Dive Brief:
- Certain grocery brands selling products during Amazon’s Prime Day will have to pay additional funding charges if sales of the products result in a loss, according to CNBC.
- Amazon, which purchases products wholesale and sells them directly through Prime, is imposing the charges to make up for profitability gaps.
- Amazon is waiving the placement fee of $500 that it normally charges to run a Prime Day promotion as part of the new financial arrangement.
Dive Insight:
This Prime Day, Amazon is trying a new approach to protect its bottom line when it comes to the notoriously low-margin grocery products that it sells online.
The new financial structure could disincentivize companies that want to sell through Amazon Prime. The previously required $500 placement fee was a known variable, but the new "additional funding" that could be charged makes it difficult for a company to predict any potential losses. If the product sells well, then the vendor won't have to cover the "profitability gap," but if there's a loss exceeding the $500 companies used to pay for placement, then the new arrangement is a bad deal for the seller.
For Amazon, the deal reiterates the company's recent push for profitability. Just this year, Amazon began blocking ads for unprofitable products and stopped selling some products altogether. According to the Wall Street Journal, these products often have bulky packaging, are priced below $15 and are expensive to ship, making for slimmer profits. The items usually fall into the grocery category, like bottled beverages and snack items.
The retailer's Prime Day grocery deals, however, will make margins even slimmer. This year, Amazon is offering a 40% discount on groceries when members shop on AmazonFresh, as well as $15 off a first-time order of $35 or more. Amazon Prime members in particular may be tempted to give grocery delivery a try, giving Amazon an opportunity to convert Prime members to AmazonFresh subscribers. The service costs $14.99 per month in addition to the cost of Prime.
The July 15 and 16 Prime Day event is predicted to be the biggest in the company’s history, with 76% of U.S. Prime members planning to shop during the big event, jumping 13% compared to last year. This could be promising for grocery vendors and brands worried about having to cover Amazon’s losses, especially considering that many consumers use the opportunity to try new products or purchase items that are outside of their normal price range.
Other retailers continue to take shots at Amazon. As it did last year, Target is having its own, membership-free deal days, which overlap with Amazon's 48-hour sale. Walmart is hot on Amazon’s heels in the grocery delivery arena. It recently announced a new unlimited grocery delivery plan starting at $98 a year or $12.95 per month on orders of $30 or more, which is slightly cheaper than Amazon Prime’s offering.
