Profitero Blog
A Q&A with Stephen Madar: Amazon’s Echo, Alexa, and Dash

Stephan Mader

Continuing our Podcast series Q&As, Profitero’s Keith Anderson speaks to Stephen Madar, global eCommerce Manager for LEGO and previously a retail analyst at Kantar Retail, where he led Kantar’s research into Amazon.

In this episode, Keith and Stephen discuss Amazon’s Echo, Alexa and the Dash button, what these new products mean for both shoppers and suppliers, as well as the implications of the Dash Replenishment Service for brands.

Q: It’s good to catch up, it’s been a little while since we spoke. If you don’t mind, just tell us a little bit about your background and what you’re up to now.

I’ve recently joined Lego and my function here at the moment is to do two primary things. One, is to grow and accelerate a lot of our eCommerce capabilities from a very tactical level. That includes things like, how is the brand manifested on retailer platforms? Or, what does a really good product description page or a product detail page look like on an Amazon or an Argos or a Tesco or a Walmart? My team helps to elevate those types of capabilities across the entire business. Then also leading quite a lot of the global strategy for our eCommerce channels.

Before Lego, I was an analyst at Kantar Retail covering lots of different channels. Everything from Walmart International to Canada, eventually to digital and social media. Recently out of Europe, I was leading a lot of our Amazon research and consulting. It’s been a fantastic opportunity to come to the brand side.

Q: I’ve been playing around with Amazon’s Dash Buttons and the Echo, and I thought it was time to really drill in on what it means to Amazon, but most importantly what it means to suppliers. I’m just curious to get your thoughts about why Amazon is doing this and what you think the potential is.

If you take a further step back and you look at what Amazon was doing with Kindles or even the Kindle Fire tablets, Jeff Bezos has come out and very publicly said that they don’t necessarily want to make money on these devices that they sell, what they want to be is the physical manifestation of the Amazon brand in the everyday lives of their primary household. Consumers are their prime members or prime shoppers and Amazon is helping to enable that shopper make some better decisions.

Amazon is slowly moving towards removing as much friction as possible from the primary household shopper’s life. One of the easiest ways that I can do that, as Amazon, is one, to know what you want before you want it, and then two, allow you to not have to make that decision. With auto replenishment, with Subscribe and Save, to ship something to my house every week, every two weeks, I’ve already made that brand choice once, or that product choice once, I don’t want to have to make it again.

We’ve seen that again with the Dash Button, moving towards single item replenishment. I don’t want to have to make a choice after I’ve already chosen that I really want Brita water filters, or I really want Tide delivered to my home, just press the button and it comes. I don’t want to have to choose between different size SKUs, I don’t want to have to choose what’s on best offer, I don’t want to have to choose between different brands, I’ve already decided once, I just want it to show up to my house.

Now the same thing with the Echo and Alexa, it’s moving towards re-ordering. Amazon is trying to facilitate as fast and convenient shopping as possible after that shopper has already made that decision once. That has massive implications for how many brands and how many manufacturers go to market, everything from a new product launch to how to do shopper marketing.

Q: You mention that part of your role now is focusing on how the brand is presented on product detail pages, and we’ve been spending a lot of time thinking about the applications of a world where maybe there is no shelf. If brands understand how to win those transactions, they have such disproportionate potential value, it’s just incredible.

For Amazon, you have a significantly more locked-in purchase cycle and you can make much better strategic decisions based on that cash flow because you’re locking in that cash flow, which is great from a predictable perspective. Then also, how do you drive value from that single item? Again, this is not necessarily basket-level economics now, this is single-item-replenishment-level economics.

For now, when you start thinking about a brand, locking in and annuitizing that long-term value, now you have to start thinking about, how do I maintain a certain amount of profitability in that? Increasingly, that’s going to become, how do I ship products inexpensively? How do I get products closer to the shoppers, such that when they press the button it can show up on the same day? How do I make money doing that when I’m no longer sending massive trucks from my warehouses to Amazon fulfillment centers, or to Walmart DCs?

I think that’s going to be the current balancing act of how Amazon continues to make money, make that profitability equation really work. It’s going to be the fine balancing act of, how do I continue to aggregate all of these different shipments to be as cost-effective as I do and also balancing the immediacy of, I ran out of laundry detergent today and I want it tomorrow. That’s very hard for that impulsive-type of purchase of, oh my gosh I’ve run out, to work when you’ve got this big, massive aggregate shipment coming, but then also you’ve got these other one-offs coming, whether they’re from a Dash Button or from an Echo.

That’s where the question comes in as to what type of an assortment do I want in the larger fulfillment centers? Where do I put products that are potentially in more urban hubs or urban centers? Then what, in theory, can I start shifting away, even to delist things from the dot com platform and instead put them on Prime Now instead. Then have them sent to me via someone on a bicycle. These are the types of economic trade-offs which Amazon is constantly fiddling around with in the backend. Increasingly, what this means for shoppers, is more and more choice, which I think is a fantastic opportunity for consumers.

Q: It’s just incredible to think about how anybody else is going to catch up. It’s not to say that they won’t, but Amazon is certainly enjoying an early-mover advantage by positioning Alexa as a de facto interface to all of these other systems that connect and integrate with it and if it ends up with that power, the implications are huge.

I completely agree. At the same time, Amazon has the capacity to start learning through all of these different touch points. I think it would be safe to assume that Amazon will be able to see how users are speaking to the Alexa voice system, how they are interacting, what the results are, are the users happy with the results. So constantly testing and trying to optimize the code of how people are naturally searching for things through language. The same thing that Google does with naturally typing search and then trying to continuously optimize the relevant to contextual-based search results that occur, Amazon is likely doing exactly the same thing through natural language voice.

