Retail got Amazoned. Here’s why that might be great news for microbrands

amazon-retail-brands-microbrands

Amazon is the beast, the bear, the devil that controls over half of digital retail in America. And they’ve copied successful products for Amazon Essentials … because they see all the data.

But could that be a great thing for brands?

Perch has raised over $900 million to buy, build, and grow microbrands, mostly on Amazon. And executive Mike Frekey is pretty pumped about it, calling Amazon the largest platform brands have at their disposal for growth.

In this edition of TechFirst with John Koetsier, we chat about the future of retail, e-commerce, direct-to-consumer (DTC), and what Amazon is becoming. Also about shadow ratings on Amazon, advertising on Amazon and if that’s pay-to-play, microbrands and their future, and much, much more.

This episode is sponsored by Serial Marketers, a Slack-based community for marketers who “share job opportunities, get recommendations for who to work with and what technologies to use, post event invites, showcase their latest projects, and support each other in countless ways.”

Keep scrolling for the full video, subscribe to the podcast, and get the full transcript …

Or, check out the story on Forbes …

Watch: Perch is a house of (micro) brands in the age of Amazon

(Subscribe to my YouTube channel so you’ll get notified when I go live with future guests, or see the videos later.)

Subscribe: Amazon won retail. Is that the best possible result for microbrands?

 

Read: the post-Amazon house of brands … how Perch is using Amazon as a platform for growth

(This transcript has been lightly edited for length and clarity.)

John Koetsier:  What does it mean to be a brand in the age of Amazon?

There’s a company you’ve never heard of that’s raised over $900 million, it’s acquired 70 brands with thousands of products and is “the fastest profitable company to ever reach unicorn status.” It’s worth a billion dollars 18 months after launch, everyone hates them already.

We’re chatting with an executive, Mike Frekey, from Perch. Welcome, Mike! 

Mike Frekey: Thank you so much, John, for having me. 

John Koetsier: Hey, it’s a real pleasure. Tell us, what is this company? 

Mike Frekey: Yeah, Perch is in a very exciting sort of $5 billion space over the past handful of years where we’ve raised over, I think, close to a billion of that.

We’re in this space of growing microbrands. So what that kind of means, to me at least, is we’re trying to disrupt the world of eCommerce in a way that brands on their own just simply don’t have the ability to do.

And I think that’s why we’re seeing so many brands coming after Perch, trying to get into this space, even in a way where I think it’s possible for us to all get along, so to speak, because the model…

John Koetsier: [laughing] No one can all get along. Somebody’s gonna win. Somebody’s gonna lose. Unpack that for us. What is a microbrand company and what is a microbrand company at scale? 

Mike Frekey

Mike Frekey, head of advertising, Perch

Mike Frekey: Absolutely. So, when we’re talking about microbrands, we’re looking at these consumer brands most of the time built from eCommerce. These are companies that really got their start in either direct-to-consumer website or, in most cases, marketplaces to try to connect and resonate with an audience that they maybe just wouldn’t have the ability to identify and find if they were going through traditional brick-and-mortar channels.

Where we’re looking at microbrands at scale is this idea of taking some of these smaller brands that don’t have as large of a budget as you can think of one of those more traditional, like a Procter & Gamble sort of a model. We can identify limitations that an individual brand might have in terms of their supply chain — where are they doing things that they just don’t quite have the scale? Where are they doing things that based on limitations in their catalog size, their catalog breadth, they just are unable to take advantage of a growing consumer base in any given channel that, because we have so many of these brands, because we’re able to go across portfolio, across different categories, deeper within the same category, we’re able to find people to, one, resonate with our brands on a deeper level.

Two, identify where can we then introduce those people to related brands and do more of a basket-building perspective.

And three, again, I think just the scale of what we’re doing for all of our brands … being able to identify where a more mom-and-pop shop they’re fighting for every single dollar, so they might not be using the most reputable manufacturing centers overseas. They just might not be able to put in the batch sizes necessary to get their costs down to a point where they don’t have to cut every single corner.

And because we’re able to operate at that larger scale, that opens up more ways for us to grow with — whether it’s us being able to offer lower prices to our consumers, we’re able to just put in more thoughtful bundles across these brands, to just keep all costs lower and allow us to do that volume at a much more efficient level than any of these brands could do on their own. 

John Koetsier: So I want to talk about what this means for the future of retail, what it means for selling on Amazon, frankly, and what Amazon is to you … whether that’s a store, a mall, or a platform of the future. I want to look at what brand and retail looks like in about five years.

But maybe let’s start with: where’d this idea come from? It sounds like a cool idea. There’s lots of microbrands in the world. They don’t have the means, the technology, the funds, the resources, to really maximize their potential. Where did this idea come from? 

Mike Frekey: Yeah, that is a great question. One thing that you touched on there that I think is a big part of where we’re going and where we think this vision works is the technology component of it.

