The Everything Store: Jeff Bezos and the Age of Amazon (42 page)

So Lore picked up the phone and called Amazon. On September 14, 2010, Lore and Bharara traveled to Seattle to pitch Jeff Bezos on acquiring Quidsi. While they were in that early-morning meeting with Bezos, Amazon sent out a press release introducing a new service called Amazon Mom. It was a sweet deal for new parents: they could get up to a year’s worth of free two-day Prime shipping (a program that usually cost $79 to join), and there was a wealth of other perks available, including an additional 30 percent off the already-discounted diapers, if they signed up for regular monthly deliveries of diapers as part of a service called Subscribe and Save. Back in New Jersey, Quidsi employees desperately tried to call their
founders to discuss a public response to Amazon Mom. It was no accident that they couldn’t reach them. They were sitting blithely unaware in a meeting in Amazon’s own offices.

Quidsi could now taste its own blood. That month, Diapers.com listed a case of Pampers at forty-five dollars; Amazon priced it at thirty-nine dollars, and Amazon Mom customers with Subscribe and Save could get a case for less than thirty dollars.
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At one point, Quidsi executives took what they knew about shipping rates, factored in Procter and Gamble’s wholesale prices, and calculated that Amazon was on track to lose $100 million over three months in the diapers category alone.

Inside Amazon, Bezos had rationalized these moves as being in the company’s long-term interest of delighting its customers and building its consumables business. He told business-development vice president Peter Krawiec not to spend over a certain amount to buy Quidsi but to make sure that Amazon did not, under any circumstances, lose the deal to Walmart.

As a result of Bezos’s meeting with Lore and Bharara, Amazon now had an exclusive three-week period to study Quidsi’s financial results and come up with a proposal. At the end of that period, Krawiec offered Quidsi $540 million and said that this was a “stretch price.” Knowing that Walmart hovered on the sidelines, he gave Quidsi a window of forty-eight hours to respond and made it clear that if the founders didn’t take the offer, the heightened competition would continue.

Walmart should have had a natural advantage in this fight. Jim Breyer, the managing partner at one of Quidsi’s venture-capital backers, Accel, was also on the Walmart board of directors. But Walmart was caught flat-footed. By the time Walmart upped its offer to $600 million, Quidsi had tentatively accepted the Amazon term sheet. Mike Duke called and left messages for several Quidsi board members, imploring them not to sell to Amazon. Those messages were then transcribed and sent to Seattle, since Amazon had stipulated in the preliminary term sheet that Quidsi was required to turn over information about any subsequent offers.

When Amazon executives learned of Walmart’s counterbid, they ratcheted up the pressure even further, threatening the Quidsi founders that “sensei,” being such a furious competitor, would drive diaper prices to zero if they went with Walmart. The Quidsi board convened to discuss the Amazon proposal and the possibility of letting it expire and then resuming negotiations with Walmart. But by then, Bezos’s Khrushchev-like willingness to take the e-commerce equivalent of the thermonuclear option in the diaper price war made Quidsi worried that it would be exposed and vulnerable if something went wrong during the consummation of a shotgun marriage to Walmart. So the Quidsi executives stuck with Amazon, largely out of fear. The deal was announced on November 8, 2010.

The money-losing Amazon Mom program was obviously introduced to help dead-end Diapers.com and force a sale, and if anyone at the time had doubts about that, those doubts were quickly dispelled by Amazon’s subsequent actions.

A month after it announced the acquisition of Quidsi, Amazon closed the program to new members. But by then the Federal Trade Commission was reviewing the deal, and a few weeks after it closed the program, Amazon reversed course and reopened it, though with much smaller discounts.

The Federal Trade Commission scrutinized the acquisition for four and a half months, going beyond the standard review to the second-request phase, where companies must provide more information about a transaction. The deal raised a host of red flags, according to an FTC official familiar with the review. A significant head-to-head competition and the subsequent merger had led to the demise of a major player in the category. But the deal was eventually approved, in part because it did not result in a monopoly. There was a plethora of other companies, like Costco and Target, that sold diapers both online and offline.

