Amazon and Walmart are in an all-out price war that is terrifying America’s biggest brands

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From Recode:

Last month, Walmart gathered some of America’s biggest household brands near its Arkansas headquarters for a tough talk. For years, Walmart had dominated the retail landscape on the back of its “Everyday Low Price” guarantee. But now, Walmart was too often getting beaten on price.

So company executives were there, in part, to reset expectations with Walmart’s suppliers — the consumer brands whose chips, sodas and diapers line the shelves of its Supercenters and its website.

Walmart wants to have the lowest price on 80 percent of its sales, according to a presentation the company made at the summit, which Recode reviewed.

To accomplish that, the brands that sell their goods through Walmart would have to cut their wholesale prices or make other cost adjustments to shave at least 15 percent off. In some cases, vendors say they would lose money on each sale if they met Walmart’s demands.

Brands that agree to play ball with Walmart could expect better distribution and more strategic help from the giant retailer. And to those that didn’t? Walmart said it would limit their distribution and create its own branded products to directly challenge its own suppliers.

“Once every three or four years, Walmart tells you to take the money you’re spending on [marketing] initiatives and invest it in lower prices,” said Jason Goldberg, the head of the commerce practice at SapientRazorfish, a digital agency that works with large brands and retailers. “They sweep all the chips off the table and drill you down on price.”

But this time around, Walmart’s renewed focus on its “Everyday Low Price” promise coincides with Amazon’s increased aggressiveness in its own pricing of the packaged goods that are found on supermarket shelves and are core to Walmart’s success, industry executives and consultants say.

The result in recent months has been a high-stakes race to the bottom between Walmart and Amazon that seems great for shoppers, but has consumer packaged goods brands feeling the pressure.

The pricing crackdown also comes in the wake of Walmart’s $3 billion acquisition of Jet.com and its CEO Marc Lore. Lore now runs Walmart.com and has said one of his mandates is to create new ways for the retailer to beat everyone else on price, including Amazon.

. . . .

One piece of the battle, executives say, is an Amazon algorithm that works to match or beat prices from other websites and stores. Former Amazon employees say it finds the lowest price per unit or per ounce for a given product — even if it’s in a huge bulk-size pack at Costco — and applies it across the same type of good on Amazon, even when the pack size is much smaller.

So let’s imagine Costco is selling a pack of 10 bags of Doritos for $10 — or $1 per bag. Amazon’s algorithm notes that one bag is $1 at Costco and, in turn, lowers the price on Amazon of a single bag of Doritos to $1.

That is a great deal for customers — something that is likely driving the decision at Amazon, where an obsession with customer value dominates its strategy.

But now, Amazon is selling individual items at Costco prices while not getting the same wholesale price that Costco enjoys. In short, it’s going to be really hard for Amazon to turn a profit on those goods.

When Walmart sees this, it freaks out on the supplier, industry executives say. And it doesn’t matter to Walmart that Amazon may not be getting the same wholesale price that retailers like Costco or other membership clubs receive. In other words, even if Amazon isn’t profiting from its extremely low prices, Walmart is still demanding the same bulk-rate discount applied to individual items.

. . . .

Unprofitable items are known inside Amazon as CRaP products — the acronym stands for “Can’t Realize a Profit.” And Amazon is not afraid to kick off big and small brands alike.

Case in point: On a Friday afternoon last month, all Pampers diapers sold by Amazon were unavailable on the site. Industry speculation was that Amazon may have kicked Pampers off the site as part of a negotiation over prices.

Neither Amazon nor Pampers parent company Procter & Gamble would comment on whether this was the case. But the bigger point may be that senior industry executives thought such a move was even a legitimate possibility.

. . . .

As Amazon Prime becomes a bigger part of Amazon’s business, Amazon ships more orders that consist of just one item. These orders can typically be tougher to make profitable than multi-item orders — a trend that could explain the renewed focus on profitability.

. . . .

The longest-term solution, however, is perhaps the most difficult: Reimagining how a product should be designed and packaged from the ground up, specifically for e-commerce sales. That often means cutting the weight of low-price goods since shipping costs tend to eat into a product’s profitability. (Amazon, in fact, is trying to capitalize on this potential shift by asking brands to reformulate their packaging to make it easier to ship — all done via Amazon, of course.)

Link to the rest at Recode

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21 thoughts on “Amazon and Walmart are in an all-out price war that is terrifying America’s biggest brands”

  1. One thing not mentioned in the above excerpt of the OP, giving different wholesale terms to different retailers is asking for trouble. It’s not wrong. It’s just asking for trouble. When retailers A and B are competing with each other on price, and the supplier is giving them different wholesale terms, either A or B or both are going to be interested in having very serious negotiations with the supplier.

    Any supplier that gives different wholesale terms to different retailers is not an innocent bystander when the fight gets ugly.

