By Laura Stevens, Sharon Terlep and Annie Gasparro
Amazon.com Inc. has trained people to buy everything from major
appliances to daily staples online. Now it is having second
thoughts about some of those sales because they don't make money --
and is pushing big brands to change how they use its site.
Inside Amazon, the items are known as CRaP, short for "Can't
Realize a Profit." Think bottled beverages or snack foods. The
products tend to be priced at $15 or less, are sold directly by
Amazon, and are heavy or bulky and therefore costly to ship --
characteristics that make for thin or nonexistent margins.
Now, as Amazon focuses more on its bottom line in addition to
its rapid growth, it is increasingly taking aim at CRaP products,
according to major brand executives and people familiar with the
company's thinking. In recent months, it has been eliminating
unprofitable items and pressing manufacturers to change their
packaging to better sell online, according to brands that sell on
Amazon and consultants who work with them.
One example: bottled water from Coca-Cola Co. Amazon used to
have a $6.99 six-pack of Smartwater as the default order on some of
its Dash buttons, a small device that allows for automatic
reordering with a single press. But in August, after working with
Coca-Cola to change how it ships and sells the water, Amazon
notified Dash customers it was changing that default item to a
24-pack for $37.20.
That raised the price per bottle to $1.55 from $1.17. And
Coca-Cola will start shipping those orders directly to consumers,
sparing Amazon the expense of shipping from its warehouses.
Manufacturers shipping from their warehouses is something Amazon
has asked more brands to do to cut its own costs.
Amazon told Coca-Cola that it was losing money on the smaller,
cheaper shipments, according to people familiar with the
matter.
Coca-Cola responds that it works with partners to learn together
and constantly evolves its offerings.
Moves like that can increase costs for brands. Amazon can get
away with it because manufacturers of food and household products
are hooked on the online retailer's size -- it accounts for a
majority of total e-commerce revenue growth -- say consultants who
work with brands on their online strategy.
For big consumer brands, not being on Amazon "is not an option
anymore," said Guru Hariharan, chief executive of Boomerang
Commerce, which makes e-commerce software. "They have the power;
they have the shoppers."
Amazon also has greater leeway to curb CRaP items because of the
rise of independent sellers on its site. They have added hundreds
of millions of items, helping ensure that Amazon's virtual shelves
are stocked with the variety shoppers expect. And those sales tend
to be more profitable for Amazon, which typically collects a 15%
cut plus fees for warehousing.
Chief Financial Officer Brian Olsavsky said earlier this year
that eliminating CRaP items is "something that we do and work with
our vendors on all the time," adding that it hasn't caused a change
in profitability for the company in 2018.
Amazon, like other retailers, has made changes to inventory when
an item isn't selling well and is unprofitable. It also has moved
some products- -- such as its smaller package of Smartwater -- into
its Prime Pantry category, in which consumers fill up a box with
items to reduce the cost of shipping.
Amazon is trying to boost profitability in its core retail
business after years of focusing on growth, according to the
people. The company's profit has risen sharply in the past couple
of years, helping its stock price soar, although its market value
has fallen again recently. But most of that profitability has
stemmed from its growing cloud business and advertising unit.
Brand executives privately say Amazon's push for profitability
can be a double-edged sword. Amazon has pressured them to lower
prices and change packaging, both of which can be costly. And
eliminating or changing what they sell on Amazon can hurt
sales.
Some executives, however, say it can help both companies.
Seventh Generation, a Unilever PLC unit that makes plant-based
household products, has altered its Amazon selling strategy in
recent months after talking with Amazon about improving the
profitability of products for sale on the platform, said CEO Joey
Bergstein.
Mr. Bergstein said his company has developed new product formats
that are more profitable to sell online -- on Amazon or elsewhere.
Amazon is "really clear that they have a profitability threshold,"
he said. "We've been clear about saying, 'Let's make sure what
we're selling is profitable, and we're not just lining Amazon's
pockets.'"
That has meant selling smaller, lighter laundry products like
detergent pods and skipping cheaper paper towels. Instead of
promoting a three-pack of dish soap, Seventh Generation recently
started advertising a 6-pack for $17.70, and it created a larger,
504-count package of baby wipes for $19.91 for sale on Amazon and
elsewhere.
Mars Wrigley Confectionery and Kellogg Co. executives said they
have seen an uptick in products Amazon has dubbed unprofitable over
the past year, although they wouldn't say which items. But they are
taking steps to change. Mars, for example, has seen better success
on Amazon in selling bigger bags of Life Savers or Dove Promises, a
spokeswoman said, and it has better figured out how to offer
products online that shoppers want for different occasions.
Campbell Soup Co., which like Coca-Cola ships some products
directly to consumers who buy online, is revamping packaging for
Amazon for items such as Campbell's Chunky Soup and Pepperidge Farm
Goldfish crackers, which are typically cheap at the store but
relatively heavy to ship.
Campbell now uses predictive technology to monitor pricing
dynamics so that it can adjust sizes, change the variety or
redesign packaging to ensure the products will be profitable enough
to stay on Amazon.
--Heather Haddon contributed to this article.
Write to Laura Stevens at laura.stevens@wsj.com, Sharon Terlep
at sharon.terlep@wsj.com and Annie Gasparro at
annie.gasparro@wsj.com
(END) Dow Jones Newswires
December 16, 2018 08:14 ET (13:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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