Bezos had won again, neutralizing an incipient competitor and filling another set of shelves in his everything store. Like Zappos, Quidsi was permitted to operate independently within Amazon
(from New Jersey), and soon it expanded into pet supplies with Wag.com and toys with Yoyo.com. Walmart had missed the chance to acquire a talented team of entrepreneurs who had gone toe to toe with Amazon in a key product category. And insiders were once again left with their mouths agape, marveling at how Bezos had ruthlessly engineered another acquisition by driving his target off a cliff. Says one observer who had a seat close to the battle, “They have an absolute willingness to torch the landscape around them to emerge the winner.”

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Anxiety over Amazon isn’t restricted to New Jersey, Las Vegas, and other American places. The industrial city of Solingen, Germany, halfway between Düsseldorf and Cologne, is famous for the production of high-quality razors and knives. The local blacksmith trade dates back two millennia, and today the city is the seat of the European knife industry and home to renowned brands like Wüsthof, a two-hundred-year-old firm that’s been run by seven successive generations of the Wüsthof family. In the 1960s, Wolfgang Wüsthof introduced the company’s high-end products to North America, riding a bus from town to town with a suitcase full of knives. Forty years later, his grandnephew Harald Wüsthof took over the firm and started selling to chains like Williams-Sonoma and Macy’s. Then, in the early 2000s, Wüsthof began supplying its wares to Amazon.com.

Over the course of its fifty years in America, Wüsthof has established itself as a premium brand, winning frequent commendations from the likes of
Consumer Reports
and
Cook’s Illustrated.
For that reason it can charge a hundred and twenty-five dollars for an eight-inch hollow-ground cook’s knife made of high-carbon laser-tested steel, even though similar-size kitchen knives sell for twenty dollars each at Target. Maintaining that lofty price is vital for a company that employs hundreds of skilled artisans in its factory but that competes in a category full of inferior products that, to an untrained eye, all look roughly the same.

Which is why Amazon’s five-year association with Wüsthof—like its relationship with so many brands and manufacturers around the world—has been about as bloody as an actual knife fight.

Manufacturers are not allowed to enforce retail prices for their products. But they can decide which retailers to sell to, and one way they wield that power is by setting price floors with a tool called MAP, or minimum advertised price. MAP requires offline retailers like Walmart to stay above a certain price threshold in their circulars and newspaper ads. Online retailers have a higher burden. Their product pages are considered advertisements, so they have to set their promoted prices at or above MAP or else face the manufacturer’s wrath and risk the firm’s limiting the number of products allocated or withdrawing them altogether.

Over its first few years selling Wüsthof knives, Amazon respected the German firm’s pricing wishes. Amazon was a good partner, placing large orders as its traffic grew and settling its bills on time. It quickly became Wüsthof’s top online retailer and second-largest U.S. seller overall, after Williams-Sonoma. Then tensions in the relationship emerged. As Amazon pricing-bot software got better at scouring the Web and finding and matching low prices elsewhere, Amazon repeatedly violated Wüsthof’s MAP requirements, selling products like the $125 Grand Prix chef’s knife for $109. Wüsthof felt it needed MAP to defend the value of its brand and protect the small independent knife shops that were responsible for about a quarter of the company’s sales and were not capable of matching such discounts. “These are the guys that built my brand,” says René Arnold, the CFO of Wüsthof-Trident of America. “Amazon cannot sell a new knife. They can’t explain it like a store.”

Wüsthof finally stopped allocating products to Amazon in 2006. “It was painful for us,” Arnold says. “Those were lost sales, at least in the short term. But we believed our product and our brand were stronger than the brand of our distributors.” For the next three years—until 2009, when Wüsthof changed its mind and initiated part two of its tortured relationship with Amazon—Wüsthof knives were absent from the shelves of the everything store.

Companies that make things and companies that sell them have waged versions of this battle for centuries. With its commitment to everyday low prices and the ingenious marriage of direct retail with a third-party marketplace, Amazon has taken these historic tensions to a new level. Like Sam Walton, Bezos sees it as his company’s mission to drive inefficiencies out of the supply chain and deliver the lowest possible price to its customers. Amazon executives view MAPs and similar techniques as the last vestiges of an old way of doing business, gimmicks that inefficient companies use to protect their bloated margins. Amazon has come up with countless workarounds, including a technique called hide the price. In some cases, when Amazon breaks MAP, it doesn’t list the price on its product page. A customer can see the low price only when he places the item in his shopping cart.

