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Who’s winning–Amazon or you?

We're only three months into 2023 and already Amazon finds itself dominating the business news. With a relentless focus on driving its bottom line, what does this all mean for toy brands selling on Amazon?

With Toys & Games being in the top five categories on Amazon (some even say it’s in the top three), profitability scrutiny was inevitable. Amazon has experienced a downturn in sales and ad revenue from merchants in 2022, compared to the pandemic years of 2020 and 2021. Its gameplan to increase profitability was clear when it announced it was cutting 18,000 jobs, as well as closing three warehouses in the UK.

From bizarre requests through AVN (Annual Vendor Negotiations) to the new distribution rules – trading with Amazon in 2023 is going to require a unique and tailored approach.

Amazon – the dream profitable account

I remember a time when the consensus was that Amazon was a brand’s most profitable account. Whether vendor or seller, Amazon was first and foremost interested in maximising selection. This allowed brands to list their entire catalogue, invest in small levels of terms and see great returns. Fast forward to 2023, and Vendor Managers are now tasked with maximising profitability as a priority.

Over the past few years, we have witnessed trading conditions where Vendor Managers would confidently take a line off sale until Amazon was able to return back to a healthy margin (a process known internally as CRaP). This process has been elevated; we have seen significant bestsellers and Top 100 items taken out of sale from Amazon until the brand is able to either offer a new cost price or fund the negative margin.

In 2023 AVN (Annual Vendor Negotiations) I have seen numerous instances of requests from Amazon to invest into marketing programmes without any clarity on what the vendor receives in return. Companies may also be faced with Vendor Managers pushing brands to raise investments in the Amazon Vendor Service (AVS). This isn't a big surprise, given that brands rely on AVS to complete even simple tasks such as catalogue updates. But it's also driven by Amazon's recent round of layoffs, which reduces the number of available Vendor Managers in 2023.

These requests appear somewhat generic in nature, with no apparent evidence of the vendor manager tailoring the requested investment support around the brand and its catalogue. Whilst I agree that businesses should be investing in Amazon to help drive sell through as well as providing a win-win margin for both, I do think some of these latest requests are absurd.

So, whilst items were delisted, businesses turned to a hybrid model and moved the sale of these items through Seller Central. A few years ago, this was a route for most businesses and allowed for a healthy margin for most sellers.

Having looked closer to a Seller Central P&L, once all costs are attributed, Seller Central turns out not to be as profitable as may had originally anticipated.

With Amazon raising storage fees as well as forcing sellers to bid for storage space, it is getting harder to manage a hybrid model when looking to achieve like for like profitability versus Vendor Central. Amazon has been taking a higher percentage of revenue from sellers - over the last five years we have seen that this has increased from 40% to 50%. I foresee a shift happening from Seller Central back to Vendor Central for those that pushed more sales through B2C than B2B.

The impact of cutting out the middleman

In recent news, Amazon is continuing to follow its strategy to increase profitability through its retail business by cutting out distributors. Amazon suggests this new procurement strategy is to cut out the middleman and therefore lower costs for consumers. However, the strategy suggests a broadening of the monopoly it has within online retail to force brands to choose between growth and profit with the marketplace, or moving with their distributor who is being cut out. Businesses who serve the marketplace through multiple retailers will have to re-examine their business structures and distribution plans and almost alter them completely. Distributors can still offer these products through marketplace, but doing so will necessitate price modifications that will no doubt have an impact on both the distributor and the consumer.

Cost to doing business with Amazon

Historically, brands have not always allocated time for analysing the cost of doing business with Amazon for the simple reason that it wasn’t considered an issue. Now this cost component and cost setting has increased so much that businesses need to ask themselves if these costs are acceptable and recognise that this cost centre needs strategical navigation. While most brand teams will naturally want to ask for payback of chargebacks and shortages from Amazon, this misses the main point. Teams must address the underlying illness (process defect), not just its symptoms (penalty charges and unpaid invoices).

Amazon used to be the most profitable retailer for most businesses, but now seems to be an account which is labour intensive and potentially leaking cash. As the cost of trading on Amazon Seller Central becomes ever more expensive, the way Amazon used to be managed as an account needs changing; it now requires specific skills to help analyse profitability on an ongoing basis. Vendor or Seller, Amazon can be a huge Sales & Marketing platform for your brands. Amazon is a strategic channel, and a strategic decision may be to sacrifice margin in order to win in other areas. Make no mistake, Amazon's reach is unquestionable and utilising the platform and all of its marketing tools to present your brand and portfolio in the correct way can have broader benefits that go beyond purely commercial.

Asha Bhalsod - Asha has 10 years eCommerce account management experience, including at Amazon and managing the Amazon/eCommerce businesses at Tomy UK and Melissa & Doug. She now runs Etopia Consultancy, to help brands create their eCommerce strategy and grow their Amazon business, and can be contacted on asha@etopiaconsultancy.co.uk for guidance with trading on Amazon.