News & Insights
The Future Looks Bright for Direct-to-Consumer (DTC) Brands on Amazon
The past 12 months have been rough for many Direct-to-Consumer Brands. Slowing growth rates and increasing supply chain costs are reducing profitability. Meanwhile, the Great Resignation and increased competition make it harder to respond effectively to those challenges.
Fortunately, there is good news on the horizon. When we at Amify look at the second half of 2022, we see signs that some welcome and much-needed relief is on the way for DTC brands selling on Amazon. Join us in our optimism as we share a few reasons we believe e-commerce businesses should prepare to grow.
Growth rates should reaccelerate
After growing 15-20 percent per year for a decade, e-commerce growth rates surged to approximately 50 percent in early 2021 because of COVID-19, then cratered to roughly zero percent in the first half of this year. Some may fear that this lack of growth will continue, but our analysis of the circumstances that led us here makes us optimistic that the second half will see an acceleration in growth rates. Fortunately, Amazon recently echoed this in their guidance of 15 to 20 percent year-over-year growth.
As mentioned, by early 2021, the COVID-19 pandemic had created a massive shift in e-commerce buying patterns. Essentially, brick-and-mortar stores were closed, so people bought more online. This caused Amazon’s e-commerce sales to peak at 55 percent per year in the first and second quarters of 2021. Now, as the economy is returning to normal, people are returning to stores, causing the growth rate for e-commerce to slow down temporarily. Clearly, COVID-19 substantially distorted the growth numbers. To adjust for the change in demand, we often compare Amazon e-commerce sales to pre-pandemic levels. By this calculation, we estimate that Amazon’s growth will reaccelerate to roughly 20 percent by the end of the year, which mirrors the projections of Amazon.
Supply chain costs are normalizing
As most people have heard or experienced for themselves, supply chain and shipping costs have skyrocketed over the past year. The added expenses have taken an enormous toll on profitability for direct-to-consumer brands. In this situation, these brands are forced to either raise their prices or reduce their margins. It’s a choice most would rather not make, and it has hit many of them hard.
For example, the costs of shipping a container of goods from China to the U.S. over the past year have skyrocketed. For the past five years, the cost to ship a container from Shanghai to Los Angeles hovered around $2,000. The price has increased five-fold since last year, to roughly $10,000. To make matters worse, last-mile delivery costs have also jumped as fuel prices rose. For many of the brands we work with, supply chain costs might have equaled five percent of revenue, but that number is now closer to 10 or even 15 percent. When brands work with margins between five and 15 percent, an increase of this magnitude can devastate profitability.
However, understanding what led to these rising prices can reveal where they are headed as 2022 winds down. As with the rest of the economy, container shipping costs are based on supply and demand. COVID-19 created a huge increase in the need for products within the United States, while the supply of containers is relatively fixed, leading to exponential growth. The demand was primarily driven by the hot economy, record-low interest rates, and a record-high number of new housing starts, all of which have now begun to trend in the opposite direction. Interest rate hikes and a slowing economy will most likely result in lower supply chain costs soon. In fact, we are already seeing an impact as new housing starts have decreased almost 30 percent in the past few months, leading to a substantial decrease in the demand for many building supplies.
Simply put, the factors that caused supply chain costs to go up will soon push them to return to normal levels. A decrease in expenses will improve DTC brands’ economics dramatically as their supply chain costs and margins once again achieve a balance that supports growth and profitability.
Amazon’s crackdown on violators continues
This is excellent news for the non-cheaters. When running a brand on Amazon, it is critical that your products rank highly with Amazon’s algorithm. The correct path to optimizing your listings is utilizing amazing content to sell a great product with excellent customer service. But sometimes, a seller will attempt a shortcut by cheating the Amazon algorithm.
The number of cheaters increased dramatically over the years, leading to a messy and inauthentic search experience. Amazon search results would be clogged by brands with fake reviews, fake orders and poor products. A massive shadow industry developed to give brands fake reviews and orders that improved their search result rankings. These cheaters made it very difficult for brands following the Amazon rules to get good placement, and they cost them many sales. Unfortunately, Amazon was slow in reacting and let this grow to epic proportions.
Thankfully, Amazon is now fighting back. The company announced this quarter they are filing suit against 10,000 Facebook groups that facilitated this bad behavior. They have also filed lawsuits against several companies that bribed Amazon employees into giving data and favorable treatment to brands. Amazon’s efforts to crack down on violators are great news for established brands that are following the rules. There’s no question that as the brands violating the search results are removed from Amazon, their buyers and sales will begin to move toward brands that followed the rules.
Growth powers through recessions
The U.S. economy has traditionally grown from two to four percent per year over the long term but recently experienced its second consecutive quarter of negative growth, a sign it is in or heading toward a recession. It’s common for businesses to assume that a recession sinks all ships, but in reality, each sector of the economy is impacted differently in a recession.
Fortunately, e-commerce has consistently grown 15 percent faster than the overall economy as it continues to take market share from its brick-and-mortar competitors. Moreover, while physical retailers continue to sell more than 75 percent of total retail dollars, they continue struggling and going out of business, pushing more demand online. As a result, we believe that even if the economy and retail industry take a hit from a recession, internet retailers’ 25 percent of total retail sales will grow, and the massive e-commerce tailwinds will push revenue growth well above 10 percent in the future.
Make the most of your 2022 sales
Although the indicators are there, a positive outlook won’t be enough for any business to thrive. Instead, brands hoping to capitalize on these positive signs via Amazon will need a well-defined and better-executed strategy to enjoy a solid end to 2022.
The most successful brands will have captivating A+ Content and understand how to learn from past mistakes. Their product listings will be effective and optimized for Amazon’s algorithm. And they will realize that motivating current customers can be as integral to driving growth as attracting new ones.
Don’t let the past year’s difficulties continue to hold back your business. Start a conversation with the Amazon experts at Amify to discover how our experience and tools can drive growth, increase sales and boost ROI. Make the most of 2022 before it’s gone.