It’s an inelegant solution, driven by Amazon’s age-old desire to have the lowest prices anywhere and the novel ability of its pricing algorithms to quickly match any major seller that goes lower. “We know it’s in the customer’s best interest that we have a cost structure that allows us to match competitors and be known for low prices,” says Jeff Wilke. “That’s our objective.” Wilke acknowledges that not everyone is happy with this approach but says Amazon is consistent about it and that manufacturers should understand that it is the nature of the Internet itself—not just Amazon—that allows customers to easily find the lowest price.

“If vendors or brands leave Amazon, they will eventually come back,” Wilke predicts, because “customers trust Amazon to be great providers of information and customer reviews about a vast selection of products. If you have customers ready to buy, and if you have a chance to tell them about your product, what brand ultimately doesn’t want that?”

Dyson, the British vacuum maker, is one example of a brand that appears to treat Amazon with caution. It sold on Amazon for years and then an irate Sir James Dyson, its founder, visited Amazon’s offices personally to vent his frustrations over repeated violations of
MAP. “Sir James said he trusted us with his brand and we had violated that trust,” says Kerry Morris, a former senior buyer who hosted Dyson on that memorable visit. Dyson pulled its vacuums from Amazon in 2011, though some models are still sold on the Amazon Marketplace by approved third-party merchants. Over the past few years, companies such as Sony and Black and Decker have taken turns yanking various products from the site. Apple in particular keeps Amazon on a tight leash, giving it a limited supply of iPods but no iPads or iPhones.

Amazon’s booming marketplace is a primary source of tension between Amazon and other companies. Over the holiday months in 2012, 39 percent of products sold on Amazon were brokered over its third-party marketplace, up from 36 percent the year before. The company said that over two million third-party sellers worldwide used Amazon Marketplace and that they sold 40 percent more products in 2012 than in 2011.
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The Marketplace business is a profitable one for the company, since it takes a flat 6 to 15 percent commission on each sale and does not bear the expense of buying and holding the inventory.

Some of the retailers who sell via the Amazon Marketplace seem to have a schizophrenic relationship with the company, particularly if they have no unique and sustainable selling point, such as an exclusive on a particular product. Amazon closely monitors what they sell, notices any briskly selling items, and often starts selling those products itself. By paying Amazon commissions and helping it source hot products, retailers on the Amazon Marketplace are in effect aiding their most ferocious competitor.

In 2003, Michael Ross was chief executive of Figleaves.com, a London-based online lingerie and swimwear site that sold popular sports bras made by the British brand Shock Absorber. Figleaves had Amazon’s attention early on. To promote the company’s debut in the United States on Amazon’s Marketplace, Ross helped arrange a lopsided exhibition tennis match between Jeff Bezos and Shock Absorber’s celebrity endorser Anna Kournikova.

Figleaves sold its wares on Amazon’s Marketplace for a few years
but left unhappily at the end of 2008. By then, Amazon.com was carrying a wide assortment of Shock Absorber bras and swimsuits, and Figleaves was selling very little on the site. “In a world where consumers had limited choice, you needed to compete for locations,” says Ross, who went on to cofound eCommera, a British e-commerce advisory firm. “But in a world where consumers have unlimited choice, you need to compete for attention. And this requires something more than selling other people’s products.”

Even sellers who thrive in Amazon’s Marketplace tend to regard it warily. GreenCupboards, a seller of environmentally responsible products, like eco-friendly laundry detergents and pet supplies, has built a sixty-person company almost entirely via Amazon, despite the fact that founder Josh Neblett says that Marketplace enables “a race to zero.” His company is constantly competing with other sellers and with Amazon’s own retail organization to provide the lowest possible price and to capture the “buy box”—to be the default seller of a particular product on the site. That furious price competition tends to drive prices down and eliminate profit margin. As a result, GreenCupboards has had to get more Amazon-like to survive. Neblett says the company has gotten better at sourcing hot new products, locking up exclusives, and building a lean organization. “I’ve just always considered it a game and we are figuring out how to best play it,” he says.