Amazon Launch in Sweden: Reflections and expectations
Amazon is coming to Sweden with its full weight which means massive opportunities for some players in the retail space while posing a serious threat to others. In this article, we share our thoughts on three crucial aspects of the Amazon launch, namely:
- What do we expect from the Amazon launch in Sweden? How will Amazon act and what consequences will it have for the Swedish ecommerce industry?
- Which companies are suitable to sell products on Amazon and should see their entry as an opportunity and which companies have to step up their game if they want to survive in the increased competition?
- What are the main aspects to consider for companies when preparing a launch on Amazon?
What can we expect from the Amazon launch in Sweden?
Are there learnings from other European markets that can give us a clue of what we can expect from Amazon in Sweden and how it will affect Swedish retail business? At Docklin Digital, we have been following Amazon closely the last couple of years and especially their latest launch in the Netherlands in March earlier this year. Based on our experience, our main expectations for the Swedish launch are:
- Amazon will price aggressively, especially on price elastic products in high demand and probably drive market prices down.
- Their price strategy will be dynamic with an extreme number of price changes, most likely resulting in more dynamic pricing for the entire retail space.
- Amazon will focus on driving loyalty through their Prime program by subsidizing Prime membership in the beginning.
- Amazon will build up their inventory over time but still launch with a massive and competitive product assortment across a wide range of categories.
Amazon is known for its aggressive pricing on price elastic products in high demand. Looking at the launch day in the Netherlands, Amazon had a lower price on 63% of the most popular products in the electronics category compared to the leading retailers in the country (Bol.com, Coolblue.nl, Mediamarkt.nl and Wehkamp.nl). For 27% of the products, the other retailers were cheaper and for 10% they had the same price.
That was for launch day, what did the price competition look like after three months? Well, looking at data from the Dutch pricing software Omnia, Amazon was consistently cheaper than the main competitors over the course of March through June. For the top 2,000 products on Amazon.nl, Amazon was 6-8% cheaper during the first three months.
This is a clear signal to Swedish retailers, that Amazon from day 1 will be a fierce competitor on price and that Amazon most likely will drive market prices down.
But how can Amazon find long term profitability and still beat the competition on price for many of the most popular products? Looking more closely at Amazon’s pricing strategy, many studies and industry experts have found that Amazon applies a so-called high runner strategy. This means that Amazon will have very competitive prices on elastic products that are in high demand in order to drive massive amounts of converting traffic to their site. Whilst on the site, Amazon will do two things. Firstly they will upsell and cross-sell products that are less price elastic and where Amazon might not have the lowest price and enjoys higher margins and actually makes money. Secondly, they will try to drive loyalty by promoting their Prime program in order to encourage repeat purchases.
An example of how the high runner strategy could work is to look at a product like the LG OLED TV below. It’s one of the most popular TVs in Sweden right now. Due to its popularity, it generates a lot of traffic and since it’s a homogeneous product, consumer choice is mostly driven by price. In the case below, it’s safe to assume that Netonnet would capture most of the sales. Their price is (at the time of writing) 8% lower than the closest competitor and since it’s a homogenous product, most consumers are driven by price. This is a typical price elastic product in high demand that Amazon would price very aggressively. What Amazon has been very successful with in the past is how they upsell and cross-sell products that are less price elastic. This gives consumers the idea that they have made a bargain on the expensive product but they don’t really pay attention to the price for accessories or complementary products that cost less, but in fact, these are the products that Amazon makes money on.
For the example below, most consumers would not think twice before purchasing a wall mount or HDMI cables after they have decided to buy an expensive TV. But the reality might be that they made a bargain on the TV but didn’t pay a competitive price for the wall mount or HDMI cable.
Another aspect of Amazon’s price strategy that might have industry wide consequences in Sweden is their dynamic pricing model. It has been reported by Business Insider that an average product listed on Amazon changes prices every 10 minutes. By leveraging their vast data on consumer behaviour, profit margins, stock levels and competitor’s prices, this is a very effective method to boost profits. The industry wide impact in Sweden due to this strategy is still unclear but it seems likely that Swedish players will have to adopt in some way which could lead to much more dynamic prices in the entire ecommerce space.
