This is the latest installment of the Amazon Briefing, a weekly Modern Retail+ column about the ever-changing Amazon ecosystem. More from the series →
There are a number of crucial decisions brand executives have to make before they get their Amazon business up and running. And one of the biggest ones is whether or not to operate as a first-party vendor or a third-party seller.
Brands that sell through the invite-only 1P program essentially serve as wholesale suppliers to Amazon, in the same way that they would sell to a brick-and-mortar retailer like Target or Walmart. By contrast, 3P sellers operate independent stores on Amazon, which means they choose which products to sell on the platform and at what prices.
The 1P model has historically been attractive to brands that wanted to take more of a hands-off approach to Amazon. They could offload their inventory to the e-commerce juggernaut, and let Amazon handle the rest. But, third-party sales have grown at a faster rate than first-party sales on Amazon, according to a 2019 post by e-commerce intelligence firm Marketplace Pulse.
Additionally, Amazon has recently taken a harder line in 1P negotiations, prioritizing profitability and pushing some vendors to cut prices. That has changed the calculus for some vendors, as brands that once relied on Amazon’s 1P model have found that the company’s terms are no longer working in their favor.
Choosing between 1P and 3P selling can be tricky because of the different terms and policies offered by Amazon. Below, we break down sellers’ cases for and against selling on Vendor Central.
For: Amazon handles everything from logistics and fulfillment to customer service
Food giant Nestlé’s vitamin supplement brand Garden of Life has been selling via Vendor Central since 2006. Amazon selects the items to sell from Garden of Life’s catalog and issues purchase orders to the brands. Once Amazon sends a purchase order all Garden of Life needs to do is confirm it and ship those items to Amazon’s warehouses.
“I do think that that’s a plus for a lot of brands,” said Gabi Viljoen, head of e-commerce at Nestle Health Science, which manages the Garden of Life wholesale account on Amazon. Viljoen said selling on Seller Central requires a lot more in-house expertise and Vendor Central takes that away. “You don’t need as many people within your company that know selling on Amazon,” she added.
“You’re really just shipping and confirming orders to a customer and Amazon is dealing with that end consumer for the majority of the time,” added Viljoen.
After that, Amazon takes care of things like pricing and inventory management on behalf of the brand. The items for sale in the 1P model are marked “sold by” and “shipped by” Amazon, indicating that Amazon is the seller of record.
“The only thing that you have to do is to give them a cost price for the product in exchange for a standard set of trading terms,” said Martin Heubel, an Amazon vendor strategy consultant. “Everything else is hands off the wheel. You pretty much have a smooth running operation if you’re setting it up correctly from the get go,” Heubel added.
Against: Selling via 1P can result in worse profit margins
However, giving up control to Amazon has some drawbacks. Vendor Central is not always the most profitable channel for brands to sell through. It really depends on the P&L of each business.
In the last two years, some 1P sellers say they have found it much harder to generate profits through Vendor Central. Amazon’s annual vendor negotiations, or AVNs, have become hard-nosed conversations where Amazon asks brands for steeper discounts. That puts pressure on margins for 1P sellers.
Viljoen gave the example of Nestle’s supplement brand Nature’s Bounty. At the last AVN in January, Amazon asked Nature’s Bounty for an additional 4.7% discount to sell items on 1P. That, in turn, would make certain items not profitable, said Viljoen. This is on top of a very healthy discount especially in comparison to competitors, added Viljoen.
The Nature’s Bounty team could not reach an agreement with Amazon on this discount, she added. “Amazon retaliated by shutting off over 180 ASINs and suppressing them so the items were not available for sale for about six to eight weeks,” added Viljoen.
That pressured Nature’s Bounty to come to some sort of agreement. “But we were forced in to it because we were losing millions of dollars in sales,” added Viljoen. She said the Nature’s Bounty account reached an agreement after five months on May 5, but did not share specifics about what the agreement entailed. “Almost half a year had gone by,” she added.
The negotiations with Nature’s Bounty point to a recurring theme that 1P vendors typically lose all price control to Amazon. One of the few options 1P vendors have when they can’t reach an agreement is to stop shipping to Amazon, in the hopes that that will force Amazon’s hand. But it’s not ideal. “That aggressively hurts our business, hurts their business and hurts the customer. It’s the last thing that we ever want to do,” Viljoen said.
Separately, Kiri Masters, head of retail marketplace strategy at Acadia, said Amazon has too much negotiating power under the 1P model. “It’s like David versus Goliath. That’s the power dynamic,” she said.
Masters said that 1P brands struggle with Amazon’s secretive pricing structure. She said brands can’t compare and contrast Amazon’s trading terms with other vendors. Brands, she explained, don’t have answers to basic questions like what are the requirements Amazon is holding other 1P brands to? And what have other 1P vendors been asked to pay for? That, according to Masters, is what makes Amazon’s 1P cost structures problematic.
By contrast, third-party sellers pay the same fulfillment fee and the same listing fee to Amazon. “The costs are public and equitable,” said Masters.
For: Amazon gives exclusive benefits such as placement priority and advanced analytics tools to 1P sellers
Amazon does offer 1P vendors exclusive merchandising opportunities like prominent presence on deal features on the homepage during tentpole deal events like Prime Day and the Black Friday/Cyber Monday period.
“1P sellers will work with vendors to ensure price discounts are competitive and they are featured among top deals or Deal of The Day with good visibly on the deals and promotions page, and sometimes also Amazon’s homepage,” said Heubel.
Additionally, Amazon offers some exclusives like retail merchandising packages to 1P vendors, that allow them to promote their brands on the category pages. “However, they aren’t driving direct revenue-attributable sales growth and brands therefore typically see a low return on investment,” said Heubel.
Historically, Amazon has also offered some features like Premium A+ content pages to 1P vendors first. However, this is now available to 3P vendors as well. And, Nestlé’s Viljoen argued that in the last three years, “anything meaningful” has actually gone to Seller Central first.
Against: Smaller brands can get lost in the shuffle
Multiple sellers and consultants said that they believe Amazon’s Vendor Central is better suited for large brands and retailers, because it involves a thorough verification process for approval. Amazon selects which items to provide from a seller’s catalog of goods and issues purchase orders to the brands. So at a high level, Vendor Central makes more sense for brands that have a bigger product catalog to wade through, and don’t want to manage listings for every single one.
Additionally, “if you’re not a big enough company that has a lot of product that you offer to Amazon consumers, then you don’t really have much to negotiate with Amazon.” Vijoen said. “They won’t blink an eye before shutting off your listings or not ordering from you.”
But if it’s a bigger company, “then you can afford to negotiate and push back with them a little bit more,” said Viljoen.
Additionally, Heubel said, Amazon now employs fewer Vendor Managers than it did before the pandemic as it targets lower cost and higher margins. This means that a smaller pool of Vendor Managers must now manage a higher number of 1P brands, leaving a lot of brands underserved. In particular, smaller brands can get lost in the shuffle as Amazon prioritizes larger vendors.
“In some instances, they don’t have access to a dedicated Vendor Manager to help with cost price adaptations or to fix operational process bottlenecks,” said Heubel. As a result, he added simple catalog updates or requests for help can sometimes go unanswered, or are met with pre-formatted responses that do not apply to the problem at hand.
Therefore, smaller brands are better off selling through Seller Central, as it equips them with all the tools they need to self-service their account, added Heubel.
At the end of the day, Viljoen said that established brands will likely have stronger negotiating tactics. “Vendor Central is always going to be Amazon’s sandbox, and brands are just playing in it,” she said.
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