Insight

If you can't beat 'em, go direct  

E-commerce retailers (usually referred to as e-tailers), starting with Amazon, care about many things.  In particular, they care about the consumer around which their organizations are built; but to the contrary, they do not care about vendors and their brands. Unlike traditional retailers who typically have an understanding of the symbiotic relationship they have with their vendors and their brands, most e-tailers view them only as cost of goods sold (COGS).  Therefore, they try to cut as much as possible by playing them against each other, and even against themselves at times through cross-border arbitrage or by exploiting two-tier distribution structures and their own private labels.

Key strategies to create as much leverage as possible in this respect are monopolising consumer satisfaction feedback and interaction, and search results, allowing e-tailers to replace one brand with the other (or push its own in-house brands whenever possible). 

By: Michael Westhoven & Johannes Faber 

Voice commerce, the logical next step with e-tailing giants, will only make things worse for smaller vendors. For example, Amazon’s “Alexa” does not offer 20 different search results for any given search on its platform any longer. Rather, by design, if a consumer does not ask for a specific brand, Alexa chooses the brand for them (and whenever possible chooses an in-house brand).  Furthermore, voice commerce also frequently eliminates popular price comparison websites as independent shopping aids.

The situation is made even worse by the fact that mass media, the traditional ally of brands against retail channels, are rapidly losing power in the age of cord-cutting and audience fragmentation. Brand owners, of course, may turn to digital media as an alternative channel to reach consumers, but trying to fight Amazon & Co. by relying on Google or Facebook, etc., rightfully so, is an overwhelming challenge. One change in algorithms and you may be back to square one. Furthermore, the emergence of voice commerce will likely exacerbate the effect as Amazon can now easily replace third-party media (where brands can be advertised) with its own media.

As a result, we are fundamentally convinced that the only real strategic way for brand owners to compete in the future is to think the unthinkable - to not only communicate with consumers directly but also to sell to them directly.  By this, we do not mean by simply implementing a buy button on your website next to your online product catalog, but by actually becoming a real e-tailer yourself. This, of course, may create massive frictions with traditional trade partners, but not doing so might actually turn out to be a much bigger long-term mistake. 

The music industry provides an excellent lesson in this respect. In the 1990s, when e-commerce was a fledgling concept, most of the major music labels developed plans to launch e-commerce operations themselves. At the time, PolyGram and BMG owned traditional mail-order music clubs which could have easily served as excellent platforms to build on. In the end, however, these plans were all shelved as the labels were afraid of potential retaliation from trade buyers.  Only because of this after books Amazon was also able to get into CDs and DVDs and monopolize this category as well, which was essential for Amazon’s development from a vertical specialist into a multi-category giant as we know it today. 

Maintaining brand value in the age of e-commerce and voice commerce

In the age of disruption, direct-to-consumer is no longer a strategy just for a few niche players selling merchandise on QVC or via mail-order catalogues – it’s becoming a major strategic thrust every brand owner should explore.

In the age of disruption, direct-to-consumer is no longer a strategy for a few niche players selling merchandise on QVC or via mail-order catalogues - it's becoming a major strategic thrust every brand owner should explore. This does not mean vendors should stop doing business with e-tailers. However, they should take advantage of the leverage that owning a direct sales channel gives them vis-à-vis Amazon & Co. since the last thing that the latter wants is constantly being ranked second on Google Shopping and other price comparison sites against captive channels for brands which are top of mind for their customers.

However, as a vendor, if you didn’t start to heavily invest in your e-business competencies at least five years ago (or even longer depending on the industry you are in), then we do not recommend you even consider trying to build this capability “in-house” at this point. Most likely, you are too late to the game and should rather look at what some of your competitors can offer. Chances are pretty high you will find various well-positioned, but sub-scale, e-tailers that would consider being acquired as they are facing strong competitive pressure from the e-tailing giants as well. In their situation, being able to leverage a partner with a real supply chain and a captive brand will increase their likelihood of success and longevity. Ideal targets are e-tailers that carry many other complementary third-party brands which are smaller than yours, but that do not have the resources to build own e-commerce activities or the means to acquire a company themselves. In this case, these long-tail brands can provide additional operational leverage and critical mass for building out your own e-business platform.

If you are in this situation and are interested in taking a closer look at suitable targets, talk to us. Livingstone is in regular contact with many e-tailers and their founders and owners who frequently mention to us that they would be interested in a strategic owner. And if you find e-commerce valuations overpriced in today’s market, let us help you optimize terms and conditions through earn-outs, vendor loans, ratchets, rollovers and similar mechanisms that are standard in the industry.

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