Every spring, Jeff Bezos publishes Amazon’s annual shareholder letter. These letters consistently deliver insights into Amazon’s achievements and priorities, reiterate the company's obsessive focus on its customers and its homegrown products and services (e.g. Prime, Alexa, AWS), and generally ignore typical investor letter topics like its competitors or investors. These letters are a must-read for those operating in Amazon’s universe, and folks in the e-commerce channel should pay special attention to how Bezos led off Amazon’s latest shareholder letter:
"Something strange and remarkable has happened over the last 20 years. Take a look at these numbers:
1999 3%
2000 3%
2001 6%
2002 17%
2003 22%
2004 25%
2005 28%
2006 28%
2007 29%
2008 30%
2009 31%
2010 34%
2011 38%
2012 42%
2013 46%
2014 49%
2015 51%
2016 54%
2017 56%
2018 58%"
This “strange and remarkable” growth Bezos is referring to was achieved by independent third-party resellers on Amazon Marketplace – and this isn’t just shareholder letter hyperbole. Third-party sellers grew from $100 million and a 3% share of Amazon’s gross merchandise sales in 1999 to $160 billion and a 58% share in 2018, translating to a 52% compound annual growth rate (CAGR) over the last 20 years. That’s truly amazing growth.
Go ahead and try to find another 20-year CAGR above 50%.
Overall US e-commerce grew at about an 18% compound rate over the same 20 years
The smartphone market grew by 62% in 2011, but that didn’t last long
eBay’s merchandise sales (all third-party) maintained a 20% CAGR since 1999
Netflix scored a 45% CAGR from 2015 to 2017 and is running out of households
You get the point. Amazon Marketplace has achieved a 20-year growth rate that exceeds the very best years of the other major “disruptive” products/ services that came on the scene since 1999.
This is a Win for Amazon
Bezos gave modesty a shot in the investor letter, exclaiming that “third-party sellers are kicking our first party butt,” though that might also be the biggest business humblebrag of the last 20 years. Of course Amazon's Marketplace growth has been a big win for the company and it’s a testament to the sales and logistics platform that Amazon has created.
With the help of its Marketplace partners, Amazon has been able to expand its product assortment exponentially, giving shoppers one less reason to check out other e-com merchants and driving a massive mindset shift among today’s shoppers. People who would have never dreamed of buying high-ticket items from an unrecognizable reseller ten years ago do it without a second thought today – as long it’s Prime-eligible and Amazon-fulfilled. Meanwhile, there’s no doubt that the success of Amazon’s third-party business played a major role in the (also “remarkable”) 25% CAGR achieved by Amazon’s first-party business over the same 20 years. Again, this is definitely a win for Amazon.
But Are Marketplaces a Win for Major Manufacturers?
Any company with a strong presence in a channel that's growing at a 52% annual clip generally has a good chance of succeeding, but it seems that most major manufacturers view e-commerce marketplaces as a challenge first and a channel second.
I don’t blame them. After maintaining well-structured retail relationships for decades, manufacturers now have to find a way to manage a channel that is, by its very nature, unmanageable. Taking a look at data from gap intelligence’s Lookout channel monitoring service, the major marketplace sites carry 66% of all products and are responsible for 74% of all MAP/UPP violations, which makes sense given that nearly 60% of the products on the marketplaces are sold by unauthorized resellers.
Marketplaces may not seem like the type of channel that deserves a starring role in investor letters, but that’s definitely what happened, and it sends a very important message to consumer brands that marketplaces are not to be ignored. At the very least, marketplaces need to be managed, before below-MAP prices trickle down to first-party sites and unauthorized resellers undermine otherwise well-established programs and reputations. However, a few brave and innovative brands will treat marketplaces the same way Amazon does – as an opportunity.
In either case, manufacturers are going to need to closely monitor this channel, and that happens to be the gap Lookout service’s specialty.
If you are someone who monitors online marketplaces and your pricing and brand equity, please give us a call at 619.574.1100 or write us at info@gapintelligence.com to learn more.
