Amazon has been on the radar of the Competition & Markets Authority (CMA) ever since it set up its Amazon Fresh grocery delivery service in 2016. Despite this, the CMA has struggled to pin it down, as Amazon never discloses the proportion of its business derived from grocery in its annual accounts.
However, the expansion of Amazon grocery through the pandemic, along with the greater attention on digital regulation, has sparked the CMA into action and Amazon is now required to abide by GSCOP rules.
Obviously, this is great news for the grocery manufacturers in a first-party relationship. And in time, this will be great news for Amazon.
The vendor perspective
Under the eye of the Groceries Code Adjudicator, grocery manufacturers can look forward to a more favourable relationship with Amazon through better terms and reduced business risk. But there will be challenges.
Amazon typically negotiates contracts every calendar year. By February 2022, most of their agreements will be finalised. GSCOP compliance starts from 1 March, so all agreements will need to be reopened and renegotiated, which will require considerably more work for manufacturers and Amazon at a time of year when you want to be focused on driving sales performance.
We don’t yet know how Amazon will respond to GSCOP. However, we do know the new rules will impact its supplier profitability due to an increase in financial and operational costs. Amazon will want to recover this profit, perhaps through increased base terms or further cost price reductions. This uncertainty will lead to cautious growth planning that won’t be good for Amazon or suppliers.
On the plus side, Amazon will no longer be able to suspend or delist unprofitable products without notice. But that also means it will need to be more cautious with the products it accepts as part of supplier agreements. This may lead to Amazon delisting SKUs, which will in turn will impact suppliers’ revenue performance.
As a result of the increased cost of servicing, Amazon may decide to sign up fewer vendors. This could be good for the large manufacturers as they will have more negotiation power, but bad news for new brands wanting to use the Amazon vendor programme to drive up their category share.
The Amazon perspective
There is no doubt GSCOP will present challenges for Amazon in the short term.
The online giant will have to create a new supplier framework and deal with the cost and hassle of negotiating supplier agreements mid-year. Furthermore, because the code permits suppliers to escalate negotiations to a senior buyer, it will need to open up personal communication to vendors currently negotiating terms via the vendor central platform.
GSCOP requires Amazon to be more transparent with payments, charges and rebates. It will need to prove these are genuine costs and not considered listing fees (which would break the rules). Consequently, Amazon will need to put in place new processes to record this information for each supplier and provide regular reporting and analysis.
However, beyond the short term, we think GSCOP will help Amazon grow its share of the UK grocery market.
Currently, the overall relationship between Amazon and grocery manufacturers is strained. Negotiating terms are often unstructured, tense, time-consuming and protracted. The suspension or delisting of products without notice and other negotiating tactics are resented by sales directors. As a result, many large grocery manufacturers have pulled back from Amazon due to the challenging sales environment.
This could be a new beginning. For example, GSCOP will bring more standardised and professional practices that will enable stronger and better relationships. Additionally, more transparency on grocery spend will mean vendors will be more prepared to invest behind initiatives to drive growth.
In fact, if Amazon successfully implements GSCOP, this could lead to it revising its vendor framework and agreements in other categories, benefiting the overall retail industry.
So, let’s hope Amazon and its grocery vendors approach the new code of practice positively and work collaboratively towards a fairer and more sustainable relationship.
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