Brands Don’t Matter. Platforms Do.

Amazon’s purchase of Whole Foods Market is just the beginning.
With Amazon’s recent purchase of Whole Foods Market, the news is abuzz with visions of how shopping will change for consumers. Perhaps we’ll see the kind of instant and effortless checkout at WFM stores that Amazon is piloting at its Amazon Go store in Seattle; or buy online, pick up in-store; or an improved home delivery experience from WFM that is closer to Amazon Prime Now’s seamless experience than it is to Instacart’s imperfections. Only Jeff Bezos knows the plan for WFM, but what everyone seems to agree upon is that the change of pace in the game of physical retail has markedly increased in one fell swoop.

Some 50% of shoppers begin their product search on Amazon, and navigating the world’s largest store is a highly-mediated experience, with Amazon carefully determining how it displays products for sale and how it suggests products to shoppers, so Amazon has already been deftly guiding the purchasing decisions of its consumers. The astounding market penetration of Amazon Prime, particularly among households that have the most discretionary income to spend (see chart below), just magnifies this effect. So what happens when Amazon controls the data and shopping experience not only at Amazon, but at Whole Foods Market and elsewhere too?

Image from recode.

As the Amazon platform extends its reach, might we also see Amazon sell its checkout services, data, and other platform-based services to other retailers? If you thought that Amazon Web Services was a big step for the enterprise market, just wait until Amazon powers every checkout process, point-of-sale, and back-end logistics systems for the stores that survive the current retail shakeout! Such a platform will result in massive changes in the consumer market, many of which brands and retailers today can barely imagine.

Brands rely on digital marketing…and placement.
While Amazon has enjoyed continued growth and while retail transaction volume has been subsumed by its platform, we’ve seen also a rush of new “disruptive” consumer brands enter the market in the last several years, all funded by cheap money in the form of venture capital (more in a future post about why increased global money supply has led to the burgeoning of venture investing). Some of these brands have challenging unit economics, some have great unit economics, but all of them have to contend with customer acquisition cost (CAC in startup parlance) and a lot of that CAC is spent on digital acquisition channels like Google search, and social media like Facebook and Instagram. (Twitter’s fortunes continue to stagnate or decline as marketers have realized the low ROI in that channel.)

(Side note: up to a point, brands should build momentum in marketing efficiency, as consumer awareness about their product(s) grows and conversion rates rise, but for many brands — as they hit new revenue milestones and take their product(s) to the widest possible audience — there is another downturn in the efficiency of marketing spend on acquisition. At this point, customer lifetime value (LTV) may drop and overall profitability will suffer.)

It’s not just new and up-coming brands that rely on digital marketing. Consumer Packaged Goods (CPG) companies now spend more on digital than traditional advertising — about 20% of the estimated $225 BN total annual spend in that category — according to AdAge and the bulk of those dollars go right to Google and Facebook. Considering that the combined market capitalizations of Google and Facebook amount to nearly $1.1 trillion, it’s clear who seems to be capturing the lion’s share of value in any consumer transaction: while Procter & Gamble and Unilever may duke it out for your shampoo dollars, it’s Google and Facebook who collect on every purchase, no matter what brand you purchase. Hence Google has a market cap of $650 BN; more than Procter & Gamble ($223 BN), Unilever ($161 BN), and Nestlé ($255 BN) combined. Facebook’s market cap of $434 BN dwarfs the enterprise value of most of the other major manufacturers of food and beverage products that you find in your local grocery store. And as Amazon ($465 BN) expands its dominance in retail and retail services, you can bet that it will continue to grow its share of the value created in every purchase.

Brand value is decreasing while platform value is increasing.
This all adds up to a world in which the channels of digital marketing and digital-enabled distribution — the platforms where we spend our time, engage with friends, and do our shopping — matter significantly more than the actual products that we buy. And brands will have to find ways to navigate the effects of that world. What happens when Amazon steers every customer to its Amazon basics brand, whether you’re searching for paper towels, potato chips, a t-shirt or a more considered purchase like a mattress? From large firms like Procter & Gamble to small firms like Everlane or Casper, the challenge is to figure out how to maximize the value of their brand amid increasing power for the platforms where they sell.

Embrace the Change.
As Parker Block notes in his discussion of Nike’s “Consumer Direct Offense” plan may be the best example yet of brands embracing this change. Even through Nike remains the world’s most valuable apparel brand, with over $30 BN in revenues, nearly 1,000 stores, and a growing e-commerce business, the company has made big bets on platforms. Nike now sells directly on Amazon, driving more revenue where its most valuable customers prefer to shop (Nike was already the top clothing brand on Amazon, despite the fact that all the product came from third-party resellers), allowing it greater control over the products sold there, and reducing the risk of counterfeit products. (Read a Forbes article here to learn more about the deal.) Nike will also sell directly through the Instagram mobile app.

Mark Parker, CEO of Nike, may call selling on Amazon and Instagram the “Consumer Direct Offense” plan, but it is, in fact, an obvious and necessary strategy for meeting customers where they want to shop. Nike was already the top apparel brand on Amazon, and Amazon Prime customers are the most attractive consumers that any company could hope for. Why wouldn’t Nike want to control its product and messaging in that channel? For a large and increasingly fashion-driven company like Nike, embracing the shift in power from brands to platforms couldn’t have been easy. But the leadership is clearly playing attention to the tea leaves. Similarly, Pepsico sees the value in platform e-commerce and has invested in building a robust e-commerce operation to promote and sell its products on Amazon, Alibaba, and elsewhere.

Partnering with the platforms does not mean that brands can reduce investments in their core e-commerce offerings. For now and the foreseeable, Amazon will be a transaction-driven platform that may grow to Nike’s largest channel. Nike has carefully built the Nike+ community, with workouts and coaching content, to solidify the network effects of hits brand. And Nike’s nearly 1,000 stores, many of which are experiential, will continue to offer more expansive and engaging opportunities to connect with the brand. With the combination of its own e-commerce; social media and shopping platforms like Instagram and Amazon; the Nike+ app and community; and its network of stores, Nike is hitting at all levels of consumer engagement, from awareness, to post-purchase reinforcement.

Several brands have begun to realize the value of top platforms and shift resources to navigate the choppy waters ahead. Brand owners and marketers must move quickly to stay afloat.