Between the two models for selling on Amazon, marketplace (third-party or 3P, where brands sell to consumers) has grown rapidly when compared to retail (1P, where vendors direct-sell to Amazon first). In his letter to shareholders in April, Jeff Bezos offered a direct analysis of the marketplace’s transformation since 1999: “Third-party sales have grown from 3% of the total to 58%. To put it bluntly: Third-party sellers are kicking our first party butt. Badly.” Over the past year, one million new sellers have joined Amazon, and 3P Sales were estimated at around $160B. According to eMarketer, marketplace sales now eclipse those from direct, a pattern set to continue. Two years ago, 1P sales grew 21% to $70.4B; those numbers are enormous, but certainly smaller than those of 3P, which grew 41% to $129.5B. 2019 forecasts expect marketplace sales to reach $230B.
WHAT THIS MEANS FOR BEAUTY
All categories on Amazon include brands that are sold through both 1P and 3P. The only exception has been Amazon Luxury Beauty. Since Amazon launched the Luxury Beauty category over five years ago, it has been a gated environment with no unauthorized sellers allowed. This differs from all other shopping categories; Luxury Beauty was special in that it was reserved for high-end prestige brands only. Inclusion in the category was invite-only, based upon Amazon’s discretion, and dependent on external retail distribution. Brands were able to participate in Luxury Beauty as vendors only—until recently. We noticed that a few months ago, Amazon slowly (and quietly) began to open up Luxury Beauty to the 3P side, supporting the company-wide shift to marketplace. Now, beauty brands can join Luxury Beauty without having to opt into the 1P model.
HOW DOES THIS CHANGE BENEFIT BRANDS?
Selling through the 3P model allows brands to have greater control over their pricing and inventory; brands control how much product to send to Amazon’s warehouses rather than wait for Amazon to place an order. Marketplace sellers also have lower Amazon fees, and therefore, work with higher margins. Giving up 50% to 60% margin is a requirement of joining the Luxury Beauty platform as a vendor. Accordingly, that has been one of the top concerns high-end brands have had about entering Luxury Beauty in the past. With this new change, brands can join the platform while just paying Fulfilled By Amazon fees (Amazon commission, storage, and handling) rather than high upfront terms.
HOW IS THIS BENEFICIAL TO AMAZON?
Amazon has long sought after the beauty brands carried in beauty industry leaders, such as Sephora and Ulta. However, Amazon also understands that many brands have hesitations about selling directly to Amazon. With the expansion of 3P, they are allowing brands to maintain control over their brand image, pricing, and inventory, in exchange for including those brands in their ever-growing brand matrix.
WHAT’S THE CATCH?
Given that Luxury Beauty is a completely gated category—and the only one of its kind on Amazon—no unauthorized sellers are allowed. For, vendors, this active removal of unauthorized sellers was included in the hefty Luxury Beauty fees. Now, marketplace sellers in this category will receive this perk, but at an additional cost (typically a fee of 15%), on top of their standard 3P fees.
At Stella Rising, we are experts in navigating the rapidly changing world of Amazon. With a deep understanding of the beauty space, we can help accelerate critical brand growth on the platform. If you have questions about whether Amazon Luxury Beauty is right for your brand, reach out to us.