Bloomberg News

Amazon Picks Favorites With Brands in ‘Pay to Play’ Move

August 06, 2014

Amazon.com Fulfillment Center

An employee stacks items to be shipped at the Amazon.com Inc. fulfillment center in Phoenix, Arizona. Photographer: David Paul Morris/Bloomberg

Amazon.com Inc. (AMZN:US) is giving special privileges to companies that sell their wares directly through its online store, according to a new study.

Companies such as Burberry Group Plc (BURBY:US) and Levi Strauss & Co. that partner with Amazon have scored unusual deals that let them control how their merchandise is sold through the world’s largest online retailer, according to a study by market researcher L2 to be released this week. The companies have been able to limit the sale of goods from third-party resellers, a practice Chief Executive Officer Jeff Bezos has traditionally let run unimpeded over objections from some brands.

L2’s study offers a rarely seen glimpse into Amazon’s relationship with suppliers whose products fill its website. Those that choose closer ties enjoy benefits such as getting their products more prominently featured to millions of shoppers. By contrast, companies that don’t partner with Amazon often continue to see their goods being sold through the Web retailer’s network of resellers without curtailment, meaning they aren’t able to reap the rewards of sales that instead flow to third-party merchants.

Consider the different experiences of Ralph Lauren Corp. and Levi’s on Amazon, according to the L2 study. Ralph Lauren, which doesn’t have an agreement with the Web retailer to offer its clothing or accessories through the site, had more than 9,000 items available on Amazon as of April via resellers. By contrast, no merchandise from Levi’s, which has a deal to distribute its apparel on Amazon, can be purchased from a reseller. Levi’s products are only available from Amazon itself.

Flexing Muscles

“It’s definitely pay to play and they are definitely muscling brands and retailers around,” said Scott Galloway, a marketing professor at New York University’s Stern School of Business and co-founder of L2, a New York-based research firm that plans to publish its Amazon findings today with the title “Great White Shark.” When L2’s researchers registered as a reseller through Amazon, they were blocked from posting any Levi’s items.

Erik Fairleigh, a spokesman for Amazon, declined to comment, as did representatives from Levi’s, Burberry and Ralph Lauren.

Amazon closely guards the terms of its agreements with partners, including financial specifics. While it’s the prerogative of the Seattle-based company to strike better terms with partners, the nature of the agreements may leave other brands with increasingly little choice but to partner with Amazon, even if they’d prefer to keep their items off the website, said Mabel McLean, a researcher at L2.

In total, Amazon accounts for about one in four e-commerce purchases in the U.S., so its merchandising decisions have widespread implications for the consumer-goods market, according to L2. Online retail sales in the U.S. are projected to reach $294 billion this year and $414 billion by 2018, according to Forrester Research.

Playing Hardball

Bezos has developed a reputation for playing hardball with vendors. Book publishers that don’t advertise through Amazon’s website have found their titles buried and harder to unearth on the site, said a former Amazon executive. Amazon is also embroiled in a dispute with book publisher Hachette Book Group, which has had pre-orders of some books blocked as part of a spat about e-book prices.

“On the list of companies that mistreat their suppliers, Amazon is one that stands out,” said Sucharita Mulpuru, an analyst at Forrester.

The findings about resellers are part of what L2’s researchers say is the largest study of its kind about Amazon. Over several months this year, the firm used software to scan 30,000 Amazon listings from more than 315 brands in fashion, beauty, home goods, jewelry and everyday personal-care items. It then compared results from companies that have direct distribution deals with Amazon to those without.

Preferential Treatment

The 53-page report concludes companies that partner with Amazon get privileges, particularly in areas such as consumer goods, beauty and fashion where the Web retailer is trying to improve its selection. Those with direct distribution deals have about half as many listings from resellers, their products get more visibly featured, and the general presentations of pictures and other visuals are more attractive, according to the report.

L2, which specializes in gathering online data to help companies such as Coach Inc. (COH:US), Nordstrom Inc. (JWN:US) and Oakley Inc. determine how products are faring online, initiated the study in January after getting repeated requests for help understanding how Amazon operates. Many companies are deciding whether to start working with Amazon directly and what that would mean for their businesses.

‘Disruptive Force’

“Amazon is the most disruptive force in the largest economy in the world,” said Galloway, who is also a paid contributor for Bloomberg Television. He said he isn’t suggesting regulators interfere in Amazon’s business and that the company’s success is largely based on its superior performance and efficient distribution system.

Resellers have long been a source of tension between Amazon and companies that don’t want merchandise on the website. Starting in 2000, Amazon let third-party merchants sell products alongside its own listings to widen selection and lower prices. Amazon collects a roughly 15 percent commission on each purchase from a reseller, according to Forrester.

While a brand can decide whether to sell to Amazon directly, they can’t curtail the flow of resale items because third-party merchants have their own indirect ways for obtaining products. About 40 percent of the items sold on Amazon come from the so-called gray market, with thousands of listings appearing from companies such as Estee Lauder Cos (EL:US) and LVMH Moet Hennessy Louis Vuitton SA (MC), among others, even though the firms don’t partner with Amazon.

Open Bazaar

Bezos has long nurtured the open-bazaar environment, yet there are now signs he’s willing to sacrifice the increased selection for a more direct relationship with companies in categories like fashion and cosmetics where Amazon wants to increase its offerings. Many of the partners that Amazon restricts resale items for belong to those categories, including Levi’s, Burberry and L’Oreal SA, according to L2.

Burberry began selling to Amazon and featuring its products on Amazon’s Luxury Beauty store last year, particularly making its line of fragrances available on the site, according to L2. In exchange, third parties are restricted from listing certain Burberry goods on Amazon, L2 said.

“Burberry has strategically traded the official distribution of a limited number of its SKUs in exchange for Amazon cleaning up third-party distribution of other Burberry products,” L2 researchers wrote.

Similarly, L’Oreal has been able to curtail the sale of its Kiehl’s brand by resellers on Amazon, the researchers said.

Prominent Placement

Other companies embracing Amazon reap different kinds of rewards, according to L2. Procter & Gamble Co. (PG:US) has a partnership with Amazon that keeps products like Tide detergent and Old Spice deodorant more prominently displayed, giving it a leg up in visibility over rivals such as Unilever Plc.

One Amazon promotion gave customers a $15 Amazon gift card if they buy $50 worth of “selective household essentials,” all of which are P&G products. Of the personal and home care items like toothpaste or cleaning supplies listed through Amazon’s Pantry service, 32 percent are P&G, according to L2.

Paul Fox, a spokesman at P&G, declined to comment.

Armando Branchini, founder of Milan-based luxury consultancy Intercorporate that advises Italian luxury companies, said he’s spoken with executives who have been approached by Amazon about making a trade. The companies feel Amazon is using their frustration about the third-party sellers to corner them into striking a direct deal. He declined to specify which companies have spoken with Amazon.

“They have been forced to change their attitude,” he said. “They consider it a very negative experience.”

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Reed Stevenson


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Companies Mentioned

  • AMZN
    (Amazon.com Inc)
    • $321.82 USD
    • -1.39
    • -0.43%
  • BURBY
    (Burberry Group PLC)
    • $49.22 USD
    • -0.27
    • -0.54%
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