What Private Equity Needs to Know About Amazon

Joanna Perry

May 12, 2020

What private equity needs to know about Amazon

In March we ran a webinar for investors in consumer brands, to explain what private equity needs to know about Amazon.

We thought it was also worth publishing a blog on the topic, to highlight why Amazon should be considered by investors at both the pre-deal and post-deal stage of the investment cycle.

Below we outline how Amazon should be considered as part of digital due diligence, and why it's essential for your existing consumer portfolio companies to have an Amazon strategy; whether it's to compete or to utilise it as a channel to market.

How Amazon works

Firstly, it's worth explaining the different ways that Amazon works with brands: the three models as called Vendor or 1P, Seller or 3P or a hybrid of these two models.

In the Vendor or 1P model, the brand sells its products directly to Amazon - as it would do to any retailer - and Amazon is then free to sell those products on the platform at whatever price it likes (within Europe and many other countries outside the USA at least). Amazon chooses which products it wants to stock; but the brand is still responsible for supplying the product content for listings pages and paying for any Amazon advertising to promote the listings. 

In the Seller or 3P model, a business pays Amazon a percentage of sales fee to list the products they choose to sell on the marketplace; retaining ownership of the stock, setting prices and managing product content and advertising. The seller can also be the brand, or a third-party seller such as our parent company Pattern. The seller may wish to fulfil the products themselves, or use Amazon's fulfilment service for an additional fee.

The hybrid model sees some products sold 1P directly by Amazon, and some sold 3P by the brand or third parties that the brand has authorised to represent it on the marketplace.

Amazon due diligence

There are two aspects of digital due diligence for a consumer brand where a consideration of Amazon is important.

The first is within the general strengths, weaknesses, opportunities and threats analysis for the brand's ecommerce presence. Shown below you can see that we would consider the brand's Amazon presence within the opportunities and threats sections.

Private Equity SWOT Amazon - Pattern Blog

Meanwhile, for brands where Amazon has been identifed as being important to their ecommerce performance, we would also carry out an Amazon-specific SWOT analysis. This provides more detail on what private equity needs to know about Amazon in relation to a specific brand. An example of the kind of data and proof-points we are interested in is shown below. 

Private Equity SWOT 2 Amazon - Pattern Blog

We have developed a number of frameworks for scoring the presence and potential for a brand to sell its products on Amazon, that help with analysing all of the above.

Why every brand needs an Amazon strategy

Amazon dominates online sales in the USA, and is taking an increasing proportion of online spend in other markets. This trend has only been accelerated by the COVID-19 pandemic, which saw the marketplace report sales that were up by 26% in value, and 32% in volume terms, in its latest quarter to March 31.

Analysis of why shoppers choose different online channels for the same purchases, clearly indicates why there is a place for Amazon.

Retailer's website - Chosen because of easy returns and exchanges, customer service and support and their loyalty programmes.

__Brand's website __- Promises authenticity of product, delivers unqiue products or services and allows product customisation.

Online marketplaces - Price, fulfilment options and product selection are the key drivers for purchasing through this channel.

With this in mind, a brand's Amazon strategy could be to compete or co-operate with the marketplace. If it wants to compete, it must focus on all of the things that customers tend to turn to a brand's own site for, and be competitive on the factors that cause shoppers to turn to marketplaces.

Even then, there can be a case for having a presence on the marketplace as a defensive strategy to reduce the likelihood of unauthorised third party sellers listing the brand's products for sale in ways that is damaging to the brand.

If a brand wants to co-operate with Amazon as a channel to market, the strategy should include deciding which model is appropriate where and consider the key roles the makretplace can play to drive customer acquisition and revenue, brand awareness and act as a shortcut to internationalisation.

The digital due diligence SWOT analysis frameworks shown above can also be useful for determining the role your portfolio companies want Amazon to play in their online sales strategies; and whether those strategies are proving successful.

If you are an investor in consumer brands and would like to see the full deck outlining what private equity needs to know about Amazon, you can email us at UK@Pattern.com and we would be delighted to send it to you.

Similarly, if you need support with digital due diligence, or a digital challenge that an existing portfolio company is facing, please contact us on the above email address and we would be delighted to assist.

