Guest Column - May/June 2010

Assessing Amazon's Exit

By Ira Ozer, CPIM

Amazon has been a major supplier to the incentive industry, starting in 2004 as the fulfillment partner for one company and then in less than a decade, growing to fulfill hundreds of client incentive programs for more than 20 incentive companies, totaling an estimated $250 million dollars in merchandise redemptions per year. Then, in abrupt, unexpected notifications during the week of April 5, 2010, Amazon announced they would be exiting the business and were giving notice to find an alternate supplier. So, why did Amazon leave this huge amount of business on the table? Where will this $250 million be fulfilled? There are many traditional choices and some new innovations, but also confusion and uncertainty. As Amazon has demonstrated… it's a jungle out there!

The incentive industry has been in existence for more than 100 years and for the first 80, the business was dominated by relatively few large national incentive companies, such as Maritz, Carlson and BI, the so-called "big three," as well as smaller, but strong regional companies, such as Hinda in Chicago, PFI in Cleveland, Harco in New Jersey and Quality in Tennessee. These companies have their own warehouses and relationships with brand-name product manufacturers. They publish catalogs, create computer systems to administer programs and manage these in-house with their own IT departments.

For years, the barrier of entry into the incentive business was high, because to compete you needed to have these services, which cost at least $1 million to create. Many smaller companies were formed that specialized in travel incentives, promotional products, recognition programs and other services, and when their clients needed merchandise incentives, these companies usually brokered the incentive catalog solutions of one of the regional suppliers. Incentive catalog merchandise was sold to corporate clients at 30 to 50 percent margins, which was enough to cover inventory, warehouse, catalog production costs, staff overhead, pay salespeople or partners and still earn a profit.

High margins could be maintained because these were the days of "fair trade laws," in which manufacturers could dictate to retailers the price they must charge consumers, generally the Manufacturer's Suggested Retail Price (MSRP). Incentive company prices were compared to retailers such as Macy's and Nordstrom and by comparison, even with high margins and the need to add shipping and handling costs, the merchandise was within 20 percent or so of retail. Incentive catalogs featured several hundred to a few thousand products at the most, and everyone was content that incentive companies shipped items within four to six weeks.

In the past 20 years, huge innovations have occurred, changing the map of the incentive industry forever. Fair Trade laws were abolished in 1975, and retailers were allowed to charge whatever they wanted. Big box stores emerged and became "power retailers" with low prices and "category killers" with vast selection and interactive showrooms. Retailers began offering gift cards, which became popular in the incentive industry, taking a substantial percentage of overall redemption from traditional merchandise catalogs, and then, incentive credit and stored value cards emerged, which let incentive program participants redeem their points anywhere MasterCard or Visa is accepted. With the advent of the Internet and with less expensive and more readily available incentive management platforms, smaller companies could compete with the large companies and not represent them as agents. Incentive margins were reduced by most companies in order to compete within the industry and with retailers, which more than ever, began to sell on price, with broad choice and immediate availability being a given.