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Ecommerce

To Join, or Not to Join: Amazon’s Retail Takeover

While some brands are embracing the Amazon marketplace, others are waging war against the ecommerce giant. Brands must make a choice: Deal with the black and/or grey markets, or else become part of the white market.

Online/ecommerce grew in distribution channel share by three-tenths of a percentage point last year to reach 11.7% of all licensed sales in the U.S./Canada—or almost $12.47 billion—according to TLL’s Licensing Business Survey. In comparison, the U.S. Commerce Dept. reports that 8.1% of all retail sales were made online in 2016. Excluding fuel, automobiles, and restaurant and bar sales, that share rises to 11.7%, or $394.9 billion.

Meanwhile, Slice Intelligence estimates that 43% of all total online retail sales in the U.S. went through Amazon in 2016. That would mean that Amazon accounted for $169.81 billion of all U.S. retail sales, and approximately $4.02–4.56 billion of licensed retail sales in the U.S. in 2016.

Amazon currently counts over 80 million U.S. Prime members (or around 25% of the population), according to Consumer Intelligence Research Partners. While the ecommerce giant seems to be taking steps to protect brands, its main retail strategy has always been, and remains to this day, getting as much stock on its site as possible—even at the risk of burning bridges with its partners. One answer? Develop your own ecommerce platform.

Third-Party Shuffle

After years of relative inactivity, Amazon moved to respond to brands’ concerns about counterfeiters in 2016 by instituting new controls on its third-party marketplace. Amazon began allowing brands not only to register, but also restrict, sales of products on its platform. In order to sell certain items on Amazon, third-party vendors must provide proof that they are authorized to sell a brand’s products (with invoices, authorization letters, etc.). To help weed out smaller players, Amazon then asks these sellers to pay a non-refundable fee of anywhere between $1,000–3,000 (depending on the brand) if their application to list a product is approved. Sellers get paid every two weeks, unlike on other ecommerce platforms. And then on top of that, the ecommerce giant takes a cut of one-third of the sales price when third-party vendors use its Fulfillment by Amazon service (usage was up by 70% in 2016, according to Amazon).

Gated Brands

TLL cross-referenced several lists, such as those from The Selling Family and Helium 10, for current restricted (“gated”) brands. Note that not all products (differentiated by ASIN) are restricted for every brand; third-party vendors report patchy, unpredictable enforcement that tends to focus on newer goods rather than used. Toy/game brands include:

  • Disney ($1,000 fee required to sell after authorization),
  • Gund,
  • Hasbro,
  • Funko ($1,000),
  • Lego ($1,000),
  • Mattel,
  • Paw Patrol,
  • Pokémon,
  • Star Wars ($1,500), and
  • Minecraft.

Other brands include:

  • Harley-Davidson,
  • Adidas ($1,500),
  • Nike ($1,500),
  • Dewalt ($1,000),
  • Polo Ralph Lauren ($1,500), and
  • Elizabeth Arden.

The fees collected are allegedly used by Amazon to detect and combat counterfeit items.

And it appears that Amazon will be expanding its registry, with the company citing the fight against counterfeits as a major goal for 2017. The ecommerce giant is allegedly building teams in the U.S. and Europe to work with major brands on a registry to prevent fakes.

Third-party sellers are responsible for at least 44% of Amazon’s stock—but Amazon doesn’t break out how much of these sales impact its bottom line in its financial statements. The company lumps third-party sales with all service sales such as compute, storage and database offerings; fulfillment; publishing; certain digital content subscriptions; advertising; and co-branded credit cards (in partnership with Visa). These collected service sales made up 30% of Amazon’s net total sales, or $41 billion, in 2016.

According to Amazon, the number of third-party sellers that sold at least $100,000 worth of goods grew by 30% in 2016. Smaller players are getting increasingly locked out of the gate. But that doesn’t mean that the black or grey markets will be wiped out—on the contrary, the WSJ reports that hackers can easily take over old accounts and begin vending thousands of unvetted or unshipped goods. And if a brand is lax in locking down its distribution contracts, even if it does not want its goods to be sold via a third-party on Amazon, a third-party seller may still be approved by the ecommerce giant.

Fighting Back

But some brands have managed to utilize their leverage effectively. Even if third-party vendors are authorized to sell their branded goods online, some brands are balking at listing their products on Amazon in what is considered the grey market. In the EU, Coty secured a favorable, non-binding decision from a top advisor to the EU’s Court of Justice. The decision states that according to European case law, Coty may lawfully block an authorized German retailer (Parfümerie Akzente) from selling its beauty products on Amazon—including licensed fragrances for Calvin Klein, Balenciaga, Marc Jacobs and Miu Miu.

Most recently, Birkenstock USA’s CEO sent out a blistering email to its merchants prohibiting shop owners from selling, distributing or shipping its products to resellers. The condemnation came after Amazon had contacted tens of thousands of domestic retailers, asking them to sell their products directly to Amazon—and thereby bypassing Birkenstock.

