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Amazon recently began sending notice of business terminations for many 1P vendors, recommending these vendors list their catalogs on Amazon’s marketplace instead. Receiving one of these letters may catch a brand off guard, but this blog post aims to help breakdown the next steps for any affected brands while also providing insight into Amazon’s decision.
Why would Amazon terminate these agreements?
We’re not surprised to see Amazon make a move like this. From what we have observed, these terminations are primarily affecting smaller vendors with SCOGs below $10M/year.
Let’s look at this from Amazon’s perspective. The 3P business has been growing faster than 1P for a while now, and 3P can be more profitable than 1P for Amazon. This shift allows for Amazon’s retail resources to focus on large, strategic 1P accounts, and reduces coverage constraints for the Category teams. As many know, 1P agreements work best when Amazon and a brand see each other as partners and Amazon provides a dedicated human resource to the relationship. Vendor Manager coverage is often spread thinly for many small vendors.
We’ve also watched Amazon call down weeks of cover for many vendors, which we attribute to Amazon finding profitability across its largest markets and rebalancing inventory within its fulfilment centers. With continued investment in automating FCs, it’s possible that Amazon is additionally looking to make more room overall for FBA inventory as Amazon’s ideal state is being the fulfilment answer for sellers who own and operate their own accounts on the marketplace and require fewer retail resources.
If we look at how consumers are increasingly price-sensitive and willing to sacrifice speedy delivery in the pursuit of low prices as demonstrated by the growth of Temu and Shein, Amazon might be further differentiating its marketplace business from its retail business. This assumes the marketplace business caters to low prices delivered at slower speeds while the retail business caters to consumers looking for high quality and trust at high speed. This could be a look into how Amazon plans to continue to tackle Temu’s growing share in the West while being obsessed with the customer.
My contract is being terminated, what do I do now?
Switching to 3P can be a long-term strategic move for a brand as 3P is incredibly flexible when it comes to inventory management and most day-to-day operations – including controlling your own pricing. Seller Central reporting can often be a bit more insightful and robust, with added metrics. While there are some positives, this switch and change management needed can still be difficult for brands.
There are two key areas that a brand must understand in this transition - the tactical elements of switching a catalog from 1P to 3P and the financial impact.
Tactical elements
Brands switching from 1P to 3P will need to first figure out their inventory strategy as this will be a major change for most brands. Whether FBA or FBM is chosen, the processes and interface differ from 1P PO management and brands will need to either partner with an expert or dedicate a resource to this task.
Thankfully, catalog migration is relatively straightforward and 1P brands don’t need to start from scratch. Within Seller Central, brands might even find catalog management to be more flexible and easier to maintain.
The last tactical element to consider is customer service management, which falls on the brand or seller in a 3P setup. We recommend building a dedicated customer service team for this task or using a provider that offers customer service management alongside other digital commerce services.
The financial impact
Now is a great time to revisit your brand’s current agreement with Amazon and understand how the shift to the marketplace will impact overall profits. 3P will be an entirely different model, with seller commission fees, FBA fees, the potential need for new internal resources, etc. It’s important to note that if your brand currently has a VM it’s unlikely that Amazon will terminate your 1P agreement.
With an understanding of how these agreements will differ, brands need to understand how to change will impact trade and marketing budgets, which then trickle down to assortment, product development, and beyond.
A daunting task, but expert help exists
Flywheel has helped many brands make the transition from 1P to 3P and we encourage you to use it as an opportunity to rethink your Amazon strategy to create long-term profitable growth.
As a 3P seller, you will have more control over your business, though you will also have to adapt your operational model and build capabilities to run it autonomously. Our team can help you understand the new requirements and financial impact of this change, benchmark your business against competitors in the category, and make specific recommendations on how to adapt portfolio and price to find growth. We can help you size the opportunity and plan investment levels to guide your forecasts, and if you choose to outsource supply chain, customer service, or legal services, we can also help you find 3P partners that are a strategic fit for your business.
Receiving one of these termination letters can leave a brand feeling uncertain, but these terminations can open the door for growth on Amazon’s marketplace if handled correctly.