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Slowing Inflation is Music to Consumers’ Ears
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Slowing Inflation is Music to Consumers’ Ears

**Instrument Pricing Changes Tune Amid Record Inflation** Compared to 2022, consumers should expect to pay more for musical instruments, but the rate of inflation shows signs of slowing. **The backstory:** America’s most popular musical instruments saw a notable price increase in 2022 compared to 2021, but the rate of inflation eased in Q4 ’22. **Why it matters:** Slowing inflation within this product category could indicate economic pressures like increased demand, rising labor costs, and supply chain disruptions are easing across the consumer landscape. **What we’re seeing:** The average cost of musical instruments increased 7.5% from 2021 – 2022; however, when analyzing individual increases year over year, some instruments saw price increases as high as 21%. <iframe title="YOY Price Change for Instruments — 2022 vs. 2021" aria-label="Bar Chart" id="datawrapper-chart-02Lwk" src="https://datawrapper.dwcdn.net/02Lwk/2/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="379" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> * Trombones experienced a 21.73% increase compared to 2021 * Trumpets +20.08% * Flutes +18.6% * Recorders +16.13% * Saxophones +13.63% * Clarinets +10.55% * Drums +5.41% * Ukuleles +5.17% **However:** Inflation among these same instruments was significantly less in Q4 ’22 compared to Q4 ’21. In some cases, prices decreased from Q4 ’21 – Q4 ‘22: <iframe title="Price Change for Instruments — Q4 2022 vs. Q4 2021" aria-label="Bar Chart" id="datawrapper-chart-6X6GZ" src="https://datawrapper.dwcdn.net/6X6GZ/2/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="379" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> * Trombones +11.23% * Flutes +10.41% * Saxophones +5.94% * Clarinets +5.59% * Trumpets +3.10% * Recorders +2.85% * Drums -2.59% * Ukuleles -8.46% **Moreover:** Certain instruments saw inflation reverse in 2022. On average, prices for melodicas, guitars, and violas saw their prices decrease by 4.41%, 3.19%, and 0.97%, respectively. <iframe title="YOY Price Change for Instruments — 2022 vs. 2021" aria-label="Bar Chart" id="datawrapper-chart-0Tefk" src="https://datawrapper.dwcdn.net/0Tefk/3/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="259" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> **Diving Deeper:** Inflation was more significant when comparing Q4 ’21 to Q4 ’20 than when comparing Q4 ’22 to Q4 ’21, indicating a slowing down of price increases for consumers. <iframe title="YOY Q4 Price Change for Instruments — 2020 – 2022" aria-label="Stacked Bars" id="datawrapper-chart-p6iqt" src="https://datawrapper.dwcdn.net/p6iqt/1/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="206" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> * In Q4 ’21, average prices for all instruments were up 8.89% compared to Q4 ’20. * When comparing Q4 ’22 to Q4 ’21, the average price for all instruments only increased by 2.65%. **The takeaway:** While consumers should expect to pay higher prices for instruments this year, overall inflation impact within this product category appears to be slowing down. With National Ukulele Day coming up on February 2, now is a great time for ecommerce brands to take advantage of slowing economic worries and reach new consumers. * Want Pattern’s data science team to power your brand with consumer insights like these? Contact us to [request more information](https://pattern.com/contact-us/) today.

Slowing Inflation? What Musical Instrument Pricing Tells Us
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Slowing Inflation? What Musical Instrument Pricing Tells Us

It’s safe to say consumers and brands alike are eager for a change to the pattern of rising inflation, steadily increasing in many ecommerce categories . Pattern’s internal team’s data scientists analysis of instrument pricing shows a glimmer of hope that inflation may be slowing, which would be great news for brands selling online.

At Pattern, we’re interested in and monitoring trends and news related to pricing since price is a key factor in a brand’s profitability (as explained in the Ecommerce Equation). When brands are able to optimize their price, conversions, and traffic, they can optimize their profitability. And profitability leads to better allocation of resources, better brand control, and gives leaders the ability to expand their presence to new markets worldwide.

YoY Instrument Pricing Increased at a Slower Pace

When analyzing the pricing changes of instruments from 2021 to 2022, our teams found that prices increased, but at a slower rate than from 2020 to 2021.

