Practicology’s Head of Client Relationships and Business Development, Gerald Maidment, addresses the pressing importance of developing an Amazon B2B strategy in the first in our series of blogs about Amazon.
What is Amazon’s growth trajectory to date?
Amazon is now the third largest retailer in the world; and the largest online retailer in the US, Germany, UK, and Japan. It accounts for 5% of all retail spending in the U.S., and for Americans, Amazon is held in higher esteem than any other company.
As well as selling directly to its customers, Amazon allows sellers to use its ecommerce platform, and fees from these third-party sales reached $23bn in 2016. Retailers often compete with Amazon, and at the same time use Amazon as a way of getting more business. There are 100,000-plus companies earning more than $100,000 per year selling on Amazon.
Amazon takes fees ranging from 8-20% of third-party sales. Third-party retail is a high-margin business based on Amazon’s existing infrastructure for e-commerce.
Key Amazon components supporting growth
Amazon continues to expand ‘building blocks’ around its core selling platform, of particular note:
- Amazon’s burgeoning film and television business has a production budget of $4.5bn in 2017.
- Amazon Web Services (AWS) provides cloud computing services for businesses across the globe and generated revenues of $12bn and profits of $3.6bn in 2016.
- Echo, the voice activated entertainment and shopping tool powered by Alexa, is the latest in Amazon’s branded electronics lines that includes Kindle. With 10 million Echos already purchased, the product has had an immediate impact on the way people use the internet and shop in their homes.
- Amazon’s Prime subscription service is used by 30% of UK adults or 19 million adults who shop online. This compares with 44% in the US or 80 million online shoppers. Prime members are estimated to spend twice as much with Amazon.
- Amazon purchased Wholefoods, a high-end US supermarket with 431 stores in the US, and nine in the UK. This marks a further presence in ‘brick-and-mortar’ retailing.
- Globally, Amazon is investing billions in India to develop infrastructure and recently purchased the largest online retailer in the middle east, Souq.com, based in Dubai.
Amazon forms brand-level relationships too
Amazon growth plans include online car sales, building on deals with car manufacturers Fiat in Italy, and Seat in France. And Nike confirmed rumours of an impending brand-level tie-up with Amazon at the end of June 2017.
Direct brand relationships don’t always go smoothly. Toys’R’Us signed an exclusive ten-year agreement with Amazon in 2000 to sell toys online. This appeared to work well for both parties in the early years with Toys’R’US paying Amazon $50m a year plus a percentage of sales. In return, Amazon’s seamless order fulfilment throughout the year, especially effective in the run-up to Christmas, ensured customers were satisfied. In 2006, after a two-year legal battle, Toys’R’Us was freed from the contract as Amazon was viewed by the courts to have partnered with rival toy-sellers despite the ‘exclusive’ agreement.
Introducing Amazon Business
Revenue at the fledgling Amazon Business was quoted as $1bn after the first year of US operation, with Amazon signing 400,000 business customers (although many of these may have been existing Amazon Supply customers). Amazon Business subsequently expanded to Germany in December 2016, with an initial 50,000 German business customers already active by the time of the UK launch in Spring 2017.
B2B implications: when Amazon enters a category or new market
The Amazon effect results in lower pricing for Amazon customers, and reduces profit margins for sellers and suppliers. Often Amazon’s entry significantly alters the market. Larger book retailers struggled or ceased to trade as Amazon captured more of the book market, transferring book sales online and then introducing e-readers. However, independent booksellers with a distinct offer are growing in number.
Amazon recently announced the opening of its Australian operations. In the four months since the announcement, ‘fear of Amazon’ wiped $120m from Baby Bunting, the dominant retailer in Australia’s $2.5bn baby products segment. If Amazon succeeds in reproducing its 45% share of the US online baby products market, investors fear it will shred the Australian retailer’s strong margins. A similar dip in share price for US Supermarkets came after the Wholefoods purchase.
Recent developments in the US for Amazon Business
In February 2017 Amazon Business was awarded a multi-year contract with US Public sector purchasing organisation US Communities worth up to $5bn. This gives access to public agencies – schools, school districts, higher education institutions and local and state government entities.
Coupa Open Buy, a sophisticated solution to help private and public sector businesses manage spend, signed a deal in May 2017 with Amazon Business. This extends Amazon’s catalogue to Coupa’s customers, allowing access to millions of products that might not normally fall within an organization’s existing supplier relationships.
Owning your customer
Sellers using Amazon’s platform find their customers become part of Amazon’s ecosystem. Amazon’s relentless focus on customer satisfaction and zero-fault fulfilment combined with Premium subscription services has allowed Amazon to become the number one search engine for shopping. More people start their shopping journey on Amazon than Google (55% start on Amazon according to Bloom Reach research in September 2016). That’s a 25% increase on 2015.
Access to new Amazon Business customers
Because Amazon’s reach is so broad, Amazon Business provides a source of potential customers beyond your current customer base. Retailers entering new markets will typically test their products using third-party market places like Amazon. In a similar way, for business-to-business one of the benefits of Amazon is that it can uncover new customers.
Later in this series we will look in more detail at some of the ways that Amazon Business will directly affect B2B. In the meantime, if you’d like to discuss developing an Amazon strategy for your business, please contact us.