The Dichotomy of Amazon and DTC Brands

“Times are changing,” Amazon said in an invitation to an event for consumer packaged goods (CPG) companies obtained by Bloomberg in March 2017. “Amazon strongly believes that supply chains designed to serve the direct-to-consumer business have the power to bring improved customer experiences and global efficiency. To achieve this requires a major shift in thinking.”

The event Amazon hosted focused on rethinking how products are designed, packaged, and shipped. Products sold in retail stores versus those sold online should be different. Late last year Tide released its classic liquid detergent in a sealed, shipping-safe cardboard box. The self-contained box includes a pull-out stand, a dosing cup, and a twist tap. Most products sold online need repackaging for shipping, and this Tide product does not.

However, direct-to-consumer is not about packing and product design. Direct-to-consumer (or DTC) brands manufacture and ship their products directly to buyers without relying on traditional retailers. They remove intermediaries and thus can offer products at a lower cost. Amazon, for a long time, has been positioning itself as not a retailer - hence not an intermediary - but an infrastructure company. Amazon’s fulfillment, marketing, and other services are continuously moving it away from being comparable to traditional retailers like Walmart and Target.

What made DTC brands work, though, is not the lack of intermediaries. Instead, it is the way these brands have built a relationship between the brand and its consumers. “The difference between a good product and a good brand is emotion,” said Jen Rubio, co-founder of Away. Away is a seller of lightweight smart-luggage valued at $1.4 billion after raising an additional $100 million this month. It has 400,000 followers on Instagram, the social network many DTC brands have utilized to build a following. “Social networks that are truly social (as opposed to news-oriented) and enable lifestyle discovery are perfect for this world, and nobody does this better than Instagram,” wrote Scott Belsky, chief product officer at Adobe.

The direct relationship between consumers and brands produces two valuable streams: data and feedback. Brands are capturing rich data about their consumers, and consumers can provide feedback directly to the brand. In turn, brands can use these signals to improve marketing, design, and communicate new products, and iterate faster than ever before. It is the two-way feedback loop which makes those brands work. It is also the frequency and speed of interactions with actual consumers, which make them nimble.

“More now than ever, consumers, particularly millennials, are spending their money on products not only for the functionality they provide but also for the meaning they convey,” wrote Namrata Patel, former VP Product at Minted. Amazon has no answer for this. It’s an efficient channel to reach millions of customers, but those customers will only ever be Amazon customers. Amazon is fewer clicks, fewer dollars, and fewer delivery days. Brands are thinking beyond that. Brands born on and for the internet are DTC brands. They use the internet for story-telling, interacting, and transacting with the consumer; consumer experience, transparency, and expertise is the focus.

DTC model is not the model. The market is getting flooded with new brands, consumer acquisition costs (or CAC) are rising, and successful winners are far in between. However, the shift from a wholesale world to a direct-to-consumer world is here to stay. Most DTC brand acquisitions have been made by large CPG brands trying to understand how they, too, could adjust to this new paradigm. Glossier, a beauty brand, has two million followers on Instagram, more than any of its larger competitors like L’Oréal.

Recently Amazon added aggregate demographic information about customers, including age, income, gender, and marital status to its Brand Analytics platform for third-party sellers. It’s an attempt to offer some of the data brands have on their websites. However, there is a lot more to be done for Amazon to become a platform for DTC brands. For example, when Glossier mentioned earlier released Bubblewrap, a two-in-one lip and eye cream, this month it was in front of 2 million followers on Instagram, plus many more on Facebook and its newsletter.

Amazon is not a retailer - in the latest quarter, Amazon online sales accounted for less than 50% of the company’s total revenue - but it operates like one. The way most brands interact with Amazon is not much different from interactions with Walmart decades ago. Also, just like working with other retailers, they get only one thing back - sales. In the world of wholesale that’s all that mattered. However, as brands look for ways to connect with customers, Amazon is no better than any other retailer.

On Amazon, branding is replaced with an algorithm informed by product reviews, sales, and clicks. It’s a system of hundreds of millions of products fighting to rank at the top of search results, ultimately netting the sale. “The 1980s saw a growing recognition of the value of the brand itself, separate from the product,” explained Dr. Dennis Mumby, a professor at the University of North Carolina who researches branding. “Corporations understood that the key to value accumulation lay not in the product, but in the brand.” Amazon’s algorithm is fighting this - it strips products of the brand value and offers reviews and ratings instead. This environment creates space for endless short-lived private label brands flooding the system. Even Amazon’s owned brands are not brands - they are a collection of products for when the brand doesn’t matter.

None of this is a fundamental problem to Amazon, in any case. Most products most people buy do not need a relationship DTC brands offer. Many purchasing decisions are for products ideally suited for an algorithm decision. However, brand building is more affordable, accessible, and accelerated than ever before. A few brands have been built on Amazon - for example, Anker electronics - but Amazon is not a platform of choice for any brand builder. It’s a channel they all inevitably, sometimes begrudgingly, add.

Amazon is right that times are changing and direct-to-consumer is that change. However, its retail platform is built on legacy principles of the wholesale past. As it slowly readjusts to offer more data and better tools for brands, brands are innovating outside of Amazon, leaving it, together with the rest of retailers, watching from the sidelines.

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Juozas Kaziukėnas

Founder of Marketplace Pulse, Juozas wears multiple hats in the management of Marketplace Pulse, including writing most of the articles. Based in New York City. Advisor to other startups and entrepreneurs. Occasional speaker at conferences.

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