Driving loyalty through Amazon Prime
As mentioned above, one lethal weapon in the Amazon arsenal is how they drive loyalty through the Prime program which likely will be subsidized during the launch in Sweden. A Prime membership usually cost around €8 on most markets but when they launched in the Netherlands, it was free for 30 days and after that it cost €2.99 per month. So what is Prime? The Prime membership gives members access to free and fast shipping. In some zip codes in the US, members can enjoy two hour shipping on thousands of products. In Sweden, it will likely be one or two days shipping. In addition to fast and free shipping, prime members get access to a number of other Amazon services and products such as Prime Video and Prime Music. The commercial impact of the Prime program is of course massive. According to a study from Consumer Intelligence Research Partners (CIRP), around 105 million people in the US are Prime members and Prime members spend on average $1,400 per year which is more than double of what non-Prime members spend.
Aggressive and dynamic pricing in combination with a focus on loyalty through Prime is to be expected during the launch in Sweden, But what can we expect in terms of product offering and the range of the product assortment? Well, looking at the launch in the Netherlands, Amazon offered a startling 100 million products across 30 product categories on day 1. The Dutch pricing software Omnia has analyzed the depth of the assortment in the electronics category. They looked at the top 10,000 most popular products in the electronics category and compared how many were offered by Amazon.nl vs the main competitors in the market (Bol.com, Coolblue.nl, Mediamarkt.nl and Wehkamp.nl). Amazon offered 4,560 products which is 46% of the top 10,000 products. Only one competitor offered more which was Bol.com (71%) whereas the rest ranged from 20%-43%. Amazon claims that they build up their assortment over time after launch, but judging from the data above, Swedish retailers can probably expect Amazon to be a fierce competitor on product assortment from day 1.
Friends, frenemies and enemies – which companies are suitable to sell on Amazon?
Consumers on Amazon have a very high purchase intent and are ready to shop. In many markets, Amazon is head to head with Google as the first place to start product research. With millions of possible customers and the ability through just a tick box, to reach multiple European markets by selling on other European Amazon domains, Amazon’s entry to Sweden is clearly a massive opportunity for many companies. But there are aspects to consider before making the decision to start selling on Amazon. Firstly, almost anyone can sell on Amazon and as long as a brand does not have tight control over its distribution, it’s common to see dozens of merchants offering the same product. That crowdedness often generates fierce price competition as Amazon values price (in combination with fast and reliable delivery) as one of the main aspects when deciding which merchants to highlight through the buy box (the ability to add a product to your cart on the product page). This focus on price makes Amazon a tough place for merchants that don’t enjoy high margins. Secondly, selling on Amazon is not free and you have to make sure your margins can handle all the fees in order for your bottom line not to go below zero.
So, who are suitable to sell on Amazon, who are Amazon’s friends, frenemies and enemies? Of course every merchant has their own unique prerequisites so this is a bit of a generalization. But if we start with general merchandise resellers who don’t enjoy sourcing exclusivity, Amazon is becoming a tougher and tougher place to succeed. The main reason is margins. Fierce price competition from multiple Amazon sellers who offer the exact same product in combination with fees to Amazon makes it increasingly difficult for general merchandise resellers to make any money on Amazon. It’s not very common, but sometimes resellers enjoy sourcing exclusivity. For many of these players, Amazon can be a great place to expand reach and increase sales at profitable levels.
One category of players who have done very well on Amazon is the private label category. In this context we refer to private label as a product which is manufactured by a third party and sold under a retailer’s brand name. The concept of private label has increased over the last few years and has become popular for many established retailers. Generally, this category enjoys much higher margins than resellers of established brands which has been a key to success on Amazon. Many private label players try to identify product categories where competition is relatively low. However, something that has been widely reported is that if a private label player starts to perform really well in a certain product category, it does not take long before that is realized by other private label competitors or even Amazon itself through their suite of private label brands. So great success for private label players can be short lived before competition becomes fierce.
