In Part 1 of this series, we discussed how important it is for every brand to monitor third-party (3P) activity, whether that’s preventing sales from leaking to 3P merchants undercutting you on price, tracking down 3P sellers hawking fake products that could destroy your brand equity, or a host of other reasons.
Here, we’ll explore the 3P phenomenon in more detail and look at which categories (and markets) are most susceptible to the “3P effect,” and why.
Using Profitero’s Amazon Sales & Share estimation technology, we identified the number of units sold by 3P sellers versus first-party (1P) vendors that sell directly to Amazon. We then further analyzed the data to see HOW third-party sellers got their sales. Was it from offering unique items? Or winning the Buy Box on the same items sold by 1P vendors?
1P vendors are definitely experiencing “sales leakage” from 3P sellers who are winning the Buy Box when products on 1P go out of stock or are offered at a cheaper price (see “1P to 3P leakage” on the above chart). Though the numbers seem small in both the U.S. and U.K., the impacts can be huge. Even 2-7% of unit sales lost per month multiplied by average selling price can add up to millions in lost sales during the course of a year. In fact, an analysis Profitero did in 2018 found that the average $5 million brand lost about $300,000 annually to 3P sellers winning the Buy Box.
3P sellers are also stealing sales another way by offering unique goods (“3P exclusives”) not available from 1P vendors. Long tail competition from these 3P exclusive products on Amazon is a reality, representing anywhere from about 50-80% of total products in the categories studied. Not only are big brands feeling the heat from emerging digitally native brands, but also from private labels, generics and cheap Chinese imports (typically priced well below national brands). Worth noting is that this “3P exclusives” bucket may be somewhat inflated too by 3P merchants selling 1P products under separate ASINs.
Finally, as the number of 3P sellers and 3P exclusive products proliferates, you can also expect advertising costs to go up since you will likely be competing on the same keywords across many categories.
The fact that 3P sellers are generating such a large percentage of sales on Amazon in the U.S. isn’t all bad. 3P sellers tend to be the digitally native brands driving the most innovation in the category; they are the ones on the vanguard of “natural” food trends and also leading the charge in areas like CBD / hemp products (areas bigger brands are not yet willing to touch).
Therefore, the range of 3P exclusive products being offered in your category should be carefully studied and learned from as much as possible. These brands can be potential acquisition targets for larger brands too.
Brands on Amazon in the U.K. have a much harder time winning the Buy Box than their American counterparts, resulting in a significantly higher percentage of sales lost to 3P sellers (2X higher, on average; even more in some categories). Inventory out-of-stocks and deep discounting by unauthorized resellers are typically the top culprits. In contrast, brands in the U.S. are further along the maturity curve on Amazon.com in applying sophisticated analytics to monitor stock rates and 3P price discounting behavior.
Managing out-of-stocks in the U.S. has gotten a bit easier too as Amazon has scaled up its Direct Fulfillment (a.k.a. Dropship) program, enabling brands to set up direct fulfillment as an inventory backstop in the event their products go out of stock in Amazon’s warehouses (Amazon 1P). This helps prevent 3P from winning the Buy Box on 1P products in the U.S., but is not currently available in Europe as of the writing of this post.
At least in the U.S., 3P sellers (typically smaller unfamiliar brands) tend to have a harder time winning in categories where trust in ingredients matter. 1P vendors (typically established larger brands) dominate in Pet Food & Treats (with 85% unit share), Food (78%) and Beauty & Personal Care (75%).
In the U.K., sales are more evenly split between between 1P and 3P. But that should change over time as brands become more committed and invested in winning on Amazon — which up until now, has not necessarily been a priority channel for growth given established click & collect and home delivery models by incumbent brick-and-mortar grocers (e.g., Tesco, Sainsbury, etc.).
Request a demo to find out more about Profitero’s digital shelf analytics, including how we help suppliers manage the challenges of 3P on Amazon.