After a problematic economic start to the year for many e-commerce brands, Amazon shared its second-quarter earnings and some of the trends they see in the market. While the information is intended to keep their investors informed, it also reveals some valuable information to sellers who list on the platform.
We wanted to share some of the most valuable highlights within this earnings report and explain why they matter to any brand participating in the Amazon marketplace. We’ve singled out five takeaways in particular that we think are worth your attention and addressed some of the actions these trends could trigger at your company.
#1 Stability is making a comeback
Total e-commerce sales on the Amazon platform grew an estimated four percent from last year, however, they are still up more than 40 percent from 2020 levels. By the end of 2022, we expect growth rates to return to their more-usual rate of around 15 percent.
As most retailers realized, the COVID-19 pandemic created a massive shift in e-commerce buy patterns by early 2021. Many brick-and-mortar stores were essentially closed, so people shifted their purchases to online stores. The result was an increase in Amazon e-commerce sales from its predictable 15-20 percent per year to 55 percent per year in Q1 and Q2 of last year.
Now, as the economy returns to a more normal state, people are heading back to physical stores. The change is causing the growth rate for e-commerce to slow, but we anticipate it’s temporary. More importantly, we would expect the e-commerce growth to reaccelerate as we get into the second half of 2022, much the same way that the online growth rates during the pandemic happened in early 2021 and then began to return to normal in the second half of the year.
Sellers should make the most of this optimism by ensuring they can capitalize on the return to a more predictable environment. In addition to focusing on effective optimization efforts to capture shoppers, a solid inventory and shipping strategy will be more important than ever. Brands on Amazon will need to meet the growing demand for the remainder of 2022 and heading into 2023, as a failure to do so could be devastating to both their search rankings and customer reviews.
#2 A shift in sales is underway
Third-party (3P) sales continue to take market share from first-party (1P) sales on Amazon. It’s becoming more evident that Amazon would rather be a marketplace than a retailer. We estimate that 3P sales have increased nine percent since last year and as much as 50 percent since 2020. At the same time, 1P sales shrunk four percent from 2021 and have only grown 10 percent in the last two years.
Media reports also suggest that Amazon is backing away from its 1P private label business. Among the motivations behind a decision to minimize these offerings is the scrutiny Amazon has faced from government regulators due to their private label products. There are well-documented questions about how Amazon’s role as a marketplace and data-collection company may conflict with its aspirations to sell more of its in-house brands. Simply put, this is another sign that Amazon would rather be a marketplace than a retailer.
1P brands should be reevaluating their strategy and considering ways to integrate 3P sales into their structure, as it seems the tide is clearly moving against them. However, vendors who choose to switch to Seller Central should be aware of the challenges ahead. Doing so successfully can require a hybrid approach or temporarily force sellers to compete against former distributors. Becoming a 3P seller can also make skills that weren’t previously needed all of a sudden crucial to your team. Therefore, any transition should be planned carefully to account for these potential hurdles.
#3 Expectations are high
Amazon estimates its total business will grow 17-20 percent in the second half of 2022. While an upcoming recession remains a possibility, and experts continue to debate the status of a post-pandemic economy, growth is still within reach. Even if a recession arrives, businesses that are gaining market share can still thrive.
Furthermore, many industry experts suggest that e-commerce is likely to grow 10-20 percent per year for the next decade. Obviously, a slowdown would diminish those expectations, but completely eliminating them would be quite a stretch. In almost any scenario, e-commerce realtors are in a solid position to take advantage of a growing market that will continue to take share from brick-and-mortar retail.
With this kind of expected growth in e-commerce, competition is sure to be strong regardless of product category. As a result, surviving and growing within the market will require a comprehensive plan for your existing listings and your new products. The last thing any business should do is head into the future unprepared to tap into this unrealized potential or hoping to figure out their strategy along the way.
#4 Advertising is big business
As much as it’s a retailer, Amazon remains a data company where its advertising sales are becoming more important to its bottom line. In fact, the company’s ad business grew 17 percent compared to the previous year to reach revenue of $8.8 billion. Advertising sales are now an estimated 6.2 percent of Amazon’s total Gross Merchandise Value (GMV). The platform’s advertising sales are now growing much faster than its total sales, and that trend is likely to continue.
For sellers, this means that ads are getting more expensive, and brands must be more vigilant against overspending on unprofitable keywords. In addition, this latest earnings report indicates that the majority of brands are using Amazon advertising, and it’s becoming more difficult for brands to compete on the Amazon platform if they do not have a substantial advertising budget.
As the stakes and costs rise, the foundation of your advertising plans will play an outsized role. Fundamentals like keyword research, A/B testing, and creativity may be the difference between a successful advertising campaign and an expensive flop. You’ll want to be sure your organization has people in place with the expertise to navigate a fast-moving Amazon advertising industry.
#5 The rules matter
Thankfully, Amazon continues to crack down on brands that are violating its terms of service. This is excellent news for authentic brands that are following the rules.
In the past five years, there has been an enormous increase in the number of brands violating policies to earn favorable placement in the Amazon search results. They would often do this by getting fake reviews or fake orders designed to trick the Amazon algorithm into thinking the products are more popular than they are in reality. Unfortunately, these tactics were an open secret to most people in the Amazon community and did significant harm to established brands that followed the rules and had much more to lose if they were suspended.
Recently, Amazon announced they are filing suit against 10,000 Facebook groups that helped facilitate this bad behavior. They have also filed suit against several companies that bribed Amazon employees into giving data and favorable treatment to brands. These actions are welcome evidence that the company is trying to crack down on bad behavior and eliminate some of the most challenging hurdles that legitimate companies face as they grow their brands on Amazon.
Unfortunately, a renewed emphasis on policing the marketplace may not be enough protection for some sellers. Brands should continue to monitor their competition and have procedures in place that can identify problems sooner rather than later. Sellers may also find that having someone with experience in Amazon fraud and familiar with the most efficient ways to alert the platform to issues can be well worth the cost. Otherwise, an overlooked issue or delayed response can have long-term consequences that are difficult to recover from.
Plan your brand’s future with Amify
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