The Elephants in the Room

This article will continue the theme of channel partners that we have explored recently (see Channel Strategy in CPG and Treating Channel Partners Strategically), and reflects a core section of my upcoming book, The New Invisible Hand.

Having value-creating channel partners is much better than the alternative. But even good partnerships carry risk. In the channel, one of those risks is that the partner becomes more powerful than the supplier.

“Booksellers initially thought of Amazon as their best friend,” writes author Franklin Foer. “They were coming in and they were challenging Barnes and Noble, and Borders, which were the big, dominant corporations of the day…but they could never envision that Amazon would overtake them all.”

There are two immediate dangers of having too powerful a channel partner:

1. That the partner becomes so dominant it can appear indispensable
2. That the partner becomes the gatekeeper between your company and your customers

Who Has the Channel Power?

One of the keys to success for Walmart a generation ago and Amazon now is their seeming indispensability. Over 90% of Americans live within 10 miles of a Walmart. And 56% of shoppers in the U.S. first visit Amazon when shopping for an item.

That incredible presence gives both companies unparalleled customer exposure. Suppliers feel Amazon and/or Walmart must be channel partners, which puts suppliers in a weak negotiation position. Customers may love Amazon, but many sellers do not. Many sellers feel like they don’t have a choice; Amazon’s just the place to be.

When a distributor has inordinate power in so many channel roles, it makes it harder for the supplier to maintain their own brand, customer relationships, and pricing strategy.

It is estimated that Amazon lost $2 billion on its retail in Q1 of 2018 after breaking out Amazon Web Services (AWS) and Prime membership from its financial reporting. As one stock analyst opinion piece put it, “Amazon clearly doesn’t care about making money from its retail business.”

That affects pricing strategy at all retail businesses that compete with Amazon, which is, essentially, all retail. Most retail operations don’t have a sister company like AWS to offset their losses, however.

So, if you are hoping to maintain good margins on the products you sell through Amazon or another massive distributor, you are fighting an uphill battle. What are your options?

One key approach is to focus on brand power.

Oatly, the oat milk company I wrote about before, provides one example of a company working hard to establish its brand before transacting with traditional channel partners. Warby Parker is another.

Warby Parker, maker of fashionable prescription glasses, worked hard to develop its brand. (It is also a fantastic example of reintermediation.) Part and parcel with its branding has been the decision not to sell through retailers such as Amazon and Walmart.

At first, Warby Parker only sold through its website. More recently, the company has experimented with its own brick-and-mortar stores, which is still an unusual step for an online company to take when most physical retail stores are suffering. Wouldn’t opening a physical store hurt its online sales, too?

“Once we open a store, we see a short-term slowdown in our e-commerce business in that market,” according to Dave Gilboa, co-founder and co-CEO of Warby Parker. “But after nine or 12 months, we see e-commerce sales accelerate and grow faster than they had been before the store opened. We’ve seen that pattern in virtually every market.”

By having a physical presence, they are doing something that (so far) Amazon cannot do: interact experientially with customers. (Amazon, of course, is experimenting with its own brick-and-mortar stores. The giants are not complacent.)

Both Oatly and Warby Parker focused on their brands and customer experience so that they would have more power in their relationships with channel partners. Knowing how to handle the elephants in the room is critical to maintaining good channel partnerships.