Cut the CRaP: Amazon's Strategy to Grow Profits
Walmart (NYSE: WMT) has been infamous for squeezing its vendors on price, and now Amazon.com (NASDAQ: AMZN) seems to be doing something similar, as the cost of shipping online goods doesn't get any cheaper.
The Wall Street Journal reports that the e-commerce giant is forcing consumer-goods companies to get rid of or alter their "CRaP," as it's called -- products that "can't realize a profit" when shipped. Typically they're items that sell for under $15 and are either heavy or bulky in size, such as beverages and snack foods.
The change in focus suggests Amazon's priority is no longer simply growth at all costs but now includes sustainable profitability.
A costly business model for everyone
Amazon.com spends a lot of money shipping stuff around the world every year. It spent over $21 billion on shipping worldwide in 2017, up 34% from the year before, and nearly twice the amount spent in 2015. Through the first nine months of 2018, shipping has cost Amazon $18.6 billion, meaning the full-year total could exceed $30 billion. There's good reason to get a handle on this quickly.
For the biggest consumer-goods companies, the workarounds are easier to achieve. Coca-Cola (NYSE: KO), for example, has reportedly changed the size of the products it sells and how the order is fulfilled.
The Journal reports that Coke used to sell a six-pack of Smartwater for $6.99 as the default size ordered with an Amazon Dash button. After negotiating with Amazon, not only was the minimum size bulked up to a 24-pack that sells for $37.20, but Coca-Cola also shipped the item to the customer instead of warehousing it at an Amazon fulfillment center.
Other companies are also heeding the call to change. Unilever (NYSE: UL) developed new formats for its Seventh Generation cleaning-products line, such as smaller, lighter containers of laundry detergent to make it more profitable. But the division's CEO said it needs to be a two-way street, noting, "We've been clear about saying, 'Let's make sure what we're selling is profitable, and we're not just lining Amazon's pockets.'"
The changes have led to higher sales for many of the companies, as businesses as diverse as Mars, Wrigley, and Kellogg have all seen gains in products that were changed after Amazon deemed them unprofitable.
Even Prime has its limits
Although it might not be unreasonable for Amazon to seek such changes to bolster its bottom line, it is not a risk-free strategy.
The so-called "crap" Amazon doesn't want to sell is the reason many customers willingly fork over $119 a year for with a Prime membership. They could drive over to Walmart instead to buy these goods, but they pay Amazon for the convenience of shipping it to them. They might not be profitable for the e-tailer, but it's what keeps customers coming back to buy those other items that are.
If the balance of benefit tips too heavily in favor of Amazon, the e-commerce site might face a backlash. That 24-pack of Smartwater Coke is selling now costs the consumer $1.55 per bottle instead of the $1.17 it did before. Particularly as the cost of a Prime membership rises to levels that reach the limits of value, at least for the casual Amazon shopper, the utility of the service is diminished.
Sure, the Prime loyalty program is more than just about free shipping, but what Amazon is seeing is the result of what it alone has created: the consumer who demands near-instant delivery at no cost for virtually any product he or she desires.
Room to negotiate
The consumer-goods companies feel they're caught in a bind and must bend to Amazon's will because it has independent, third-party retailers it can call on to fill their slots. Not being on Amazon is simply not an option for them. As Amazon also takes a 15% cut plus warehousing fees from these smaller sellers (it just announced it renegotiated new, lower fees for them), they are a more profitable alternative.
Companies that meet Walmart's demands for ever better pricing are rewarded with better distribution and more strategic assistance. Amazon.com's play isn't necessarily dissimilar, but as it focuses more intently on the bottom line, it needs to ensure it also isn't strong-arming its customers.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.