Segue - Secondary Channel Analysis
Pricing volatility within domestic channels
The attached brief is designed to provide you with insight and visibility into specific causal factors that are contributing to margin compression and volatility, as well as cannibalization of “A” stock product sales. This cannibalization also contributes to erosion of brand equity and higher post-sale, customer service support costs. Many of the causal effects are directly related to fundamental changes in channel partner programs and the lack of adequate controls in place within existing distribution, retail and select ecommerce partners. For our analysis we analyzed a Fortune 100 OEM (“Company A”) that sells consumer electronics. The provided information will outline the foregoing in detail along with SKU level examples supporting these factors.
In 2009, retail returns in the United States amounted to $185 billion, equal to about 8 percent of the estimated $2.3 trillion in retail products sold by members of the National Retail Federation. In 2008, the last years for which figures were available, returns and exchanges totaled $11 billion in the US consumer electronics industry alone. So far the data for 2010 indicates that return rates for all consumer electronics products are averaging about 8 percent overall.
The economic downturn, in early 2009, altered consumer-buying behaviors forever by reorienting consumers to more value driven positions. In addition, lower cost refurbished products have emerged as a viable alternative to new product purchases due to retail and ecommerce partners increasingly promoting refurbished as “like new” condition with extended warranties and service plan offerings. In most cases the refurbished inventory is marketed alongside A-stock offerings. Finally, ecommerce sites such as Amazon, Buy.com, Dealtree and Newegg provide consumers the ability to quickly identify, review, locate and purchase products based on the lowest published price. Below are additional contributing factors including:
- Consumers more scrutinizing of branded products
- Product brand (and premium) is diminished
- Inconsistent classifications when defining new, refurbished and used product. Condition categories vary remarketer to remarketer, creating further brand dilution and customer confusion
- Sales by non-sanctioned remarketers lack after sales support which negatively impact the brand, increase customer dissatisfaction and increase Manufacturers customer support costs
Zero Returns Allowances: Cause and Effect
Over the last 18 months, several leading manufacturers, (including Microsoft, Logitech, and others) have modified their traditional returns programs in the hope that they could improve predictability in managing the Sales P&L and driving down operational costs that came with a traditional returns program. These “zero returns” allowances, while improving the P&L and providing increased predictability, caused unforseen consequenses by creating an "inventory bubble" for the retailers and distribution partners.With no ability to return or stock rotate the product back to the manufacturer, unregulated brokers and liquidators became the alternative.
Exhibit A: Traditional Channel Model
- Inventory returns/stock rotations flow back and forth between OEM and direct OEM customers, significantly reducing the amount of low-priced product placed in competition with A-Stock
- With appropriate controls, inventory is remarketed into non-competitive, alternative channels, protecting A-stock pricing, margins, brand, distribution and prime sales channels, etc.
Exhibit B: Zero Returns Model
Emergence of Marketplace Resellers within Major ECommerce
With no safe or controlled means to sell thru the inventory, retailers and distributors liquidate these products through open, uncontrolled channels and resellers (brokers, auction houses). These resellers now having deeply discounted A and B stock product along with no defined selling restrictions to abide by, aggressively leverage marketplace programs through some of the vendors’ largest customers including Amazon, Newegg and Buy.com to name a few. This level of increased marketplace competition will accelerate price and margin erosion for all parties. The example below shows that for 18 current bestselling CE products (selection of mice, keyboards & webcams) listed on Amazon (on 4/20/11) showed an average 20% price differential between Amazon Store (A Stock) price vs. Amazon Marketplace (A Stock - see Exhibit B1). The irony is that while these Marketplace resellers are primarily responsible for price, margin erosion; the largest A-stock OEM customers consistently leverage the price erosion friction with the marketplace resellers to demand deeper discounts on their inventory due to market conditions they themselves have created.
Exhibit B1 Price Erosion – Amazon snapshot from 4/20/11
Store vs. Mall Competing Organizations within Major ECommerce
With the majority of price monitoring and adjustments done automatically through sophisticated spiders and algorithms; the “store” (OEM A-stock selling) part of the organization reviews and if need be, chases the “Mall/Marketplace” (excess/B-stock product) division of the organization which includes the Marketplace vendor partners competing for the lowest price. With more aggressive pricing in the channel, as a result of uncontrolled liquidation, the “store” has no choice but to lower A-stock pricing in order to secure the sales or end up with unsold, excess inventory that will continue to erode in value. Once secured, 80-90% of the business transacts through the designated low price leader (typically the “buy box” leader). This cycle will continue as long as marketplace vendors have the ability to secure excess A and B stock in uncontrolled ways and vendors will have no choice but to compete with themselves or look to alternative methods to stabilize excess A and B stock supply in more controlled ways.
In addition to taking advantage of vendor funded on-line merchandising and content, many of these marketplace resellers use loose and misleading classifications in determining new A stock versus B stock or refurbished labels further eroding pricing integrity (see Exhibit I). Major E-commerce further compromises pricing integrity by allowing these predatory partners to be positioned and validated alongside their own well known and established stores. The illustration Exhibit C below reflects the cause and effect of having large, uncontrolled levels of excess A stock and B stock visible and available in the channel, while directly impacting pricing integrity for existing direct A-stock available products. We have defined this as the “Boomerang” effect; competing internal factions within a given OEM customer (ie: Staples); one team owning the store and another separate team owning the mall (Marketplace). The vendor now has no choice but to promote or lower pricing just to compete against the marketplace- in most cases, competing against themselves. This cycle will likely continue as long as marketplace resellers have the ability to secure excess A and B stock in uncontrolled ways and vendors will have no choice but to compete with themselves or look to alternative methods to stabilize excess A and B stock supply in more controlled ways.
