on the other hand is also pressuring brands to lower their prices. Nobody likes losses, not even Amazon. Everybody likes positive contribution margins.

The greater point for the whole CPG ecosystem is now though that Walmart is not a refuge for brands. Amazon is bringing even more pricing pressure to Walmart:

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.

​There are more insidious tactics that highlight how opaque the Amazon Marketplace is; and how problematic the combination of online retailer and marketplace provider will become for the industry the larger it gets:

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.”

Growing Amazon Prime is fueling this downward spiral for prices at Amazon: It leads to more single-item orders. It works for Amazon because of clever cross-subsidies and inner dynamics that grow the whole pie. But again, nobody likes losses, not even Amazon. Everybody likes positive contribution margins.

Walmarts reaction to Amazon comes back to Amazon:

“Amazon realizes Walmart is serious,” the executive said, “and is basically asking manufacturers to subsidize their unprofitable shipping costs for them.”

​So, what now? Manufacturers can pursue one of those five different strategies:

(1.) Keep the (to Amazon) unprofitable product, but give a better deal on a more profitable product. This is a strategy that is almost certainly already in effect at, at least, P&G and Unilever.
(2.) One can stop selling to Amazon as a wholesaler and use Amazon Marketplace directly or through resellers. A path, Amazon is surely aware off and may, let’s say, throw some stones in your way. I were not surprised to learn that items from companies that went that route ranked exceptionally poorly after the switch.
(3.) Change the packaging. (and/or the whole product.)

Recode:

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.)

This makes sense and was only a matter of time: Products are shaped by their distribution systems. Traditional retail shaped consumer packaged goods and their packaging. And now, e-commerce is starting to do the same to them.

(4.) Sit it out and reap the long-term benefits of less competition:

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.”

(5.) Take a cue from Dollar Shave Club, Casper and co. and build a new direct-to-customer brand. Facebook, Pinterest and Instagram may be expensive to use to build a new brand but compared to what Amazon is already doing this seems like a more staple long-term path.

The greatest takeaway: Walmart being serious about online retail now (thanks, Marc) will -by virtue of a fierce fight between two giants- accelerate the change not just for retail but all of consumer packaged goods.

For more on this topic, make sure to read “The Faustian Pact Between Manufacturers and Amazon“, in which, amongst other things, we talked about possible strategies for manufacturers:

There are few things manufacturers can do: One, when your product category allows for any kind of service -think Dollar Shave Club or Runtastic– start experimenting with this sooner rather than later. In the end, manufacturers need to find ways to reach customers and create value for them that goes beyond selling goods.

In short: whatever a retailer can do for a manufacturer, a big marketplace aggregator like Amazon Marketplace can do as well. If it weren’t Amazon it would be eBay or Alibaba or Rakuten. Those aggregators hold the market power, as they provide the access to the customers.

Every brand, every manufacturer, who can not build out a whole system that gives them differentiated leverage will get their business marginalized by those who win on the marketplace level. The only other way out is, counterintuitively, to go ‘all in’: at the other side of the spectrum, the manufacturer/brand manages to optimize towards a pure marketplace seller model, pricing the aggregator’s power in, even counting on it, and working towards best possible product positions and branding. (Think Anker or KW-Commerce.)

Yes, this is not very promising for a lot of manufacturers. Especially, this doesn’t solve today’s pain today. And, even more profoundly, this is only realistically implementable for a subset of manufacturers. (And, I might add, this is yet another reason why 20th century brands will slowly lose relevance while new brands seize a growing market opportunity.)

For manufacturers, it is the beginning of an era of uncertainties, opportunities and dangers unseen in scope before.

​More on this topic:

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  1. […] Amazon Is Pressuring Walmart into a Price War That Will Change the CPG World Forever […]

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  2. […] ​* Here Is What a Big Part of Amazon’s Endgame Looks Like ​ ​More on this topic: ​ ​* Amazon Is Pressuring Walmart into a Price War That Will Change the CPG World Forever ​* ​Amazon Presents Itself as Brands’ Best Friend at #Shoptalk17 ​* The Faustian Pact […]

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