Amazon is the first destination for most US consumers searching for products online. For venture-backed startups building direct-to-consumer brands, Amazon is often an afterthought. They fear ceding any level of control over the brand narrative and customer relationship, the core drivers of brand value. However, it’s becoming increasingly perilous to ignore Amazon.
With each passing quarter, an abundance of reports illustrate Amazon’s growing stranglehold on consumer spend. According to Raymond James, 52% of consumers typically start an online product search on Amazon. According to Slice Intelligence, 43% of online dollars in 2016 were spent on Amazon, and the company accounted for an astounding 53% of online sales growth.
Amazon’s utilitarian platform is also becoming increasingly fashionable. In the last year, 46% of consumers purchased apparel on Amazon according to a Morgan Stanley survey. This year, numerous analysts expect the company to surpass Macy’s as the largest seller of apparel in the country. Many contemporary fashion brands are now targeting Amazon’s 80 million Prime members, who skew to the upper income bracket. Brands on the platform include Coach, French Connection, Diane von Furstenberg, Kate Spade, Michael Kors, Rachel Zoe, Rebecca Minkoff and Under Armour.
Amazon is also developing its own assets for the fashion world. The company has launched 8 private-label brands, focused primarily on basics. The new Echo Look camera device incorporates Style Check, a service that combines machine learning algorithms with advice from fashion specialists. Amazon’s next step is reportedly custom clothing, based on a patent the company received to manufacture customized suits, dresses, and shirts.
Amazon’s commanding impact on retail overall is apparent in its market cap, which now exceeds that of its core retail competitors combined. Essentially all incumbents not named Walmart have experienced significant market cap declines over the past decade.
Marketplace Dominance in China
While there are many arguments to avoid Amazon as a core channel, the company’s seemingly inevitable dominance is foreshadowed in the Chinese market. According to iResearch, over 80% of e-commerce is now controlled by Alibaba and JD.com. Brands in China focus primarily on building a presence within these marketplaces as opposed to proprietary online storefronts.
While the dynamics of the Chinese market differ in many ways to the US, the two dominant marketplaces emerged in large part given the choice and speed enabled by their massive investments in infrastructure and logistics. Amazon appears to be playing the same game, automating warehouses with Kiva robots, launching proprietary Prime Air cargo planes and, eventually, drones for last mile delivery.
The Early Days of Search
The dynamics of Amazon’s A9 search platform are similar to the early days of internet search. Keyword stuffing has been exploited and is being increasingly penalized by the platform. Keywords now must be assigned judiciously across product titles, bullets, descriptions, and back end search terms.
When internet search matured beyond keyword stuffing and spammy backlinks, consumer brands and online retailers built up relatively sustainable, self-perpetuating search engine rankings. They did so via high quality inbound links, rich and timely content, and paid marketing. Massive value was created by properties that landed on Page 1 of search results and figured out how to stay there. Links and content are to search rankings as sales and reviews are to Amazon rankings.
Paid marketing works similarly on both platforms. Sponsored results on Google and external display via AdWords got the ball rolling with search rankings. The same can be done on Amazon’s site today with sponsored listings, and externally via ads on Facebook and Google AdWords that drive traffic back to Amazon.
While Amazon hasn’t had to battle the click fraud prevalent with Google, it has had corollary issues with fake reviews and counterfeit goods. Credible reviews and legitimate merchandise are critical to driving conversion and repeat usage. Amazon is actively fighting the same unending battle that Google faces on this front.
Amazon-first Brand Strategy
Many direct-to-consumer brands have emerged in the US, building their own sites and driving proprietary traffic via social media and content marketing. This strategy has built tremendous value for a number of companies including Casper, Dollar Shave Club, Harry’s, Warby Parker and many more. However, as Amazon’s share of the American wallet has grown, a few successful companies have emerged with an early focus on the increasingly compelling Amazon channel.
In 2011, Steven Yang left his role at Google as a Senior Software Engineer to launch Hunan Ocean Wing E-Commerce, maker of the Anker portable charger. Steven had been helping his wife sell on Amazon since 2009, developing software to help automate her business. He saw an opportunity to sell compact technology that could be built and shipped inexpensively from his native China. Steven focused on building a high quality product and brand, and he launched with Amazon as his primary storefront.
Anker eventually became the top-rated portable charger on Amazon. The company subsequently built out a suite of USB-charging products and, with Amazon’s support, has now sold to 24 million customers across 30 countries and regions. With no publicly disclosed financing, the company grew to $193 million in sales in 2015. In December 2016, the company raised $47 million at a $521 million valuation led by IDG Capital.
Anker’s products are now available online and offline with numerous partners including eBay, Best Buy, Wal-Mart and Staples. However, the company was built on the backs of Amazon. CEO Steven Yang notes that “Amazon reviews are actually the single most important input to our new product development process.” The rich review culture amongst Amazon buyers not only helped Anker rise to the top, but also to identify how to develop and evolve its products.
Tuft & Needle
Tuft & Needle, which has raised only $500,000 in capital from alternative lender Bond Street, built a rapidly scaling mattress business fueled by Amazon and the credibility of its rating system. While the founders launched with their own website, they tested Amazon a few months later in order to generate reviews from the most credible online retailer. The company’s high quality product and high touch customer service yielded stellar ratings, which catapulted their product to the top of Amazon’s search results for mattresses.
Launched in 2013, the company did $1 million in revenue via its site and Amazon. Boosted by top ratings on Amazon, Tuft & Needle grew to $9 million in sales in 2014, $42 million in 2015, and an estimated $150 million for 2016.
Note that Tuft & Needle attributes much of its recent revenue ramp to Google Display Network, where it now allocates 60% of its marketing budget. They started working with Google in the fourth quarter of 2015, which helped propel its mattress business even higher. While the company still drives the majority of its sales through its website, Amazon reviews are at the core of Tuft & Needle’s brand genesis.
Brands vs. Private Label
Competing directly with Amazon on commodity products is a losing game. Some companies like Rain Design have discovered that the hard way. Brand vs. private label has been a significant battle in retail since Sears-Roebuck launched Craftsman and Kenmore. Today’s dominant retailers like Kroger and Walmart sell billions of dollars of their house brands on the shelf adjacent to third party products.
Though offline retail appears to be descending its peak, tremendous brands have been built for decades on shelf with high quality product and superior marketing. As consumption continues its rapid shift online, can brands leverage Amazon’s pervasive reach and credibility to develop sustainable brand equity? If their products become top sellers, can they avoid the risk of being undercut by the platform itself?
Anker and Tuft & Needle illustrate the potential to do so. Both companies deftly constructed premium brands around high quality products and customer service with an Amazon-centric launch strategy. They focused on driving top ratings and landing on Page 1 of Amazon’s search results, the digital endcap of the online shopping world. From this foundation both companies diversified their distribution across a variety of channels, drafting off of the scale and credibility enabled by Amazon. Will more startups in the future navigate Amazon’s dicey waters to build the next great brands?