Monday, October 14, 2013

Diapers and Alliance Advantage: Amazon connects to P & G

Procter & Gamble (P & G) makes and sells all sorts of essential goods that we don’t necessarily talk about so much: diapers, paper towels, toilet paper, laundry detergent, cleaning liquids. Some of these goods are heavy and bulky, and there are probably some parents who wish they had not needed to carry all the diapers back home from the store. Well, now Amazon is there to help: they can deliver these goods, in fact as subscriptions that arrive regularly. Now this seems a bit odd because these products are cheap to buy and expensive to ship, at least compared to books and other Amazon goods, but Amazon do mean to profit from it.

Part of the ambition comes from how they do it. Now there are little Amazon centers in some P & G warehouses, and these pack and ship goods directly from the warehouse instead of having it sent to the Amazon warehouse. The cost savings are obvious. And, this is not just P & G; Amazon is said to be pursuing similar arrangement with other manufacturers too.

What will these alliances do to the market? The complementarity between Amazon and P & G in this arrangement will make them stronger than other firms trying to sell similar goods online; that is the easy part. It is likely that other firms will be either inspired or threatened enough to try the same strategic move. Interestingly enough, I found in research published in Strategic Management Journal that even strong competitive moves are not necessarily imitated fast. That research was about technologies that gave major advantages, but the results are likely to be similar for new alliance types. There are enough doubts about their value and too little information about how they are done, making other firms reluctant to move.

But to the extent that other firms will try to get the same benefits, the competition is likely to make things harder for the small firm and the late firm. P & G are happy to have Amazon in their warehouse, but how many additional alliance partners do they need? Amazon is happy to have P & G goods for sale, but how many brands of diapers and toilet paper do they need? The low need for replicating this arrangement with others will reduce competition, especially because people are more likely to use the web services that they already use for other goods. This will mean that many firms on both the producer and the web sales side will be left out in a game where the big firms win. And that’s probably fine with the big firms P & G and Amazon.

Ng, Serena. 2013. Soap Opera: Amazon Moves in With P&G. Wall Street Journal, October 14, 2013.