Strategic Value of Amazon Sales to CPG Acquirers
It is impossible to ignore the seismic shift that Amazon has caused in the landscape of CPG. As arguably the lowest barrier way to get product in front of (and in the hands of) large quantities of consumers, it is no surprise that brands have a proclivity for selling on Amazon right from their onset. The data collection, product iteration, visibility, and sales generated from Amazon can be instrumental in a brand’s journey to scale. However, for brands with strategic acquisition as an ultimate goal, Amazon must be treated carefully.
Compared to revenue from traditional retail, Amazon revenue is less scalable, defensible, and predictable, so CPG investors and acquirers value it at a discount. For true strategic value, investors and acquirers are looking for signals of product market fit beyond revenue on Amazon (e.g., repeat rates) and brands that use Amazon to grow their offline presence.
Let’s dive into those three buckets (scalability, defensibility, predictability):
- Scalability
Strategic acquirers want to see velocity in channels where they can scale distribution, and velocity on Amazon does not indicate velocity in traditional retail
Success on Amazon does not predict success in retail. Since consumers on Amazon search using keywords, a brand’s positioning and use-case is clearly defined based on it coming up in a particular search. Consumers searching for “keto cookies” and purchasing the first brand they see does not equate to a purchase in retail where a brand must communicate its value prop unaided. In addition, search filters such as price and and availability on Prime lessen the importance of brand and limit the amount of brand equity built by businesses on the site. Said a different way, virality on Amazon does not mean virality in traditional retail. Strategic acquirers want to see resonance in channels where they can scale distribution, which Amazon does not provide.
However, while Amazon sales may not translate to retail success, my hypothesis is that high repeat rates do. Repeat rates are an indication of product market fit (does your product really solve a problem for people?), and so should have a direct impact on the strategic value of Amazon sales. Alongside revenue mix by channel, repeat purchase rates provide a useful framework to think about value of Amazon sales.
2. Defensibility
Amazon revenue is less defensible than traditional retail due to the lower barriers of entry (more copycats…) and the looming threat of Amazon Private Label
Successful ideas on Amazon will be copied quickly either by other upstart brands or Amazon itself. The low barriers to entry cause brands in categories with momentum to face a sea of competition with lower prices and identical claims. Categories with serious momentum (e.g., skincare) will prompt Amazon will come out with its own PL brand that will be front and center on an array of keyword searches, be available on Prime, and win on price. While the threat of PL also exists in traditional retail, Whole Foods 365 can’t use an algorithm to be the first brand a consumer sees when looking to purchase.
Valuable brands are using their momentum on Amazon to develop case studies to bring to the retailers to diversify revenue channels and grow simultaneously in the offline world. Founders should highlight stats that show defensibility (e.g., repeat rates, high ratings sustained over time, sales growth with price premium to comp set)
3. Predictability
Brands sell at the mercy of the algorithms. Non-subscription revenue on Amazon is less predictable than traditional retail. Brands are dependent on Amazon’s ranks to generate sales, and changes in the algorithms can send CACs soaring
Amazon owns the algorithms that determine order of search results, ‘Amazon Choice’ designation, and the ranks of Amazon’s Best Sellers List. Algorithmic ranks on Amazon serve as a foundational piece for brand discovery, and because Amazon could change the algorithms at any time, they are a far more variable form of ‘shelf placement’ than you’ll find in traditional retail. Strong Amazon marketing and ability to get on these algorithm driven lists is a valuable skill set to generate cash but is less valuable in terms of indicating product market fit, which is truly what strategic acquirers are after.
…So in sum, how can an Amazon presence be used to demonstrate strategic value to investors and acquirers?
- Indication of product market fit through repeat purchase rates, review growth, and sustained high ratings
- Ability to use customer data to figure out core demo and iterate on offering
- Building case studies to drive growth in offline retail
- Growing a subscription business
