Member Exclusive   //   January 11, 2024

Amazon Briefing: Confusion over 2024 strategy leaves 1P brands in a bind

This is the latest installment of the Amazon Briefing, a weekly Modern Retail+ column about the ever-changing Amazon ecosystem. More from the series →

Even while inflation cools, 1P brands still say that Amazon is continuing to tighten its belt as the e-commerce giant continues to raise fees with longtime wholesalers and prioritize profitability.

Last year, Amazon’s first-party vendors told Modern Retail that the e-commerce giant had been tightening margins in contract negotiations for longtime sellers, citing inflation and supply chain disruptions. Sources say this trend shows no signs of abating. Sources said that Amazon has begun allegedly begun telling brands it will no longer prioritize smaller individually-packed items, and will instead support products that have higher average selling prices. Other vendors have posted on LinkedIn that they’ve received similar information from vendor managers in the European Union.

Amazon, however, denies these claims and says that its strategy with vendors is not changing.

At this very least, this points to the fact that there is confusion among first-party vendors about what Amazon’s strategy is this year. This leaves brands in a bind, unclear of the best way to strategize product assortment in the coming year. Some are being advised to create new bulk listings that have a higher selling price, but that would require big back-end changes. Others also feel pushed to rethink advertising budgets and strategies. In short, while 1P vendors certainly feel a continued focus on profit margins, it’s unclear how deep that profitability quest is getting.

Amazon, for its part, said that “there is no truth to these claims. No change has been made to our policies, and we continue to work with our vendors to expand our selection of low priced products.” In a statement to Modern Retail, a spokesperson wrote, “We hold open and consistent conversations with our selling partners on business needs and, where relevant, seek improvements that positively impact our customers. We have faced and overcome many challenges side by side with our selling partners the last few years including supply chain disruptions, inflationary environments and dynamic costs and have worked collaboratively to find mutually beneficial outcomes.”

Brands that sell on Amazon are faced with the decision of whether to sell first-party or third-party. Brands may choose to sell to Amazon as a 1P seller because Amazon will buy brands’ products directly in bulk and handle logistics on its end in terms of fulfillment inventory, and customer service. That is why a lot of bigger brands, like Coach and Levi’s, use the 1P seller model. Conversely, 3P brands are able to control their inventory and listings, giving them more control over the business.

For the last few years, Amazon has been pushing more sellers to sell 3P. According to Marketplace Pulse, nearly 60% of the units sold on Amazon were from third-party brands in the first quarter of 2023, up from 52% in the first quarter of 2020.

However, as Amazon shifts priorities in 2024 from 2021 pandemic growth to maximizing profitability, its tight control over profit margins and seller prices might push brands to reconsider existing 1P strategies with Amazon.

Demanding better margins and focusing on higher prices
Over the last few years, Amazon has consistently asked for better terms on wholesale contracts. That trend is continuing this year, according to sources. Amazon recently, in its contract negotiations, increased its selling margin to 40% for hardline products — like electronics and home appliances, an increase from last year which was around 30% to 35%, according to Dan Brownsher from the agency Channel Key. 

This means the profit Amazon makes off any one sale in the hardline category has increased around 5% to 10%, cutting further into profits for brands that sell 1P.

Some vendors say they have picked up on an alleged strategic strategic shift that highlights this newfound focus. According to Martin Heubel, a former Amazon employee who now runs the 1P consulting firm Consulterce, the e-commerce platform has begun limiting listings of products from European brands that have an average selling price of less than about $10. Heubel said that about six weeks ago, Amazon vendor managers began informing brands in certain categories that it would no longer support those less expensive listings.

Only a few years ago, Amazon had been pushing brands to sell lower-priced individual products as a way to get more shoppers comfortable purchasing one-off items. “Now, it seems to be at the end of the cycle where Amazon again prioritizes its profitability and only wants to sell multi-packs again,” Heubel said.

Amazon, however, categorically denies that it is de-emphasizing smaller-sized items.

It leaves many 1P brands unclear of what to do. Heubel described the conundrum brands could face like so: “Now Amazon comes around and says, ‘look, we don’t want it anymore — just list larger pack sizes again and create new listings,'” he said. “They have established those single pack listings over the last three to four years, have invested heavily in retail media and advertising to establish the sales rank.”

Rethinking advertising
But that’s not the only headache 1P brands face. Amazon has been expanding its advertising offerings over the last few years, so brands are now reconsidering ways to invest in different types of campaigns, according to Brownsher. “I think the big important topic for us coming into this year is how to leverage upper funnel through Amazon advertising appropriately,” Brownsher said.

Over the last year especially, the company has tried to push brands to test out streaming TV ads and it’s demand-side advertising platform, DSP, which focuses on bringing users off Amazon onto the platform through targeted ads.

“Advertising on the platform is getting much, much broader. Focus is being placed on top-of-funnel activities like streaming TV, DSP,” Brownsher said.

The theory — at least from Amazon — is that investing in more advertising beyond search and in-platform display will lead to greater awareness and more sales. But for brands already feeling a profit crunch, it’s unclear what the best strategy is going forward.

“There’s just general confusion in a lot of cases on what brands should be doing and where they should be deploying their dollars within Amazon,” Brownsher said. 

Whatever the new strategy is, the one thing for sure is that profitability remains core.

“Amazon has very clearly reprioritized its retail operation away from growth to profitability,” Heubel said. “Amazon is really happy to have less growth or single-digit growth year-over-year in revenue with most of their big brands, across categories, as long as they’re really profitable.”

Amazon news to know

  • Amazon unveiled a new sizing tool that uses artificial intelligence to better estimate how products on Amazon Fashion fit on shoppers.
  • CNBC reports that Amazon is laying off hundreds of its workers across its Prime Video and MGM Studios divisions.
  • Amazon hasn’t offered the EU any updated proposals over antitrust concerns about its intended acquisition of iRobot, writes Reuters.

What we’ve covered