When the marketing community gathers in Orlando at the ANA annual meeting in a couple of weeks, chances are it will ignore the metaphorical elephant in the room. For consumer companies, which are incidentally, among the U.S. biggest advertisers, Amazon’s $13.7 billion acquisition of Whole Foods can be painful for giants like Procter & Gamble or Johnson & Johnson.
By expanding the current 450 stores to 2000 Whole Foods stores as is anticipated, Amazon could further slice into the $800 billion food retail business. The acquisition puts Amazon on a collision course with Wal-Mart. Groceries account for almost 60 percent of Wal-Mart’s $486 billion in revenue from 4,700 stores. What makes Wal-Mart so formidable is that these stores are strategically located, within 10 miles of 90 percent of the U.S. population.
Still, this may not be as overwhelming an advantage as it might seem. Amazon disrupts markets with a supply chain efficiency, not to mention superior customer experience. It excels in mining consumer data that provides it greater understanding of customers than any other retailer or marketer for that matter.
With this data, it has built advanced analytic models predicting what consumers want, when and for how much. Its proprietary algorithms serve to lower prices dynamically, always undercutting its competitors at any given moment.
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Amazon’s original disruption, bookselling, was not just about transforming book marketing. It changed the economic model of publishing, by forcing publishers, authors, and everybody else along the book supply chain, to cut their costs. Now, it is in an even stronger position to bring ruthless pricing pressure to consumer goods vendors.
It can engage vendors in margin-busting negotiations, especially since it has strong private label brands, from coffee to baby wipes to toys to batteries. Whole Foods will now add its own private label brand, 365. Amazon can threaten third-party branded products with de-listing. It can demand lucrative deals, force companies to discount, and even dictate how their brands are promoted. It can tell companies to take the money they’ve been spending on marketing initiatives and apply it to price cuts much the same way, ironically, that Wal-Mart flexed its muscles in an earlier era.
A price war with Wal-Mart, already in early stages, could be devastating for brands. It coaxes consumers to look at shopping solely through the lens of low cost. It undermines the emotional link to brands, and it undercuts brand loyalty. For brands, this means eroding margins, and destruction of shareholder value. This is a race to the bottom, literally.
Price wars create a commoditized marketplace. discounting and other forms of price instruments replace advertising, and companies are scaling back investment in brand differentiation. P&G, the world’s biggest advertiser, wants to cut $2 billion over 5 years. It’s rival, Unilever, the second-biggest global advertiser, announced a €6 billion cost-cutting program. Creative will bear the brunt of these cuts. Unilever will also have the number of agencies it uses for creative work.
The contagion has spread quickly to Madison Avenue, making agencies, those traditional brand stewards, weaker, as stocks take a major dive. The ensuing retrenchment and stagnation of the sector mean greater competition for new clients, often through price competition. And, the environment for agencies will only get tougher, as consultancies, such as Accenture and Deloitte, are entering the space and intensify competition.
A price war in grocery retail will not create a friendly terrain for brands. To judge by past experiences, very few brands will weather the storm. Most are likely to fall victim to the price squeeze and the shake-out in the aisles, real or virtual.
Avi Dan is CEO of Avidan Strategies. It improves agency partnerships, and manage agency search and compensation.
Date: Sep 18, 2017