Amazon’s lockdown: how a ruthless algorithm drives suppliers to favor the e-commerce giant over other retailers


SEATTLE – In the second week of March, as the stock market and many US companies collapsed, Peter Spenuzza’s company, Rise Bar, unexpectedly rebounded. Amazon, where the protein bars are sold, has suggested that Spenuzza keeps 18,000 packages in its warehouses, up from the usual 4,000 due to the growing demand for almond honey and other flavors.

The demand on Amazon, which is still close to this peak, poses a dilemma for Spenuzza. Rise Bars are also sold in grocery chains nationwide. Although its Irvine, California plant was operating at full production capacity, it did not have enough bars to send to both Amazon and all the brick and mortar retailers who also increased their orders . One week in March, when he was out of stock at Amazon, his algorithm downgraded his product listings in Amazon’s search results and removed his sponsored ads. Rise Bar dropped from 2,000 to 8,000 in Amazon’s “bestseller” ranking in the grocery category, allowing competitors to overtake it.

Amazon’s weekly sales of the brand dropped 25%. Appalled, Spenuzza has decided to send the “lion’s share” of its inventory to the e-commerce giant on a regular basis and ship whatever is left to everyone, he said.

“I did as much as possible to filter all of our requested items on Amazon,” he said.

He is not alone. At a time when much of the retail industry is collapsing, Amazon is strengthening its competitive position in a way that could survive the pandemic – and which could raise antitrust concerns. Increasingly, manufacturers of in-demand products are turning to Amazon, while competing retailers are taking leftovers, consultants and brand executives told ProPublica.

“Amazon has the power to bury sellers and suppliers if they don’t comply,” said Sally Hubbard, director of application strategy at the Open Markets Institute, a think tank that criticized Amazon and other big tech companies. “It could be automated using an algorithm, but it’s still the monopolist’s anger they’re afraid of. … Amazon is able to cut off competitors’ access to inventory by leveraging its monopoly power. “

While locked-in buyers flocked to buy food, medicine, cleaning supplies, and personal care products from Amazon, the retailer in turn increased its suggested inventory levels for many manufacturers who sell their products on its platform. It has also increased purchases of some essential products which it sells directly to buyers, often buying two or three times more than before the pandemic, officials said.

The increased demand has forced both third-party sellers on the Amazon platform and its direct suppliers to make difficult decisions about where to send inventory, consultants said. Often, like Rise Bar, they favor Amazon before other retailers. Third-party sellers like Spenuzza don’t have to keep as much in stock as Amazon recommends. But if they run out on Amazon, where “bestseller” status and list ranking in search results are tied to availability, the impact on sales could be devastating.

This model makes it more difficult for Amazon’s competitors, such as grocery and discount chains that remained open during the pandemic, to keep coveted items in stock. “Everyone in the retail world realizes that there is limited access to certain things, so you better get there first,” said James Thomson, the former chief executive of an Amazon team that is recruiting third-party sellers and now a brand consultant working with the company. “The difference is that Amazon can afford to collect the money in one go and say,” Save the trucks, let’s take it all. “” Thomson called the stock-out on Amazon a “cardinal sin.”

An Amazon spokesperson said the company is a relatively small player in the retail market, competing with “all other online and brick-and-mortar stores,” and that Amazon is not responsible for suppliers who give it priority over other customers. The algorithm is designed “to present the items we think customers will want to buy, and that includes the items in stock,” said the spokesperson. “We are working to help our trading partners in this difficult time and are evaluating several ideas to mitigate the impact of the different demand patterns we are seeing in light of COVID-19.”

“Retail is a competitive industry with many choices for customers and suppliers,” added the spokesperson. “Suppliers make their own business decisions, not Amazon. “

In a letter to shareholders dated April 16, CEO Jeff Bezos said that “the demand we see for essential products has been and remains high” and acknowledged that it has created “major challenges for our suppliers and our delivery network ”. The company has waived the fees generally imposed on suppliers who cannot fulfill purchase orders.

Amazon is facing at least one European antitrust investigation and two in the United States. The House Judiciary Committee announced in June an investigation into possible anti-competitive behavior by major technology companies, including Amazon. In addition, the Federal Trade Commission has been investigating Amazon’s anti-competitive practices for at least nine months, including examining the company’s power over its suppliers, media reports said. The House’s investigation is underway, a spokesperson for the chairman of the judicial commission’s antitrust subcommittee said, while the FTC declined to comment.

The Amazon spokesperson declined to comment specifically on the investigations. “We face intense competition in each segment in which we operate, and we love this competition because it allows us to better serve our customers,” said the spokesperson.

To take antitrust action against Amazon, the government would have to prove that the company has substantial market power that has been acquired or maintained by improper conduct, said William Kovacic, director of the Competition Law Center at George Washington University Law School and former president. of the Federal Trade Commission. Sellers who prefer Amazon over other retailers could be a sign of market power, he said.

