The dream for many brands, including homeware suppliers, is to list on Amazon and capitalise on existing high traffic volumes on the largest global marketplace. While it is true that there is a large market for brands, success on Amazon is dependent on optimising a brand’s presence rather than merely showing up with a good product.
The big picture
Especially in the Home & Kitchen sector, a segment we know well, we’ve seen higher numbers of new players listing – this is a trend kicked off by the Covid-19 pandemic. This has resulted in leading brands facing greater competition, but with flat or decreased demand across many sub-categories we watch closely, year on year. The net result is more fish in a shrinking pond.
We have accumulated real data across multiple clients in the UK and it has become evident that in addition to the shrinking pond, the cost of advertising has also increased. Pay-per-click (PPC) bids have gone up by 10p per click on average year on year, while cost-per-acquisition (CPA) has risen 30% in the same period, which makes it more difficult to drive returns and the growth that were more common in previous years. This means that brands would do well to take counsel from experts to set realistic, but still ambitious targets.
The “what now” question is driven by the rapid realisation that it is more difficult to rank on Amazon compared to before as a direct result of the increasing competition and changing and evolving algorithms. For example, in the past a brand could rank fairly quickly using a strong PPC strategy – they’d generate quick sales, quick returns and a rising ranking. This has changed, with a far greater emphasis on purchase intent and sales velocity and conversion rates. This means the updated algorithm’s SEO backlinks weight higher than before, including various parameters that guage a brand’s actual quality and customer centricity. Understanding and working with, not against, the algorithm is crucial to work the infamous Amazon Flywheel.
Why does all this matter? There is currently big pressure on margins – from delays and price increases in logistics, to increasing advertising and other Amazon costs. Amazon is well known to be a low margin channel and, in spite of this, brands are penalised for increasing their prices. If a brand goes in and tries to increase their price by, say 20%, it’s not unusual for Amazon to remove access to its buy box, meaning it can’t deliver traffic to the pages. The irony is that Amazon itself is feeling the pressure and developing their own logistics as a means of getting around the global crisis and this pushes up fees on the Amazon site.
Beware of the mice eating your lunch
Hundreds of Home & Kitchen brands are seeking to make an impact on Amazon UK, but Brexit has compromised access to the UK, as well as UK brands’ access to the European market. It’s also far more expensive to ship to the UK compared to the rest of Europe. This is compounded by the mice eating bigger brands’ lunch, so to speak. A brand that is in the top 10 or 15 is having to deal with scores of small brands coming into the marketplace that are not doing particularly well, but doing enough to erode the bigger brand’s net position. The result is that these brands are being squeezed between increased budgets to succeed on Amazon and the increasing competition in a fixed-sized, or shrinking, market.
Then, there’s obviously the other side of the coin. Geopolitical circumstances will change, and what happens when the UK sentiment shifts? There are brands well-adapted to the high street stores that know they’ve waited too long, that they should have moved to Amazon three years ago at least. They can only delay so long because when the market shifts, they will want to be riding that wave and not trying to play catch-up with incumbent brands on the Amazon marketplace.
Meet the bots
Amazon is a specialised environment and a brand can wreck its prospects on the platform forever with a series of simple mistakes. Perhaps the best way to make this point is to consider that when dealing with Amazon, you are talking to a machine that applies policies and rules in an inconsistent and non-transparent manner. We have seen, time and again, how brands have created obstacles they cannot get past, precisely because they are not communicating with people, but Amazon’s bot army.
A closer look at Home & Kitchen numbers and what they mean
We estimate that the total Amazon UK Home & Kitchen sector is worth up to £300-million a month, meaning that even a small piece of that pie can be lucrative. However, being far more competitive than before, knowing how to navigate tricky terrain and implement strategies from hard lessons others have learnt, is crucial. Every day lost can be worth thousands, or even hundreds of thousands, of pounds.
It is useful to hold a magnifying glass over the market on Amazon and witness trends, what they mean, and how brands are – or should be – reacting.
If we run our software that measures category performance over time for the Home & Kitchen category, we immediately see a few themes.
Trends in the Home & Kitchen market
● Increase in small white label sellers
Whether we look at the category as a whole, or zoom into various sub-categories, there is a marked increase in new, smaller, resellers.
● Big brands shrink
Big, established and more well-known brands have, for lack of a better description, started to shrink. There have been significant drops in the market share of big brands and we see some of these shrinking shares going to these new and rising brands. Brands which have held their own are typically well
● Market in decline
Despite some sub-categories, such as Cooking & Dining, enjoying various degrees of actual market growth, the parent Home & Kitchen category is showing a general decline.
