For the customer, the price is always a big factor when it comes to shopping. It is especially important for Walmart and Amazon customers. They are shopping from the two largest retailers because they advertise the lowest prices available on products. Consumer Packaged Goods (CGP) are starting to take a hit, though, with a price war that is becoming heated between Amazon and Walmart. Walmart wants to sell its CPS’s at the lowest price point possible and is feeling pressure from an algorithm that Amazon uses to price the products it is selling.
What does the Amazon Price Check Algorithm Do?
Amazon prides itself with being the best at pricing. It uses an algorithm to do its work by finding the lowest price on an item throughout the internet. There is a catch, though. The algorithm does not discriminate between bulk items and single use.
For example, a 114-ounce ketchup bottle retailing at $5.99 has a per ounce cost of $0.05. A single-use bottle that is 20 ounces is currently retailing at $2.99, making it $0.14 an ounce. Amazon’s algorithm will detect the price as lower on the 114-ounce and now sell the 20-ounce bottle for $1.00 even though it is a different size. Customers will most likely buy the item from Amazon as its price is about 66% lower than its competitors. They might sell more, but it is highly unlikely that it will result in increased profits as their costs will remain the same.
The Algorithm is Disrupting the Relationship Between Buyers and Sellers
Amazon’s mantra is putting its customer first. If that means they will be making less in margins, they are okay with that. How long will that last is anyone’s guess. The company has plenty of different services that can offset some of the lost profits on CPS’s they are undercutting on. Overall, it is important to note that this model cannot be sustained for long periods of time. A loss is a loss no matter how large or small. Will Amazon raise its price to be comparable to competitors? Time will tell.
Conversely, when competitors like Walmart see Amazon’s price drop, they want to take action immediately. The first step will be looking at their own margins. How low can they go with their current negotiated wholesale rate? Can a promotion be put in place? Competitors will also question. How can Amazon sell at that rate? What must their wholesale rate be? They might even get to the point where they will call their CPG sellers. They will demand a rate reduction in order to compete with Amazon. While there might currently be room to negotiate rates, at what point can Walmart no longer be a viable competitor? Or, for that matter, does a CPG no longer want to be harassed to drop prices and stop dealing with Walmart?
Possible Retail Dynamic Changes
If Amazon keeps their price changing algorithm as it is, there are some possible outcomes that may change the retail landscape. First, sellers of CPG’s would reduce their wholesale cost and sell at price points much lower than they have in the past. The CPG’s will have to sell only to retailers like Amazon and Walmart. The price point that they are selling their product to other retailers cannot compete. That means that things like ketchup, diapers, and paper towels will no longer be available at your local grocery store. They cannot sell the volume that would demand the lower wholesale price. However, CPG’s will have lower profit margins which could have implications with stock holders as well as stunting growth potential.
CPG’s Fight Back
Another possible outcome is that CPG’s fight back. They place a baseline on the retail selling price of their products. This helps to retain their profits. It is something that is being seen in the travel industry currently. Hotels and airlines are selling their services lower than major third party sites like Hotels.com and Expedia. However, this means that the seller has to spend more advertising dollars, increase customer service staff, and add more money to operating costs. This can shrink their margins, but this will retain pricing control by the seller. In a retail space, this might look like CPG’s selling at Walmart exclusively or only at local supermarkets.
Since the latter outcome is a possibility, Amazon should reconsider its price check algorithm’s flaws. It could be the difference in brands choosing to sell exclusively through Walmart and not with them.
Sharon Shichor is the CEO of Eighteen Knowledge Group LLC, your solution and knowledge base for brand building and getting your products in the hands of consumers. With over 15 years of wholesale-retail experience, she speaks the language of Walmart fluently. Want to learn more about e-commerce trends? Visit our Company page and blog for more on the subjects that affect your company’s daily operations the most!