“Let everyone do exactly what you want and be the first to worry that if they fall out of favor with you, they are in real trouble – this could be seen as proof of your market power”, said Kovacic. “The way people look at you, how they react to you, how they respond to your wishes indicates if you have market power, and that is a key issue in these cases. If people say, “We dare not alienate them,” that is part of that evidence. You have market power when it comes to retail and distribution, because everyone knows that if you are disappointed, the price will be high. … The crisis reinforces the position of importance they had before. “

One advantage that Amazon has enjoyed for a long time over some competitors is that it can afford to make little profit in the short-term retailing business to increase market share and traffic, said Hubbard. Unlike most traditional retailers, Amazon can rely on revenues from other parts of its business empire, such as cloud computing. It has a history of pricing below cost to exclude competitors, a practice known as predatory pricing, said Hubbard, former New York State assistant attorney general for antitrust matters.

Of course, even Amazon doesn’t always have enough toilet paper and disinfectant wipes. And traditional retailers also have ways to penalize suppliers who do not fill out purchase orders. For example, they can reallocate storage space for goods from a supplier to a competitor. Retailers like Walmart, Target and Costco also sell merchandise online, but these retailers’ e-commerce sites account for a small proportion of their overall sales, so suppliers may be less concerned about the stock-out on these sites. .

Aside from the stick of the algorithm, Amazon offers several carrots to brands, including a massive customer audience and a high level of customer confidence, said Steve Yates, CEO of a company that advises sellers on the platform. -form. “There are good reasons to say,” If I have limited inventory and where I’m going to put it, it will be most effective, “Amazon is this place,” said Yates.

Amazon accounts for less than 4 percent of the US retail market and the same percentage of the grocery segment, according to the company spokesperson. Its 2018 retail sales were less than a third of Walmart’s, according to data released by the National Retail Federation. However, Amazon accounts for nearly 40% of online sales in the United States, compared to less than 5% for Walmart, according to eMarketer. According to the market research company, Amazon’s share of e-commerce in retail and e-commerce is expected to increase due to changes in online consumption during the pandemic.

While retail sales in the United States fell 8.7% in March, the worst monthly decline on record, Amazon sales soared. In response to customer demand, the company has hired 100,000 workers and plans to hire an additional 75,000. For the week ending April 12, customer spending on Amazon is up about 44 percent from the same time last year, according to Facteus, a company that analyzes consumer transaction data. Spending at Walmart remained unchanged over the same period, although it peaked in mid-March, according to Facteus.

Fahim Naim, a former Amazon category manager who now runs a consulting firm advising mainstream brands working with the company, said that the high demands for high priority products have prompted some of his customers to choose between Amazon and d ” other retailers. One completes the brand that deliberated last month on whether to send its inventory on demand to Costco or Amazon, two things it deemed important to its business. In the end, the brand dramatically cut supplies to Costco, said Naim. Naim refused to identify the company because it did not want to upset Costco.

Likewise, customers who sell deodorants, feminine skincare, and sexual and beauty products asked Naim if they should set aside big box retailers – even those where sales have been strong – in order to maintain high inventory levels on Amazon, he said. He generally advises to favor Amazon.

Out of stock on Amazon is detrimental to the ranking of a brand, such as “bestseller,” which is directly correlated to sales and “hard to recover,” he said. Brands can give Amazon 80% of the inventory “so they can at least have something more” for big box retailers like Walmart, Target and Costco, he said. Costco and Target spokespeople declined to comment. Walmart did not respond to a request for comment.

“It is a difficult decision,” said Naim. “But you’re almost stuck against the wall in that you have to allocate at least enough quantity to Amazon to avoid a stock-out because the consequences of a stock-out on Amazon are often greater than the consequences of a stock-out on the other hand. Amazon is so powerful right now and there are so many customers on it. The impact of not being on Amazon is probably more important than not being in some of these stores. “

Another Naim customer, Las Vegas-based CEO Ramon van Meer, was unable to secure new supplies of his company’s popular dog training towels, although demand on Amazon for them has increased. China has diverted some of the raw material used to make the pads to make protective masks, said van Meer. Due to a 6 to 8 week buffer stock, van Meer has suspended expansion plans in physical stores, and will reallocate inventory for sale on its own website to Amazon. He also suspended advertising on Facebook and Instagram to curb demand until he finds a manufacturer in another country.

“The worst thing that can happen to an Amazon seller is that they run out of stock,” said van Meer. “I really have as much inventory as possible for Amazon. I prefer to be out of stock in my own shop rather than out of stock on Amazon. “

Some suppliers have sufficient inventory to accommodate Amazon and their other customers. Beginning in the first week of March, Amazon began sending orders to Italy-based Corman up to three times the normal amount for its Organyc branded female skincare products, said James Ebel, vice president global marketing company. In addition to Amazon, which sells Organyc products directly to customers, Corman also provides pharmacies such as CVS and Walgreens. Corman, which had already forecast growth in the United States, was able to increase production to meet demand from Amazon and traditional retailers.

“On Amazon, there has been a remarkable change in terms of volume,” said Ebel. “The migration of consumers to the platform will have a long-term impact.”

