The Supply Side: Avoiding the race to the bottom with online pricing algorithms

A top concern among retail suppliers is how to avoid the so-called race to the bottom with prices resulting from online retailer Amazon’s use of algorithmic pricing to undercut its competitors.

The online price wars have been intensifying among retailers over the past 12-18 months. Keith Anderson, senior vice president of strategy and insights for Profitero, recently held a webinar on the topic, sharing with suppliers insights and strategies to mitigate downward pricing pressures. Anderson said the high-stakes race to the bottom may be good for shoppers but leaves consumer packaged goods brands scrambling.

Anderson examined online pricing across 53,000 products in beauty, grocery and household supplier on Amazon, Walmart.com, Target.com and Jet.com during 2017. He said the pricing study compared apples to apples and did not factor in loyalty programs like Target Redcard or basket discounts at Jet.com. The study focused on the online prices of the same items sold at the four retailers in 2017 between June and August and September and November.

“Amazon is the price leader in almost all categories with the exception of beauty in which Walmart had the lowest prices,” Anderson said. “Walmart.com is using algorithmic pricing, too, and that has helped it narrow the pricing gap with Amazon from 9% in 2014 down to 3% in 2017. Amazon had the lowest online prices consistently among the 52,450 best selling items online.”

PRICE COMPARISON
Specifically, between the 2017 period of June through August, Amazon pricing was 4% less than Walmart.com on appliances, 1% less on baby items, 7% less on electronics, 1.7% cheaper on furniture, 2% less expensive on office supplies, 2% less costly on pet supplies, 6% cheaper on tools and 4% less costly on toys. Video games were 5% cheaper at Amazon than at Walmart.com.

There was a 4% savings on vitamins bought at Amazon compared to Walmart.com. The beauty category was the exception in the time period, with Walmart.com being 1% cheaper than Amazon on beauty products. Target.com and Jet.com were more expensive with beauty items costing 6% and 8%, more, respectively, than at Amazon.

Anderson said the price gap is narrowing between Walmart.com and Amazon in the areas of household and grocery, but Amazon continues to be the first mover on price drops. Looking at 4,230 competitive products during the month of November 2017, Amazon marketplace sellers initiated 3,188 price drops. Amazon as a first-party seller initiated 3,110 price drops. Walmart.com initiated 995 price drops in the period.

Anderson said once a price drops there are followers that match the lower price or take it lower. Amazon marketplace sellers were also the top followers matching competitors or further reducing prices 1,604 times in the period. Jet.com was a top follower with 969 followed drops, and Kroger was the other largest follower with roughly 800 lower price moves.

DOWNWARD SPIRAL
Anderson pictured price competition as a downward spiral. For example, Amazon may have the low price at $45, but a third-party marketer selling on Amazon drops the price to $40, with Home Depot then lowering its price to $30 with a special promotion. That could trigger Amazon to lower its price to $30, which becomes the new floor.

He warns third-party marketplace sellers are the common driver of low-price dynamics because Amazon will monitor and match competitors including retailer promotions. Anderson said Amazon is also matching the pickup discount being given by Walmart.com by discounting its price 5% or so.

“Amazon is looking to match Walmart’s best price, and this cat and mouse game has been going on for nearly a decade now,” Anderson said. “It’s going to be important to understand how retailers set their own shelf prices in light of the asymmetrical discounts.”

Ziploc bags for two-day shipping sold on Walmart.com cost $8.12, but if the shopper picks the item up at a store the cost is $6.88. Anderson said Walmart is trying to unbundle some of the value consumers now expect from their Amazon Prime membership, and that represents some of the ways retailers are thinking and communicating value in sophisticated ways to shoppers.

FIGHTING BACK
Anderson said it’s painful for suppliers, and it’s no picnic for retailers. He said one way retailers are trying to fight back is by expanding private label, which in the past has not been part of the online realm. That is changing with Amazon’s focus on what has become more than 35 private-label brands as well as Jet.com’s “Uniquely J” brand launched in 2017. Aldi and Lidl products are nearly 100% private brands.

Anderson said it’s important for suppliers to remember not all price matching policies are rational or sustainable. He said deflationary pricing can impact margins and product availability. He said it’s important for suppliers to manage and monitor all their third-party sellers to avoid downward pricing pressures.

Anderson also said it’s important for suppliers to manage profits down to the item level and factor in the cost of goods and promotional budgets against the profits generated. He said Amazon and most retailers will discontinue products where a profit cannot be realized, so understanding profitability metrics down to the item level is a must.

Anderson also said suppliers that have MAP contracts (Must Approve Price promotions) need to monitor them for retailer violations. He said a review of 4,184 products sold online at Target, Amazon, Kroger and Walmart found many MAP violations. Walmart was below the MAP contract price 26 days, and the product was out of stock 22% of that time. Amazon first-party was lower than MAP contract price 25% with out-of-stocks occurring 2% of the time. Amazon Prime was lower than the contract price 48 days and out of stock 2% of that time. Target was the biggest violator of MAP being lower than contract prices 47 days, with no out-of-stock issues.

Anderson said suppliers that decide to draft or enforce MAP policies need to align with executives around the importance of maintaining margins. He said there can be short-term tradeoffs with major long-term benefits such a building brand equity by keeping prices higher. He said to make sure the policy is clearly written, leaving no room for interpretation by the retailer on the back side of a violation.
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Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.