One of the biggest categories of sellers on Amazon are brand owners or single brands. In addition to the branded website and brand resellers, both online and offline, Amazon can be a great channel for additional reach and sales. This is something that every Swedish brand should consider in light of the Amazon launch. But what factors should be included in the consideration set – what are the pros and cons of embracing the Amazon opportunity? Well, the pros are simple – Amazon can potentially be a great way to find new customers and revenue streams. Some of the main cons are related to control of the brand and the price strategy. As mentioned above, almost anyone can sell on Amazon and brands must have tight control of their distribution in order to avoid competition from grey market sellers. In this context, a grey market seller is a seller who is outside the brand’s intended distribution network. Another aspect is the price strategy. In order to maintain good relations with resellers, brands are often reluctant to sell their products at a lower price than is offered by their resellers, either through their branded website or in this case, through Amazon. Given the general focus and importance of price on Amazon, this can be a challenge for some brands who are tempted to lower their prices on Amazon in order to improve visibility and sales.
Aspects to consider for anyone who’s deciding about selling on Amazon
When the decision has been made to start selling on Amazon, there are many operational aspects to consider such as which products to sell, keyword research, content creation, advertising, customer reviews etc etc. But if you are at the starting point of considering if Amazon is right for you, we have listed what we consider to be the most important factors to take into account when making your decision.
- Selling on Amazon or to Amazon
This question is essentially about control and margins. On Amazon you can either choose Seller Central or Vendor Central. If you choose Seller Central you sell your products directly to consumers on Amazon whereas Vendor Central is more of a B2B setup where you sell your products at a wholesale price to Amazon and then Amazon sells the products to consumers.
Seller Central is associated with higher margins and much more control, but at the same time, more work for you. Vendor Central, which is an invitation only program, means minimal work after you have sold your products to Amazon since Amazon is responsible for selling to the end consumer.
- Fulfillment method
If you choose Seller Central, the next major decision is regarding the fulfillment method. Here you can choose fulfillment by merchant (FBM) or fulfilment by Amazon (FBA).
FBM is often associated with lower fees but means that you are responsible for everything regarding logistics and customer support. Amazon demands are very high so before choosing FBM it’s important to understand the full scope of responsibility that you agree to. Typically, FBM can be a great option for players who have a well functioning logistics and customer service solution in place and sell big and overweight goods with a slow turn over rate – this is because the FBA option can become costly for oversized goods that sit in Amazon’s warehouses for a long time.
FBA is a setup where sellers ship their products to Amazon’s warehouses. Amazon then stores the inventory, manages the packaging, delivers the products and manages customer service. The main arguments for FBA is the reverse of FBM – if you don’t have logistics and customer support in place and sell small and light products with a fast turnover, FBA is probably the way to go. One additional reason for choosing FBA which has become increasingly important is that Amazon tends to prioritize FBA sellers when deciding which seller should have the “Buy Box” – of course this has a major impact on the overall conversion rate on Amazon.
- Cost analysis
When you have made the choices above, it’s time to calculate your overall cost for selling on Amazon. There are referral fees which typically vary between 8%-15% depending on the product category, fulfillment fees which can vary greatly depending on FBM and FBA and potentially other costs such as long term storage fees. In addition to that, advertising cost is something that all sellers should incorporate into the cost analysis. In sharp contrast to Google, traffic and sales through advertising improves your organic visibility on Amazon and because of that it’s recommended to keep some margin for advertising cost as well. Amazon summarizes the cost structure in a fairly good way which makes your analysis easier.
In summary, Amazon’s entry into the Swedish market won’t go unnoticed by consumers or current retailers, regardless if they are online or offline players. Judging from other markets, Amazon’s approach to price, fulfillment and customer loyalty will have industry wide consequences and is something that most, if not all Swedish ecommerce companies have to tackle in order to maintain and grow their customer base. At the same time Amazon’s entry means massive opportunities for a lot of players who are suitable for selling on Amazon. In short, we have a very interesting fall ahead of us!
Docklin Digital is an award winning Performance Marketing Agency. Founded in 2015, we have grown through a relentless focus on developing innovative solutions and frameworks within the field of Performance Marketing.