Amazon generally recommends that Fairy Tales Hair Care, based in New Jersey, keep a 30-day supply of its best-selling children’s shampoo. This recommendation is now up to 90 days old, said CEO Risa Barash. Despite this, the brand has enough inventory for Amazon and mainstream retailers like grocery chains Wegmans, Meijer and H-E-B, said Barash.

Eric Heller, a former Amazon executive, said some of the renowned brands he advised were transferring inventory from brick and mortar retailers to Amazon. Beyond a desire to prevent stock-outs, they consider Amazon’s supply to be “selfless” because consumers are reluctant to leave their homes, Heller said.

Hubbard of the Open Markets Institute recognized the value of online shopping during the pandemic. “It doesn’t have to be bad for it to be anti-competitive,” she said. “You can create something of value while doing something that distorts the competitive market.”

Even though Amazon has increased its stock of high priority goods, it has reduced purchases of certain items it considers non-essential. “Exploding Kittens”, a popular card game made by one of Naim’s customers, was out of stock when Amazon temporarily stopped ordering it, said Naim. Amazon has also extended delivery times for some of its other customers’ products. Slower delivery means lower sales, as customers generally don’t want to wait weeks for an order.

Amazon has also differentiated delivery times for non-essential items in a way that some of its critics see as potentially anti-competitive. It has placed shipping delays of several weeks on non-essential items sold by certain third-party merchants on its platform. But he promised delivery within days of almost identical products that he sells under his private brand AmazonBasics. While Amazon said that its private label products only account for about 1% of total sales, the consultants said that AmazonBasics had taken market share from competitors in products such as batteries.

Amazon has the power to bury sellers and suppliers if they don’t comply.

–Sally Hubbard, Director of Application Strategy at the Open Markets Institute

At the end of March, ProPublica found that products including a backpack in stock, a wireless mouse, a digital alarm clock and a set of wine glasses offered by third-party sellers were all delayed by three weeks. (Items may arrive faster than the stated delivery date.) Own versions of Amazon at similar prices were available within a few days, although some AmazonBasics products, such as a coffee maker, were also delayed. A review last week indicated that this gap had been eliminated and that delivery times were similar.

“The changes to our logistics network to meet the increased demand resulting from COVID-19 were not designed to benefit Amazon brands, retailers or sellers,” said the Amazon spokesperson. “They were based on the best way to serve customers during the epidemic while helping to ensure the health and safety of our employees.”

Kovacic, former FTC president, said if he was Amazon’s general counsel, “I would ask” the company to avoid the appearance of personal preference – a key area of ​​government investigation , he said – even if it was not intentional. “They shouldn’t want to do anything right now that reinforces these concerns.”

Other Amazon decisions during the pandemic have highlighted the risk to sellers of relying on the business. As part of its Fulfillment by Amazon program, the retail giant packages and ships products from third-party sellers from its warehouses to their customers, as well as providing customer service. But on March 17, he told these traders that his warehouses would temporarily stop accepting shipments of products he deemed non-essential. Combined with Amazon’s nearly one month’s delay in shipping non-essential items already in warehouses, many sellers had to struggle to fill customer orders themselves, said Tim Hughes, Director of operations of a consulting company that helps brands manage their Amazon accounts. In addition, sellers whose non-essential products were already stored in Amazon warehouses were temporarily unable to retrieve their merchandise because the company prioritized customer orders.

“Many of these people send all of their inventory to Amazon, so there is nothing they can do,” said Hughes. The goods are, in fact, “held hostage” until Amazon employees retrieve them from the warehouse and return them to vendors, said Hughes, who worked in product management at Amazon.

To prioritize products such as basic groceries and medical supplies, Amazon has “temporarily suspended withdrawal operations” in some of its warehouses, the spokesman said. “We know this is a change for our business partners. … We are working to increase capacity. “

Spenuzza, the CEO of Rise Bar, has been selling its product on Amazon for nine years. Last month, he and consultant Rachel Johnson Greer, who advises him on his Amazon business, discussed whether to respond to a large order from Costco, she said. Greer, a former senior Amazon program manager, warned him that if Amazon ran out of stock, the algorithm would send Rise Bar lists lower on the search results pages, which would result in less potential customers to see – and buy – their products there.

“If you go out of stock on Amazon, you can have major problems,” said Greer. “If I fill this order for Costco, I may lose my Amazon rank and may not be able to recover it. … Amazon is a single point of failure for many of these people. “

Spenuzza filled the Costco order for a week and also sent inventory to Amazon, he said. But it took Amazon more than a week to move the packages to its warehouse, and by the time inventory was entered into the system, most of the Rise Bar flavors were out of stock. “Amazon was so overwhelmed that they had to prioritize the best-selling essentials,” he said.

During a trip to a Long Beach grocery store in late March, Spenuzza noticed that the shelves usually filled with dozens of bar types now looked “half-empty,” he said. He knew the stores would be grateful for all the bars he shipped to them, he said. But he couldn’t spare the product. That week, it sent about three-quarters of its protein bars to Amazon, up from 45% in January.

Ava Kofman contributed to the report.

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