Exhibit C: Boomerang Effect
Below is an example of uncontrolled product liquidation from Major Retailer to broker. The list below of bulk pack new inventory was offered to Segue by a broker. This type of inventory quantity has traditionally been tightly managed by Company A to insure channel integrity. This broker obtained this inventory through an alternative channel, presumably distribution. In addition, we also received several calls from other brokers, each trying to sell the same list to Segue. This is a frequent occurrence since implementation of the Zero Returns Allowance program, never happening prior to the program going into effect.
Increased “B” Stock Availability and its Effect on “A” Stock Pricing
Since Microsoft products are very prominent on Amazon, we are using their products offering as an example. This print screen snapshot (4/27/2011) shows the number of search results (1,034 unique products) that appear when the phrase “Microsoft Used” was searched on Amazon. Since Amazon began their marketplace, Segue has frequently utilized the Amazon search engine as a vehicle to establish market pricing, market saturation, police gray marketers as well as confirming that our own customers are abiding by their “Do Not Sell” commitments. Prior to the deployment of the generous returns allowance programs at various companies, the average search results yielded no greater than 100. Over the last two years, search results have increased more than ten times. This suggests that the head to head competition of B Stock and A Stock inventory in the same visual space has increased significantly.
Exhibit D: Amazon Screen capture depicting “used” product availability
The screenshot below taken on 4/27/2011 shows a very standard example of how A & B stock is advertised on Amazon. The vast majority of A Stock products will have impacting amounts of B Stock offered in the same selling space, incentivizing customers to purchase the lower cost product available at the expense of A Stock sales.
Exhibit D1 Amazon Screen capture depicting product availability, the product above was selected searching for Bestselling Computer Accessories.
Pricing Volatility Examples: 3 Selected Major Categories (Mice, Keyboards and Webcams)
The following examples were selected as the top three velocity SKUs within the mouse, keyboard and webcam product categories at Amazon. Daily pricing data was pulled from a 3rd party application by model number, seller and condition (New, OEM & Refurbished) the time horizon is based on a twelve month period ending April, 2011.
Interpreting the provided Graphs
- Amazon New
- A Stock inventory purchased directly from Company A
- Amazon Marketplace
- A Stock excess from zero returns allowance partners, Distribution, Retail, OSS, Clubs etc.
- Estimated Refurb Amazon A Stock
- Average price difference typically 45% vs. Amazon A stock pricing
- Estimated Refurb Amazon Marketplace A Stock
- Average price difference typically 45% vs. Amazon Marketplace A stock pricing
Amazon Marketplace Comparison: New vs. Refurb
As an example, the market price for refurbished is based on an average discount from Amazon store new A Stock. If the marketplace mall for new A Stock secures the “Buy Box” the refurbished price will reset to a lower buy price. This cycle will continue to perpetuate itself continually.
Exhibit: F Daily Pricing Data from 4/2010 through 4/2011
- Amazon Store average selling price over the period was $21.26
- Amazon Marketplace average selling price over the period was $13.47
- On average Marketplace pricing is 36.6% less than Amazon Store pricing, thus eroding the pricing for both A stock and Refurbished inventory.
- With Refurbished/Used product selling at 30-45% below Marketplace new, the pressure on Store A Stock is accelerated.
Exhibit: G Keyboard example
- Amazon Store average selling price over the period was $40.53
- Amazon Marketplace average selling price over the period was $35.72
- For a 1 year period the average Marketplace pricing is 11.66% less than Amazon store pricing. However 3 periods during of the selling duration of 1 year, the average Market place price discount to Store price was as much as 24.6%.
- This chart shows that although on an average the differential in price between Stores and Marketplace A Stock is not great, there appears to be excess inventories in the marketplace driving prices down for several months at a time.
Exhibit H: Webcam example
- Amazon Store average selling price over the period was $40.21
- Amazon Marketplace average selling price over the period was $34.26
- On average Marketplace pricing is 14.80% less than Amazon store pricing. Soon after the product introduction the Marketplace price was 15% less than Store price.
- From the selling period beginning September 2010, the average Marketing place price discount to Store price was as much as 26.4%.
- The excess inventories in the channel continue to drive the A Stock pricing in the Marketplace down until inventories are exhausted.
Exhibit I: Refurbished Validation by Best Buy
- Exhibit I reflects major retail taking a more direct and active role in validating refurbished product as a viable alternative to new
- Improved selling margins on refurbished vs. new (increased A stock cannibalization)
- Increased attach-rate for aftermarket extended warranties vs. new with factory warranties
- Over time as more B Stock product is introduced the lines between A and B begin to blur
Exhibit I: Product classification for New, Refurb and Used Cowboom.com
- No clear cut, defined standards for product classification
- Lack of condition definition leads to potential misrepresentation customer dissatisfaction and brand degradation
The biggest issues facing manufacturers today is their inability to think multi-dimensionally; clearly understanding cause and effect and being to anticipate issues in advance. While zero returns allowance programs yield short-term financial positives on the surface, it is also clear that this approach has a long term adverse impact by allowing a significant amount of excess A and B stock to resurface through various unmonitored marketplaces readily available to the consumer. This ultimately impacts the manufacturers’ ability to maintain stable and predictable product margins and product planning thus leading to product and price erosion.
Essentially, the economic benefits realized by manufacturers addressing their at-risk/returns inventory (on average 8%) with zero returns allowance programs, are significantly outweighed by the negative impact on 92% of the A stock business (sales, margin, sell thru, support costs and branding).