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As an Amazon software provider working with Brands and Agencies around the world, we at dash / APPLICATIONS have been afforded a unique perspective on the impact the COVID-19 pandemic has had on the retail sector.
It has been a challenging time for businesses small and large, with far-reaching impacts to individuals and families. It has also been an inspiring time, as companies, people, and networks pull together to offer a helping hand to those in need. And, while we are just a small firm with our own struggles, we wanted to do “what we can, where we can” in the hopes of helping others weather the storm.
The economic impact of this pandemic may take years to shake out, and while we do have experience working inside Amazon, and across retail and brands generally, the opinions expressed here are ours alone. We hope that these insights, in some small part, help you as you navigate back to normalcy.
Amazon as an Entity
Amazon is positioned better than most in the Retail Sector to come out on top. As customers stay-at-home, Brick & Mortar retailers close their doors (some permanently), and customers migrate online, the ‘everything store’ has become the go-to-option. The initial rush has passed, with some of it being pull-ahead demand, but the question moving forward will be “has this been a ‘level-up’ event for Amazon as a whole?”. We’re anticipating that indeed it has.
Some of the demand spikes are situational, the run on puzzles for example is a byproduct of people being stuck in their homes and looking for alternative forms of entertainment. Structurally, however, we expect market dynamics to change.
Brick & Mortar stores will retract, pushing more customers on-line. This trend has been coming for some time, but the pandemic will accelerate it as underperforming stores shutter, and some businesses fail altogether. Large Retail outlets will seize upon the opportunity, making deeper cuts now, knowing that the political fallout will be less now than at any point previously. Small retail outlets, lacking the cash reserves, will be especially hard hit.
Short Term Operational Impact
If you have shopped on Amazon these last few weeks, you will have seen first-hand the disruption on the platform… stockouts, dated-out delivery promises, and random rules around which items are deemed essential. If you are a seller or vendor, you may be experiencing a drop off in your PO’s, Inbound Shipping delays, wild swings in sales, or new policies rolling out every day about pricing rules or storage costs. Most would assume it will eventually return to normal, and there is no reason we would believe otherwise but if you are curious what is going on within the walls of Amazon… here is our perspective.
Amazon has been on a constant push towards streamlining their operations while they scale their offering and distribution footprint. Forecasting, Buying, Receiving, Distributing, and Fulfilling the tens of millions of ASINs is no easy task, and beginning in 2013 they began pushing towards true ‘automation’ of these business functions.
The models have continually improved since then, but still were never built to handle volatility like this. Further, there is no longer the institutional knowledge to put “hands back on the wheel”, which means it is falling to the operations technology teams, and not the retail teams, to work through the disruption. In some ways this is better; the scale of Amazon’s operations is such that humans would be crushed under weight of the challenge. The downside is that ‘exceptions’ are hard to come by. If you need to talk to someone to get your receiving prioritized, good luck… it is possible, but you will need to find your way to the right person, with the right authority, who still retains the ability to influence the automated operations.
In terms of what is actually happening behind the scenes as a result of the pandemic, you have likely read about steps Amazon is taking at their fulfillment centers, and maybe about their remote working policy at Corporate… but perhaps not on what is happening on the systems side. I will spare you the ‘inside baseball’, but the most important takeaway is that demand signals are completely unreliable, and Amazon will struggle for months to return to their normal levels of efficiency. The data from March through May (at the least) is ‘corrupt’ and will require causals and dampening to limit the impact to the models going forward.
Consumers will make do, and may not even notice once normal shipping speed is restored. Vendors however should expect that the Amazon purchasing volatility will continue long after the world has returned to normal (new normal). For Sellers, capturing and interpreting your operational and advertising data during this time is critically important. You will need it when time comes to forecast sales, plan your inventory and replenishment, and build your financial forecasts, etc.
As we at dash APPLICATIONS oversee massive amounts of advertising data, we can say with certainty that these times are not normal. We will share a bit of what we are seeing here.
So, the good news, for Brands that are ‘winning’ on the platform now, it will be a ‘level-up’ event like Q4. Strong conversion rates, across both paid and organic, will build search relevancy and increase sales moving forward. Maintaining ‘in-stock status’ with Amazon’s inbound capacity constraints will be a challenge, but for those that can weather the storm, they will benefit once on the other side. Generally, Performance Metrics have been degrading since the initial rush, and we are interpreting this to be driven as much by the macro economic factors, as by Amazon’s internal reactionary measures. Still, we see Amazon as customer’s ‘preferred’ e-Commerce retailer, but are not expecting Amazon will be fully immune once we look back on Q2.