Q: The one thing that I think a lot of folks aren’t thinking about, is the data that Amazon gets on consumption patterns and usage. In other words, for DRS-integrated products, Amazon suddenly knows exactly at what rate people are using the product, when they need to replenish. I think as brands get more deeply engaged in some of these services and APIs, a really important question is, who owns the consumer and what data will we or won’t we get?

Absolutely. That’s always going to be a very hot topic. Amazon, as most brands probably realize, they’re quite protective of their data, quite protective of their shopper. Even if you have a fantastic relationship with them, they are unlikely to open up. I do think they are quite open to co-learning opportunities, as long as we’re building towards something that is a win-win for, of course, a brand as well as Amazon, but also a win for the shopper and consumer.

Q: I actually don’t know if this is happening in the UK, but there’s been a lot of interest in a program introduced in the US last year called Seller Fulfilled Prime. Which is invitation only for third-party sellers based on their history of accurate, on-time deliveries and overall merchant ratings. Essentially, what it allows third party sellers to do is, make their items Prime-eligible even if they’re not using the fulfilled by Amazon service. Which is a pretty big deal because almost overnight, it increased the Prime-eligible assortment by about a half a million SKUs. What we’ve seen over the last three years, I think, if memory serves, is an increase of third party unit sales from 32% of total unit sales to 47%.

From the Prime shopper’s perspective, it’s a huge win. Of course, they get additional selection, and rightfully so when you think about the shift away from having to own that inventory. Amazon frees up a huge amount of cash which they can then reinvest in other parts of the business. Increasingly, as Amazon puts more points of fulfillment and smaller and smaller FCs closer and closer to where shoppers are, that requires, in theory, a huge amount of inventory, and capital tied up and cash tied up in that inventory to maintain stock levels for that immediacy of fulfillment.

If they no longer have to have that cash on the books, that inventory on the books, they can instead enable trustworthy, reliable third parties to do that. I think that that’s something that they’re going to continue to do with the caveat of having to maintain the experience for their shopper on the fulfilment side of the equation, but then also on the actual shopping platform.

Q: That actually sets up a question that I haven’t resolved for myself. If you think about Amazon historically, especially Amazon.com and the endless aisle idea, what we see time and again is that there are what we call emerging brands that tend not to be the incumbent, total market-leading brands. This question I have is, is the paradigm of Amazon being the great equalizer starting to erode as there are more and more programs that require significant vendor investment just to participate? I don’t think you’re seeing too many emerging brands putting much investment behind Dash Buttons. I’m curious if you’ve got any thoughts on that dynamic?

I do agree that it has really big implications. What I think we’re going to start seeing is, I’ll say, a separation of quote, unquote, best-sellers SKUs, away from the general assortment. Those products which have reached best-sellers SKU status, or say on the top two or three of the category in their search rankings, those products are going to continue to accelerate increasingly with programs like Amazon’s Choice.

It may not necessarily be those SKUs which are the dominant offline market leader or the dominant share of shelf, it could be those that were first to market. It could be those that were the leaders in going to market with Amazon, the very, very first ones, the ones that jumped in head first and have done a really good job owning the best-seller’s spot. This has really big implications on those brands which have historically taken a fast-follow mentality. In particular with Amazon, but broad reaches for eCommerce, which is a very sticky type of channel to operate in.

It actually makes you start thinking about wishlists and favorites lists, behaviors and the stickiness factors that retailers can activate against. If you are there first and a shopper makes a brand choice first for you, it will only accelerate that increasingly as a lot of these mechanisms remove the ability for shoppers to make broad shelf-based choices. Increasingly, the previously purchased items are the brands that were there first.

Q: It’s not necessarily that the big get bigger, but the winners win more. If you play it out, I think it definitely speaks to the need to act now, there is early mover or first mover advantage. Secondly, it sounds like you definitely have to execute on all the fundamentals. Be in stock, be discoverable, have great content, so that you at least end up in the basket with a purchase so that Amazon’s algorithms are likelier to recommend you again when shoppers try to reorder through the Echo or one of these other mechanisms.

I think this is where we’re going to start to see a bit of the polarization, particularly around the capabilities of these new technologies for different categories. I will probably go out on a limb and say that those that are in consumer electronics, entertainment, and hardware types of brands will likely have a stronger role to play in shaping what that future looks like. Whether that is something as simple as having the Philips Hue light bulb, which previously you controlled through your iPhone, now you can, in theory, control it through your Echo device as well and talk to it and change it to a different color.

Things that are somewhat connected devices already, I think offer the opportunity to see where the industry was moving towards. If we’re in a CPG category, or a large manufacturer brand of consumable goods, we have the ability to look at what’s happening with that and start to gain some really good ideas. I’m willing to bet that Amazon is quite open to hearing some of those ideas. Whether or not they have the bandwidth to actually act on them, because I’m sure they’re being bombarded from all different places. As many of us know, Amazon is often times stretched thin, but will be very open to hearing ideas. I think if we look at seeing where the LGs and the Samsungs and the Microsofts and the Phillips and the Logitechs are going in this space, I think there will be a lot that we can learn from that.

Q: I totally agree. Steve, this has been such an interesting conversation and I expect it will not be the last on this topic, and maybe not with you. I want to thank you for joining me, I really appreciate it. If people want to reach you, where can they find you?

Best bet is to contact me on LinkedIn.

To hear other industry thought leaders discuss the key eCommerce trends impacting the CPG and retail sector today, including our latest podcast episode with Melissa Menchaca of InstaNatural, visit our brand new Profitero Podcast Series.

We’ve also summarized some of the most important guidance in our Podcast series to date – download the key highlights here.