Amazon is falling into the same trap as GE. Or is it?
I know the chart above showing how Amazon’s acquisition of Whole Foods tanked the stock prices of grocery counterparts doesn’t quite fit a sports and sportswear website, but let me explain. When Amazon acquired Whole Foods the entire grocery industry had to adjust to what in retail is becoming known as “the Amazon effect”. What it means is that Amazon never pays a dividend on its stock. They reinvest their profits into developing divisions of its company of which there are hundreds. The company then looks at the entire market as a loss leader and as the source article states:
Amazon’s scale means it can cross-subsidize huge losses from different ventures, plowing profits back into businesses that work. The aim is not to make money on any particular service; Amazon likely lost $7.2 billion on shipping last year and is selling hardware supporting its virtual assistant Alexa around or below cost. It’s adding to the value of the system itself. Entire industries are loss leaders for Amazon. For companies that must make money on what they sell, it’s a terrifying prospect.
What does this have to do with sneaker companies? As online shopping continues to become the norm, brands are looking to reach the consumer where they are. Amazon’s extensive reach and control of e-commerce places the company in a unique position to give brands the ability to reach customers they probably can’t acquire themselves. Unfortunately doing so comes at an extreme cost to the brand.
Last week during Nike’s Investors Day, Nike did something I thought was very interesting. They barely mentioned Amazon. When I heard that Nike was starting a brand registry I thought it would mean doom and gloom for retail stores like Finish Line and Foot Locker. I even wrote a series of posts explaining that it would be the worst thing for the sneaker industry. I finally settled on a discussion that it would be horrible for Nike because Amazon would scrape Nike’s sales data on their platform and utilize it in the creation of their own sportswear private label. I saw the brand registry as a trojan horse for Nike.
Nike saw it too and they aren’t using Amazon for the release of footwear. They are doing something completely different and it’s something that every brand should do. It’s what Birkenstock kind of did. Two years ago Birkenstock snatched its products off of Amazon. This was a smart thing to do, but Birkenstock did it the wrong way.
Nike is doing it the right way. Nike is utilizing Amazon’s brand registry to take control of the third party marketplace. While Birkenstock removed its store it hasn’t been able to control the listing of its footwear by people who don’t have accounts. Amazon still carries Birkenstock because it is an open source market. Amazon is not directly responsible for the fake shoes being sold. It’s on the buyer to make a decision to purchase from Amazon.
Nike, adidas and Under Armour along with the smaller brands like New Balance and ASICS have brand registries with Amazon. They shouldn’t sell on Amazon and Nike knows this. This is why during Investor’s Day Nike stressed that Amazon was a small pilot while talking up the alignments with online retailers in the international market. TMALL, Zalando and FarFetch are all international online retailers that will not perform like Amazon. Those companies aren’t looking to launch private labels. Farfetch has even directly stated that it will remain a marketplace, “We have no plans to launch a private label or add any inventory,” Neves tells me. “The plan is to continue to be a marketplace and connect global retailers.”
So, why can’t the sneaker companies leave Amazon? Brand Registry allows for Brand Gating. If Birkenstock was smart they would offer a limited number of products on the Amazon platform. Which is what Nike is doing. They aren’t releasing enough information for Amazon to scrape and use for their private label endeavors. What the Brand Registry will do is enable Nike to Brand Gate items limiting the ability of third party sellers to sell their products through Amazon. The Brand Registry requires that a seller provide evidence from the Brand that they have the right to sell the product.
I wasn’t quite right about Brand Gating last holiday season, but it’s only a matter of time before I’m right in a big way. Nike’s revelation that its program with Amazon is a pilot and is small is exactly what has to be done to gain better control of the online marketplace. I’ve been saying that brands shouldn’t be selling on Amazon. I now have to adjust that and say that bigger brands who have the problem of counterfeits and the grey market damaging the brand should have a presence on Amazon so that they can enforce Brand Gating opportunities. Using the Brand Registry as a tool requires that brands be a part of Amazon, but those brands should not provide a lot of products to the e-commerce giant. That wouldn’t be smart at all.