Advertising, similarly, is offering plenty of opportunities, but staying ahead of the volatility will be an ongoing challenge. We can see in the data how dynamic this environment is, and the platform performance you saw last week will be different from what you’re experiencing now. With Amazon’s extended attribution window, assessing ‘real-time trends’ is difficult in the best of circumstances, so consider putting more weight on secondary metrics (e.g. Impressions, Clicks, Click-through-rates) as early indicators of performance.
Macro Advertising Trends
With our dash/DATA STUDIO product we are pulling data across hundreds of brands, spanning eight (8) marketplaces and containing time series data for many millions of Search Terms. While by no means a perfect sample, at aggregate levels we are getting a read on the macro platform trends. To avoid distorting the trends, we have segmented the data for just the US Marketplace YTD.
Spend vs. Sales & ACoS
Two (2) points jump out off the page when looking at Spend, Sales, and Advertising Cost of Spend (“ACoS”).
The first, Advertising Spend has largely continued to trend upward throughout the pandemic with peak spend occurring on 3/22 followed by 10 days of softness, then rebounding to the trendline by 4/7. There is nothing in our data that would indicate a significant disruption to Amazon’s Q1 Ad Revenue.
Second, ACoS has had significant volatility as customer purchase behavior has swung wildly these past four (4) weeks with the first spike occurring after the initial rush had past, and the second we are experiencing now as customers hunker down and take a tighter grip on their credit cards.
Spend vs. Impressions
Layering Impressions data over Spend, Customer purchase behavior, and the reaction of Advertisers, becomes clearer.
Amazon was flooded with shoppers starting around 3/13, with Peak Impressions coming on 3/19. For the initial peak, spend lagged behind Impressions by about 3 days, but once Advertisers recognized how volatile the environment was, they took tighter reins on budgets and drove better alignment between Impressions and Spend during the second spike starting on 4/2.
Conversion Rate vs. Impressions
Bringing Conversion Rates into view further illustrates the changes in customer purchase behavior these last four (4) weeks.
Conversion Rates are generally fairly stable in aggregate, with normal ‘day-of-week’ volatility. But starting on 3/11, over a week before peak traffic, customers began converting at a higher rate. Conversion Rates actually dropped to normal levels on the day of peak traffic, before settling in at twenty-five percent (25%) below normal levels from 3/22 forward. Over the past few days, conversion rates have slipped further, which can be understated due to the lookback window, but otherwise stockouts and dated deliveries are taking a heavy toll.
For those who make their livelihood on Amazon, be prepared for a bumpy ride. It’ll never be more important for synchronized ‘Operational Marketing’ across all stakeholders.
For Advertisers, optimizing to ACoS either directly, or through an ‘automated’ software solution, will not provide sufficient signals to manage through the volatility. The extended attribution window makes this difficult in the best of times. We recommend paying closer attention to your Impression’s trends at the keyword level, in parallel with your Cost per Clicks (“CPCs”), to monitor for changes in traffic and the competitiveness of the auction.
Staying in-tune with your inventory availability and the promise status of your products should be a daily exercise. If you are seeing your products with long shipping delays, it will impact your conversion rates. You may want to consider rerouting spend to prioritize other ASINs, or all else fails, pausing your campaigns until your products ‘operations’ have improved.
If you are a Seller and managing your cash-flows tightly (who isn’t), Amazon pays you after your product has shipped, however you pay for your Ad clicks on an entirely different cycle. So, if you are experiencing shipping delays on your products, keep a close eye on your Ad budget management to ensure you are not fronting Ad dollars without the sales revenue to support.
For our dash users, we recommend taking full advantage of our bridging engine. Running daily, day-over-day bridges will pinpoint what is driving changes in performance, and where in your catalog/account to go first. Also, bridge comparisons of your recent performance versus the platform inflection points noted above, may bring you additional optimization insights.
How Can We Help?
If you found these insights useful, we would love to hear from you. Our primary focus has been building software solutions, but in these volatile times if we can help shed light on macro trends for the broader benefit, we may do this more often.
You can contact us directly through our website, www.dashapplications.com or through email at firstname.lastname@example.org.
And if you are struggling with your Amazon performance, we work with Amazon Agencies around the globe, with services ranging from Full-Chanel Management and Distribution, to Advertising and Content specialists. These agencies are all users of our platform, and thus are highly data-driven and armed to navigate this complex market.
For Brands with in-house management teams, our Analytics and Data Management solutions may be of interest. As we noted, capturing your detailed advertising data will be critically important during this time… before you lose it forever. And if you are struggling, we also offer training on ‘Operational Marketing’ to help you make the most of the platform.
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