Amazon gets cozy with product suppliers

In an attempt to grow its consumer product goods business, Amazon has gotten cozy with consumer products giants Proctor & Gamble and Kimberly Clark to ship personal care products straight from the assembly line. This eliminates key links in the process – the warehouse and the retail store.

Analysts applaud Amazon’s “vendor flex” program as co-locating helps to reduce storage costs for bulky items like Tide and diapers that would typically occupy space in a distribution center. They see this as one more way Amazon is working to decentralize its supply chain.

Jason Long, CEO of Shift Marketing Group in St. Louis, said there are multiple benefits to suppliers and Amazon as the online retailer looks to broaden its scope of the products offered, while also shaving logistics costs. He said suppliers like P&G may see reduced costs of moving goods to Amazon distribution centers, but even more important is the e-commerce knowledge the supplier can glean when partnering with Amazon.
 
“P&G has mastered in-store selling but is still a relative newcomer with online sales,” Long said.

Marshal Cohen, chief retail analyst for NPD Group, said “vendor flex” benefits manufacturers because they can sell more of their products directly to consumers as Amazon is helping them create a new retail channel – manufacturer direct to consumers.

E-commerce is an area that P&G CEO A.J. Lafley wants to target, as shoppers are growing more comfortable with purchasing everyday items online. Lafley made no mention of “vendor flex” in the company’s earnings call last week, but multiple media reports indicate Amazon has been utilizing space inside P&G warehouses for three years and recently expanded those services in Tunkhannock, Pa.

In this facility, P&G reportedly loads diapers, paper towel, pet food, razors and shampoo on to pallets that are pushed into the roped-off area run by Amazon, who then packages, labels and ships the products to the consumers who ordered them. Talks are also reportedly underway between Amazon and Kimberly Clark and Georgia Pacific for similar arrangements.

Nielsen Holdings reports Americans order just 2% of household staples online, a small sliver that adds up to $16 billion, but they predict those sales will grow 25% a year to $32 billion in 2015.

Jim Tompkins, CEO of Tompkins International, said the separation between the consumer products industry and retail is blurring. He said Amazon has been at the forefront of many disruptions in the retail world and “vendor flex” is another example.

“Consumer products companies are beginning to operate in retail by selling to the end consumer, while retailers are moving to private label products more and more,” Tompkins said.

Clorox is already selling Brita water filters and disinfecting wipes on Amazon’s site to the tune of $75 million at the end of its fiscal year June 30. Long said many CGP companies could sell directly to consumers if they wanted to but he doesn’t believe most of them want to compete head-to-head with their largest retail partners.

AMAZON ADVANTAGE
Cohen said the move by Amazon expands its warehouse footprint, which can speed up delivery and shave storage and transport costs to the distribution center. Long agreed that Amazon has ample upside with this initiative as household staples are a category that Amazon hasn’t conquered yet, but offers significant upside if they can figure it out. He said even though household staples are typically low margin items, their consumable nature drives traffic, something all retailers are aggressively seeking.

“Also, household staples are often bulky. Shipping these out of piggyback locations frees up space in Amazon distribution centers for higher margin items,” Long added. “Amazon is also able to sharpen its price and better-compete with the Wal-Mart’s and Costco’s of the world.”

He said it will be interesting to see how the big retailers respond to the cozy relationship between Amazon and suppliers.

“Costco has the Kirkland brand to combat P&G. A few months ago a local Costco carried only Kirkland brand detergent pods but on a more recent trip I noticed both Kirkland and Tide brand detergent pods. At the end of the day, big brands likely carry a big enough stick to fight off any serious damage,” Long said.
 
A few naysayers of this effort said as long as Amazon can package everything in a single box, its model works well, but when items are shipped separately the costs quickly escalate.

The analysts agree the biggest winners with this initiative are likely to be consumers as retailers continue to push the bar higher with creative delivery options.