Amazon’s newfound focus on the bottom line has put CPG categories in the e-tailer’s crosshairs.
The company is most concerned with low-priced food, beverage, and home care products that are heavy and costly to ship, a category that Amazon employees have dubbed CRaP (“Can’t Realize a Profit”). In categories with already razor-thin margins, profitability in the e-commerce channel is often driven by a product’s shipping cost. The online retail giant is now taking measures to influence partners to optimize packaging for e-commerce and remove unprofitable products from the digital shelf.
Amazon’s pursuit of a more profitable retail business is evidenced through two diverse strategies. First, the e-tailer works directly with companies like Coca-Cola to optimize the assortment for profitability. After taking on losses from shipments of Smartwater’s smaller, cheaper six-pack, Amazon worked with Coca-Cola to replace this product with a more expensive 24-pack.
As Gartner L2’s Digital IQ Index: Beverages & Beer US makes clear, the shift to higher price point pack sizes is also prevalent across the broader water category on Amazon. Year-over-year, 24-packs and 40-packs of water saw the biggest jumps in average rank among Amazon’s top 100 best selling water products. In addition to revamping its product assortment, Coca-Cola will also start shipping its Amazon orders directly to consumers, a sign not only that Amazon has a new focus on profitability, but also that the online retail giant has increasing influence over its brand partners.
Another sign of Amazon’s profitability push is the application of the ‘Amazon’s Choice’ badge. A Gartner L2 case study focusing on the meal replacement drink category illustrates how the ‘Amazon’s Choice’ badge is not always attributed to the best selling product, but to the most profitable product. While nearly half of Soylent’s organic search results for unbranded meal-replacement-related terms carried the ‘Best Seller’ badge across the month of November, none of these results were featured as ‘Amazon’s Choice.’ Conversely, despite not being a best selling meal replacement drink, 4% of Amazing Grass’ Green Superfood product received the ‘Amazon’s Choice’ badge. The key difference: the shipping weight for Soylent’s product is 12.8 pounds while Amazing Grass’ shipping weight is 1.2 pounds.
In light of Amazon’s strategy to drive profitability for low-margin CPG products, other online retailers are developing new models for selling packaged goods online. Boxed, an online retailer that launched in 2013, sells large, warehouse-sized packages of consumer goods at low prices. The e-tailer helps keep costs down through fulfillment center automation and predictive analytics to anticipate consumers’ demand for their household goods. Additionally, the online retail upstart is focused on building strong brand partnerships.
Shortly after the Smartwater repackaging announcement, bulk online grocery retailer Boxed won the right to sell Coca-Cola’s new Smartwater Antioxidant and Smartwater Alkaline products exclusively for three months. Boxed CEO Chieh Huang articulated the niche he is hoping to exploit: “Amazon is not built to sell the low-margin CPG item […] It came together because of what we’re going at—being fast, being nimble, being easy to work with.” Huang’s company was also a more equitable partner by agreeing to share consumer data on the reaction to these two new products, a concession Amazon will not make.
Amazon’s growing influence in the e-commerce space and appetite for profitability only adds to the pressure brands will feel from their retail partners in 2019. Some CPG giants have already responded with new packaging designed specifically for e-commerce. Procter & Gamble’s new Tide “Eco-Box,” for example, reduces its shipping footprint by using an ultra-concentrated formula which comes pre-packaged inside a ready-to-ship box, eliminating the need for secondary re-boxing and bubble wrap. Investments similar to Procter & Gamble’s will set a new stage for the race to capture the online consumer. Winners will be determined not only by their ability to optimize media, merchandising, and assortment across the online channel, but also their ingenuity in supply chain and product packaging.