    • My friends used to own an independent bookstore and couldn’t compete with BAM, Barnes & Noble, other brick and mortar big box stores because (as they were told straight from distributors) the more you order, the bigger your wholesale discount, so sometimes the price they paid wholesale was the price Amazon had the books listed… it was awful to watch. Those with more money to spend always have the biggest advantages.

      • I’ve seen reports of independents that faced with a need to reorder an unexpectedly pooular title will order from Amazon because it is both cheaper and faster than going through the regular distributor.

        Back in the mid 90’s the ABA sued the big publishers and B&N for violating the Federal price discrimination act:

        https://en.m.wikipedia.org/wiki/Robinson–Patman_Act

        The publishers settled by swearing they would offer everybody the exact same terms. And promptly made wholesale book pricing dependent on volume.

  2. I noticed Jet.com being more competitive. A tea brand I like, that I usually get through Amazon or, if I have a coupon, Vitacost, I ordered FIVE cases this month through Jet.com, as they had a much lower price, and the more cases, the lower the price. I’m well-stocked now. 😀 Six bucks a case less than on Amazon. So, their algorithms are not competing with Jet, I guess.

    I prefer to shop Amazon, but I can’t ignore 6 bucks less per case with free shipping, even if it took more than a week to get my case (slower than Prime).

    • Food items I’ve found on Amazon are often way too costly — then I check the seller and find it’s a third-party entity. Search further for the same item on Amazon to bring up all the sellers and you can see prices that go so high it’s impossible to imagine anyone actually making the purchase. Same thing happens on drugstore type items. Or the prices will be reasonable, but they’re not Prime so shipping is outta sight. Ticks me off when I find what I want at a good price, but it’s an add-on item so I have to order other stuff in order to get it. I sent Jeff an email asking him to give the customer an option: buy more stuff, or pay for shipping. Jeff must not love me because he hasn’t done that.

      What kind of tea did you get? I recently loaded up on oolong tea that I couldn’t find locally. Years ago I bought a lot of Tazo’s Awake tea — so much, I’m still drinking it. I know people think tea gets stale, but I’ve never noticed that (perhaps because I like it strong, so stale doesn’t bother me).

      • Yep. I sometimes review items I’ve tried–and not bought at Amazon– with a “the price here is crazy, shop around.”

        This is canned STEAZ (convenient out of the fridge). I never liked bottled/canned green teas until this brand. My fave is the mint, then the pomegranate/lime, then the grapefruit. I always previously just made my own iced green or black tea in hot water and let it chill.

        I add pomegranate extract and fresh lime juice, mint, etc. Here, they do it for me and I just grab and guzzle. It’s more expensive than making it myself, but whatever.

        I have so many teas, it’s nuts. REpublic of Tea (I like a couple, including the Almond), CHoice organic (green, oolong, bancha), Twinings (orange pekoe), Celestial Seasonings (various, but the Cherry Berry and Red Zinger are yum) NEwman’s Royal (cheap, so I like for iced tea), Bigelow decaf green, Rishi has a lovely loose black tea, and then some Japanese imports for ceremonial matcha and etc.

        I order my coffee from Paradise Roasters, so I don’t shop around. They roast to order and I love some of their single origins. TEa, I’m less picky, but STEAZ is addicting.

        • I wonder if STEAZ is the ice tea my daughter’s family is so crazy about. I’ll have to ask — it’s something they have trouble keeping in stock because the whole household consumes it. Does STEAZ come pre-sweetened?

        • I deeply envy all of you. For years I used to “chain drink” tea, but I’ve recently been forced to accept that caffeine hates me. I’m on the lookout now for loose-leaf herbal teas.

          • Jamie, if there’s a Teavana near you, check it out. Just taking a good deep breath in there is wonderful. I’m spoiled and have a store nearby, but they may do business online as well. So many delicious blends!

        • I buy bulk loose-leaf tea from Amazon almost exclusively (I switch back and forth between the breakfast blends of Numi and Mighty Leaf), mainly because it’s so easy with Prime. But it sounds like I should shop around.

          • I so like easy. When Vitacost has a 20% off teas, I stock up, because they ship to me and get here as fast as Prime, no lie. And if you spend more than 49, shipping is free. So, I stock up when those 20% off food or tea promos comes around–and they do every couple months.

  3. And some companies will finally decide that it’s not worth making CRaP products for Walmart or Amazon, though I don’t see it affecting Amazon as much as it will Walmart.

    Snapper lawn mowers can’t be found at Walmart, Snapper refused to make their mowers so poorly that they could sell it at the prices Walmart was demanding.

    Hmmm, if you think of Walmart as the big publishers trying to give less and less to the creators of what they’re selling — and not willing to lose any of their own profits in the bargain, more and more of those items may start showing up as third-party sellers on Amazon.

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