Amazon pioneered e-commerce in the 1990s starting with, interestingly, books, which incur higher delivery costs. Although its business model didn’t produce a positive margin in the initial years, as it started including more categories, streamlining logistics and adding new businesses like AWS, Amazon became a spectacularly successful e-commerce company. The success of Amazon led many others like Flipkart to follow suit.
A retailer, be it online or brick and mortar (B&M), quite often buys not only national brands but also white-label goods or store-label goods that are replica of the respective national brands. The store-label goods are manufactured by a third-party vendor for the retailer at a much lower cost because the vendor would reverse engineer the national brand without incurring any R&D costs or facing the risk of failure. The duplication is possible because in many cases products do not have IP protection.
Store-brands enable retailers to gain negotiation power over national brands and to target the price sensitive customer segment, who wouldn’t buy the expensive national brands otherwise. The coexistence of national brands and the store-label brands seems to be a market equilibrium benefiting many stakeholders.
Between national and store-label brands lie are a number of “upcoming” brands. Typical categories where this happens include cleaning products like mops, household kitchen gadgets and personal daily wear. These SMEs invest in R&D; they don’t copy national brands. They always had great ideas to introduce novel features in their products but couldn’t market their wares given the limited shelf-space and poor market reach of the traditional B&M stores.
Thanks to the limitless shelf space and global reach offered by e-commerce companies, many of these SMEs are getting the much-needed break when they get “on-boarded” by the likes of Amazon, which not only allow them to showcase their products but also get help in marketing and logistics.
However, there is a peculiarity with respect to the much talked-about limitless shelf-space. Customers must first search for the product in an e-commerce site, either directly or through a browser (or a search engine), that will lead them to a landing page where they can see the brands they can choose from.
Consider someone trying to buy a mop in Amazon.com. The way the customer is led to a ‘landing page’ is determined by a proprietary search algorithm that is believed to optimise the customer’s purchasing decision. The landing page has limited shelf-space. The customer then may either choose one of the brands featured on the landing page or scroll down to see other brands, but it has been found that customers don’t scroll down much, with the result that the limited number of brands on the landing page have strong advantage over the brands that are featured on pages way down.
National and SME brands are naturally sceptical about the presence of a possible algorithmic bias that could lead the customers more to the e-commerce brand, especially since e-commerce firms might be able to tweak prices on their store-label brands in real time much more easily than on other brands. However, nationally prominent brands like Eveready or Duracell in the case of torch battery would have such a strong brand equity that many customers would scroll down if they don’t see their preferred brand on the landing page.
This implies that for SME brands, which lack any brand recognition or equity, customers are less likely to scroll down from the landing page. From this perspective, SME brands cannot expect to do well if they do not figure on the landing page of the search. Thus, the SME brands, which were helped by the e-commerce companies to come on board, might not do well if their placement is farther away from the landing page. To get featured in the landing page, they can sponsor but that will eat into their profit margin.
This was a major complaint raised against Amazon recently. It is claimed that small vendors introducing a new product like a newly designed mop, for example, start off on a high note on Amazon’s website, getting figured in the landing site of “mop” search, but gets pushed off the landing page once Amazon introduces its own mop that is probably a replica of the design of the original mop but at a much lower price.
Amazon denies this accusation, but the complaints are increasing.
One could wonder why an e-commerce player would indulge in such a practice. After all, it gets a fee from the vendors on each unit sold through its platform, and its revenue would only increase if the vendors achieved more sales. It is much more “easy” money compared to what they could get manufacturing their own brand through a third party, unless it is highly inexpensive to do. There is also the complaint that Amazon deliberately tweaks its search algorithm to drive the vendor sales down. This self-referencing behaviour of e-commerce entities is being hotly debated in the regulatory circles of the US and the European Union.
One could argue that e-commerce companies like Amazon have enabled thousands, if not millions, of SMEs become successful entrepreneurs. The associated boost in economic activities like production, logistics and financing, coupled with more choices for customers at lower prices, is clearly a positive for an economy.
However, from an ethical perspective, even if one vendor gets affected by a e-commerce site’s alleged misbehaviour, it must be addressed by the relevant authorities. In fact, such misbehaviour is not just unethical but anti-competitive as well because one can conclude that e-commerce players use their huge channel power to stifle competition. Further, if the e-commerce world comes to be occupied majorly by a few players resulting in an oligopoly, it can lead to concentration of market power in those players and suppression of market forces.
The search algorithm used by e-commerce companies is a black box because it is a function of many variables like purchase history of the customer, previous searches by the customer, what other items the customer purchases on this trip, how price sensitive the customer is, actual price paid for the mop by ‘similar’ customers, the prices of various mops on Amazon.com, how long the customer spends on analysing the alternatives, etc.
These data are only available to the e-commerce firm. If a vendor wants to buy these data they have to pay a hefty fee, which the big established firms do regularly to analyse customer behaviour. However, SMEs are unlikely to have either enough resources to buy these data or competence to do any analysis on that. They just go by what the e-commerce companies tell them.
Krishnan and Mahambare are Professors at Great Lakes Institute of Management, Chennai, and Kathuria is Professor at BML Munjal Law School, Gurgaon
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