Birkenstock’s strategy makes sense—if Amazon won’t enforce its distribution agreements, it will. Even if the brand partners with Amazon directly, there is no guarantee that its interests will be represented. According to the Susquehanna Financial Group, commenting on the recent Amazon/Nike partnership (below), although “removing unauthorized third-party Nike product sales would help enhance Nike’s brand presentation and prevent counterfeit sales, given Amazon’s reputation as a transactional retailer with no interest in brand building, we have doubts as to whether Amazon will ever agree to the removal of an unauthorized third-party Nike sales from the site.” And that’s for a brand with relatively hefty financial leverage to pressure Amazon. So what does it take? Apparently, the power of sports.

In 2016, the NFL and MLB threatened to entirely ban the sale of licensed goods on eBay, Amazon, and other third-party ecommerce marketplaces—and Amazon responded by stepping up to enforce the sports leagues’ selective distribution agreements (at the time, against its own policy). After a massive purge in late 2016, however, Amazon is now quietly operating a “Fan Shop” store with a relatively paltry selection of team-branded merchandise for all of the five major sports leagues. Presumably, these vendors have been authorized to sell on Amazon through their own licensing agreements. As for the rest, they have apparently been replaced by a new partner of choice—Fanatics.

An Alternative?

One answer brands may have is to develop their own ecommerce platform, and reap the benefits of licensing more directly. But it’s not easy.

Sports brands are one example of how this strategy can successfully play out. According to TLL’s Licensing Business Survey, 11.2% of all sports-based licensed retail sales were made through ecommerce channels in 2016, or $1.66 billion. And one company is looking to dominate the lion’s share of the market.

In May, the NFL, NFLPA, and MLB all purchased equity stakes in the online sports retailer Fanatics, which is now one of the biggest licensees for each league. Collectively, the NFL and MLB accounted for $7.27 billion in licensed sports-based retail sales in 2016. And Fanatics is thought to be worth $8.3 billion, according to an IBISWorld report. When GSI bought Fanatics, it recorded fiscal 2010 revenues of $186.3 million and operating income of $23.8 million.

In addition to selling licensed merch online through over 300 stores for all five major professional sports leagues, sports media brands, and 150+ collegiate and professional team properties, Fanatics also operates brick-and-mortar events retail for several properties, including NASCAR, the Kentucky Derby, and Intl. Speedway Corp.’s motorsports tracks. But most of its gains are not from merchandise sales—Fanatics is estimated to make two-thirds of its revenues from the digital and ecommerce services it provides to other sports leagues, media brands, and collegiate and professional teams.

Amazon isn’t lying still. Earlier this year, Amazon bought the rights to the NFL’s streaming package, and will offer 10 Thursday night games for free to its Amazon Prime subscribers around the world. The cost? A reported $50 million, or 5x more than Twitter had paid the year before for the same package. While some analysts insist the deal makes good fiscal sense, especially considering the hefty $2.8 million price tag for advertising packages Amazon sold afterwards, the deal seems, in part, a bid to try to take back a piece of the $15.4 billion U.S./Canadian sports-based licensing market from an up-and-coming competitor.

If You Can’t Beat Them

On the other hand, some brands have decided to join the Amazon marketplace directly, reducing the hold of third-party sellers by selling their products at a discount, or through a direct partnership with Amazon that gives greater control to the licensor over how officially licensed goods are marketed.

Cash-strapped Sears joined hands with the commerce giant to sell Kenmore appliances directly on Amazon. Although Sears was one of the first to vend goods online, the retailer seems to be regarding Amazon as a distribution channel and digital marketing partner, rather than as a direct competitor. Some of the Kenmore-branded goods will incorporate Amazon’s digital assistant technology Alexa, marking a step in Amazon’s ambitions to develop smart home technology.

Nike confirmed that it is planning to open a dedicated shop on Amazon, giving the athletic company more control over how its products are marketed (currently, Nike products can be found on the site via both licensed and unlicensed sources). Rival Adidas already seems to have a custom store page on the site, although officials have not confirmed a relationship with Amazon. Other brands who have done the same recently include Samsung, Microsoft, and Bose.

Distributor-to-Distributor

Despite these new partnerships, Amazon is not abandoning its previous, tried-and-true strategy of targeting distributors to expand its branded offerings. Amazon’s recent acquisition of Whole Foods is one example of its willingness to work with other vendors to snatch away market share from competitors. And the Birkenstock email points to a concentrated effort of the part of the ecommerce giant to target brands who aren’t already on board.

Amazon recently partnered with Violet Grey, a luxury L.A. beauty emporium whose best-selling brands include Chanel, Tom Ford, Dior and Dr. Barbara Sturm—none of which are currently in stock on Amazon. Grey will receive a 20–30% commission on the as-yet-unknown curated selection of products. The deal allows Amazon the chance to cultivate a prestige reputation by appealing to well-connected fashion tastemakers with strong editorial content—Grey also specializes in content production.

But Amazon’s distributor-to-distributor partnerships haven’t always been successful. In 2009, Amazon agreed to pay out $51 million to Toys ‘R’ Us after the toy retailer accused Amazon of breaking their contract by allowing other companies to sell toys, games, and baby items on the site. Amazon countersued, alleging that TRU consistently failed to keep products in stock. The legal fight lasted five years. As noted above, it’s unlikely that Amazon would ink any type of agreement that demands exclusivity on its part.

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