Does 2014 mark the beginning of the end for Amazon?
Probably not, but it is certainly going to be a difficult year for Amazon in Europe. Legislation in Europe is significantly different than in the U.S, in two major ways, which directly affects Amazon and its marketplace sellers.
First, the E.U. anti-competition laws have forced Amazon to withdraw its rule that marketplace sellers cannot undercut their Amazon prices on their own sites. Now sellers are free to price lower off Amazon. Amazon has not widely publicized this U-turn. Nevertheless more and more sellers are beginning to hear about it.
Second, suppliers and manufacturers cannot set a minimum selling price. Nor can they ask for agreements with retailers regarding prices. This means that some marketplace sellers are driving the prices down so low that manufacturers believe it devalues their brands.
At first, it seems that these two points are opposite. One resulting in Amazon prices being higher than off Amazon, and the other resulting in Amazon prices being too low. In fact, both together could result in significant business being taken off Amazon.
Cheaper Off Amazon?
The first is obvious. If the retailer is free to discount its Amazon prices on its own website, then savvy consumers will start to search out these sites. The more consumers do this, the more word of mouth gets out that this is a way to get cheaper products. It could snowball. Taken further, if these off-Amazon sites use the Checkout by Amazon payment method, the argument that these sites are less trusted goes away. This could lead to a reduction of sales on Amazon as retailers effectively use the Amazon brand for advertising.
The second is more subtle. Because the Amazon marketplace is generally driven by price, there is a tendency for that price to go lower and lower. Some sellers are hobby sellers with little or no overhead, or little or no understanding of true retail costs. Other sellers are successful businesses that have grown with deliberately low margins. These low prices devalue the brands they are selling. If consumers regularly see a branded item for $5 on Amazon, then they could think that the shop price of, say, $10, is a ripoff — even if $10 has always been the correct price. Manufacturers are waking up to this and are moving to protect their brands reputation. The problem is how to do it.
No Minimum Price in Europe
It the U.S. it is relatively easy. Simply set a minimum selling price and refuse to supply those who break it. In Europe, however, this is illegal. So manufacturers and suppliers have come up with an alternative solution: Refuse to supply any retailer who sells on Amazon.
I live and operate my business in England. As I go to the January and February trade fairs looking for new products, I have found more manufacturers doing this. They are qualifying their customers. They are not accepting the smaller hobby sellers. They are prohibiting selling on third-party markets like Amazon and Ebay. They are actually spelling out Amazon and Ebay as examples in their contracts. When I challenged them about this (as it will inevitably reduce their sales volume) they replied with (a) they themselves will sell on Amazon, or (b) they will accept the reduction as the price they pay to maintain their brand’s value.
Taken together, both will result in higher prices on Amazon. Both will result in customers beginning to realize that Amazon may no longer be the cheapest. This will inevitably drive some trade away from Amazon. I suspect that this will not really damage Amazon as much as it will hurt the marketplace sellers.
I suspect that 2014 will prove to be a very difficult year for the European Amazon marketplace sellers. Those who do not adapt and play the game according to the new rules could find their list of suppliers shrinking. The small sellers are especially vulnerable.
Effect on U.S. Merchants
There is however a way out that some U.K. marketplace sellers may use, which could affect U.S. retailers. For some strange reason, it is cheaper for me to mail a parcel to the U.S. than to the U.K. Further as I am mailing outside the E.U., I do not need to charge VAT — i.e., “value added tax” — so my goods become 20 percent cheaper. Further, since I sell “toys,” there is no import duty or sales tax to the U.S. Moreover,, U.S. manufacturers cannot hold me to a minimum sale price. With the proposed E.U. U.S. free trade deal, this could affect many more areas.
So, how can a E.U. problem affect U.S. merchants? It’s because we in the E.U. could be driven by circumstance to compete with U.S. merchants and undercut their sales prices. Thus, a purely E.U. problem could migrate across the Atlantic. The world is indeed shrinking.