As shown below, the year over year Q4 changes show quite a lower rate of increase.

Inflation Improvements Raise Profitability

Because inflation impacts online shopping behaviors, lower inflation can lead to better overall profitability for brands. This idea, of course, is nuanced, but Pattern’s Ecommerce Equation can help illustrate the general principle.

When inflation rises, consumers change their spending habits. Shoppers spend more time researching products, forego premium, higher-priced brands, and buy more in bulk. Brands tend to see a loss of loyalty as they’re forced to raise prices.

Price is a key variable in the Ecommerce Equation: price x conversion x traffic = profitability. As inflation lowers, brands can expect better performance in all of these areas—more traffic as spending habits return to normal, higher conversion from returning customers, and price that better fits consumer demand. As inflation lowers and these variables stabilize, brands will see profitability increase.

Raise Your Profitability with Pattern

As an ecommerce accelerator, Pattern is obsessed with gathering data that helps our brand partners succeed. We’ve created best-in-class technology, models, and analytics to understand changes on the horizon and inform our decisions. With an incredible team of data obsessed Pattern employees, we see what makes the difference in truly great ecommerce performance and apply those learnings for brand partners. 

Ready to improve your profitability? Contact us here.

Inflation hits LEGO, but lighter than you’d suspect
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Inflation hits LEGO, but lighter than you’d suspect

**Some sets get more expensive, while others become cheaper** In June 2022, LEGO announced it would be increasing the prices of their sets. Ever since, consumers anticipated their favorite plastic construction toy prices to increase [by as much as 25%](https://9to5toys.com/2022/06/02/lego-officially-confirms-price-increases-coming-to-most-sets-later-this-fall/). **Why it matters:** Consumers are feeling the sting of inflation in all areas of their lives, from groceries and gas to entertainment. With LEGO Day right around the corner (January 28th), fans may wonder whether it’s a good time to purchase a set. **What we’re seeing:** While inflation continues to ravage the economy, consumers are seeing a small reprieve when it comes to the pricing of LEGO sets. Despite the anticipated 25% price increase, average prices among the top LEGO sets only increased by 4.7% year over year when comparing Q4 2022 to Q4 2021. <iframe title="YOY Price Change for All LEGO Sets – 2022 vs. 2021" aria-label="Interactive line chart" id="datawrapper-chart-3gn9L" src="https://datawrapper.dwcdn.net/3gn9L/3/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="393" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> * During this same period, annual prices for some of the most popular LEGO sets were up as much as 23%. <iframe title="U.S. Price Change for LEGO Sets – Q4 22 vs. Q4 21" aria-label="Split Bars" id="datawrapper-chart-vh7B2" src="https://datawrapper.dwcdn.net/vh7B2/1/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="708" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> **Yes, but:** Prices of other popular sets were down by as much as -12% during this same period. Depending on the kit, consumers might actually find some popular LEGO sets have gotten less expensive since 2021: * LEGO Star Wars Imperial Probe Droid was down -6% in Q4 2022 vs. Q4 2021 * LEGO Creator Tuk Tuk was down -7% * LEGO Star Wars Ultimate Millennium Falcon was down -10% * LEGO Ideas Tree House Business Kit was down -12% **However:** Even for the sets that experienced a price decrease, the decrease was less significant in Q4 2022 as set prices increased across the board following the June 2022 announcement. <iframe title="YOY Price Change for Individual LEGO Sets – 2022 vs. 2021" aria-label="Interactive line chart" id="datawrapper-chart-KjSXz" src="https://datawrapper.dwcdn.net/KjSXz/1/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="400" data-external="1"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r<t.length;r++){if(t[r].contentWindow===e.source)t[r].style.height=e.data["datawrapper-height"][a]+"px"}}}))}(); </script> **The takeaway:** While prices didn’t increase as much as consumers anticipated, inflation still had an effect on the cost of LEGO sets. As ecommerce brands prepare for increased demand ahead of LEGO Day, they could increase customer interest in all sets by promoting the sets that have seen a price decrease. * Pattern’s data science team analyzes consumer demand on Amazon to understand how economic forces impact pricing and shopping behavior. If you’re interested in using insights like these to propel your ecommerce strategy forward, [contact our team today. ](https://pattern.com/contact-us/)