While the Home & Kitchen market is under pressure, there are more resellers and brands entering the market, which makes it significantly more competitive. This is one of the reasons the cost of advertising on the platform is increasing. The net result is that many of the larger brands are losing significant market share to the newer upstarts.
Analysing graphs which track the trends and which show increasing share for smaller brands and resellers, it becomes clear that the new players are coming in at a cheaper price point, white labelling, and capitilising on certain keywords, phrases or trends, with visual SEO (strong on TikTok and Insta) increasingly evident.
Regarding the use of keywords and phrases, sometimes established brands are attacked with their own brand name, and lose tens, even hundreds, of thousands of pounds a day through resellers using their brand name to market their own products. Knowing how to mitigate against this is an exceptionally valuable strategy to defend your market share.
We have noticed a significant change in appetite from bigger or established brands seeking counsel and assistance from specialists who understand the greater Amazon ecosystem, and especially those that have a finger on the pulse of the Home & Kitchen category. This is largely because they are being squeezed and they recognise that they must proactively work to hold onto their market share in the face of new competition. An agency can help defend against declining market share through better storytelling and better campaigning. In the current cost-sensitive environment, an external or outsourced team is more attractive than an inhouse specialist division.
The cost of advertising
● CPC and CPA costs are rising
Interestingly, CPAs have gone up by about 30%, so it is becoming more expensive to advertise and hold onto market share. CPCs have also shifted up, and even though this increase is only 10p a click year on year, when dealing with many thousands of clicks the cost implication becomes significant.
You need advertising on Amazon to help with awareness and to grow a brand. This is before doubling down to defend market share. However, what we are seeing now is that these costs are going up alongside freight and other input costs, meaning margins are becoming increasingly smaller, which in turn makes it significantly more difficult for brands to leverage advertising to drive their success on Amazon like they did in the past.
● Advertising cost of spend (ACoS) is also rising
ACoS is an Amazon-specific metric that measures whether PPC marketing has been profitable. A high ACoS is, therefore, not good and brands want to keep this as low as possible. Typically, a brand would want to benchmark their ACoS under 20%, with some leeway depending on the margin of the product.
The amount of total actual spend has gone up drastically across the Home & Kitchen category, driven by increased budgets and spending by large brands seeking to fend off attacks on their market share.
Ultimately, it is becoming clear that brands have to invest more to kickstart their performance and get the Amazon flywheel moving, and then continue to invest to fend off the crowd of new resellers.
Regarding the flywheel, the latest iteration of the algorithm has changed how brands need to look at their advertising strategy. Before, you could rely largely on internal advertising (or advertising on the Amazon platform itself), whereas now the algorithm rewards brands that use their external marketing mix to drive external traffic onto the Amazon platform. The sum total of these insights are that advertising to be on the good side of Amazon’s algorithm is becoming more expensive and more competitive.
What not to do
● Embark on a race to the bottom
By now, all brands should understand that price is king on Amazon. With the influx of new competitors and as brands start losing market share, the temptation is to do what the
challengers are doing and compete on price. The problem with this is that it becomes a one-way journey to the basement, so to speak, and then no one wins.
When brands embark on a price war with challengers who are prepared to work for little or no margin at all, they hurt their long-term sales for a short-term defence and gain. Amazon makes it incredibly difficult to increase prices, which means that sometimes, if margins are wiped out, vendors find themselves driven off the platform altogether, as happened during the pandemic. This is damage that you can’t undo.
● Ignore the seasonality of the platform
Make no mistake, there are seasonal spending habits on Amazon. While there are broad geopolitical drivers that affect consumer spend and sentiment, there are unique times in the year that see sales spikes on Amazon. A brand that does not plan and strategise ahead of time loses out to the competition, which speaks to all the points previously mentioned, not least the algorithm and market share. Be prepared for Amazon Prime Day, Black Friday and others.
● Do nothing, or worse, do what you have been doing and expect a different result
The market has changed. The new competition from small white label sellers, driven by brands and vendors prepared to work on the tiniest of margins, means that market share is under attack – irrespective of whether the sub-category is in a growth or decline phase. Beyond this, the Amazon algorithm has shifted, with very strong weighting going to conversion rates on sales and advertising, and a significant reward towards bringing external traffic onto the platform. It cannot be stated more clearly: as the market and the algorithm changes, brands simply must adapt, and do so quickly. What