At Perch, we’re considering this vision that our CEO Chris Bell had as not just a ‘Oh, we see people are buying things online and we can help people buy more things online.’ You know, I think that’s always part of it, but we’re trying to identify in a space that has a lot of bodies, but are they always operating in the best ways. Where they’re not operating in the most efficient, the smartest way for both themselves and for the benefit of the consumers, is how are they utilizing technology?

At Perch we do consider ourselves a bit of this technology company as well, not just a traditional retailer. And I think that’s what makes us a little bit different in this vision. We’re looking to see what are … what’s any type of change we can make to the way that people conduct business. A lot of that is more technology-based where we can find ways to innovate.

John Koetsier: Well, yeah, it’s interesting because the concept of a house of brands is not new. You mentioned Procter & Gamble. There’s other mega corporations, mega companies out there that have 50, 70, 100 brands and most people have no clue; you pick out something on the store, you buy something on Amazon, whatever, you have no idea that Johnson & Johnson makes it, or whoever it is, right?

So that’s not new, but the way you’ve constituted your company is new; a third of your employees are engineers, correct? 

Mike Frekey: Correct. And that’s honestly one of the most exciting pieces about Perch that sort of sold me on joining in growing this rocket ship, so to speak. So we do have that commitment to the technology piece.

Over 30% of our company is dedicated to tech and we have a very, just exciting roadmap of across every aspect of our company.

You know, I’m the head of advertising at Perch, so I’m focusing on how can we grow every brand where we’re acquiring and using ads as one of those most dedicated levers to achieve that growth. So we have a number of plans in our roadmap for how can we utilize technology to identify any opportunity, whether it’s better tracking of reviews to identify when a product’s efficiency might start to go down and we can start to shift more of our resources towards going from a 4.0 visible rating to a 4.5 visible rating, because we know that that’s going to have a large impact.

But it’s going to be so much more than just what touches me, as much as I’d love to take as many of those people for my own team. I think what makes this really exciting is we are looking at the technology piece for a supply chain and fulfillment. We’re looking at how can we better utilize technology and our data team on merchandising, and how can we speed up our processes for creating assets. How can we just find any aspect within our way of doing business, and we want to find a way to make our technology support that. 

John Koetsier: You said visible rating. That leads one to believe there’s an invisible rating. 

Mike Frekey: Yes, actually that’s a really fun sort of in-the-weeds piece that is somewhat top of mind for me. So, on Amazon you can —everything is done at a half-star rating when you see your products.

So if you see a product that’s showing at a 4.0 stars, it doesn’t necessarily actually have a four out of five star rating, it’s going to have a 4.2 out of five star rating. And so when you see the 4.5, it doesn’t mean they’re actually 4.5, they could be below 4.5 but it’s rounded up.

And so there’s a certain drop-off point where you’re going from showing as 4.5 stars to showing as 4 stars that can hurt you, depending on what your other competitors are showing as. 

John Koetsier: And with the right technology you can see that in advance and say, ‘Oh, shoot, we’re getting close to dropping to 4 here from 4.5, so let’s invest something in getting better reviews’? 

Mike Frekey: Exactly. 

John Koetsier: Okay. Okay. Interesting. Let’s talk about Amazon a little bit because you’re pretty Amazon focused. And what does that mean about what Amazon is for you? Is it the world’s mall? I mean, I’m talking mostly the West right now and probably mostly North America. Amazon is pretty big in Europe, it’s pretty big in other places — not China, obviously, where they have their own giants — but what is Amazon for you?

Mike Frekey: Yeah, that’s an awesome question. And I think, so I’m coming with a little bit of a unique perspective where I’ve spent my past five years working directly in this Amazon space, and I got to work with more dot-com sellers as well.

But I am completely bought in to this idea of Amazon as the largest platform we have at our disposal for growth of these brands, identifying well over 50% of sales that are going on online happening directly on amazon.com; looking at the very bullish case of where things could go — not just in Europe, but also if Amazon’s successful in growing in some of these other markets, like Southeast Asia, that I’m tracking somewhat closely.

So I think we’re looking at Amazon as similar to we’re looking at ads as a growth lever for Amazon, we’re looking at Amazon as a growth lever for these brands. Now that’s not to say that we’re not looking at other channels as well, and equally excited about other marketplaces, equally excited about the prospect of … for me, it’s a combination brick-and-mortar combined with eCommerce.

So how can we find ourselves putting products in brick-and-mortar stores that then also sell via, you know, maybe a grocery delivery service and then how can we start to run ads within there to get our products more prominently placed, are all narratives within the growth of these brands that I’m very excited about. But Amazon, at least for right now, is far and away the largest of those. 

John Koetsier: It’s the easy choice, right? It’s the default choice as a consumer. They have my information. I’m not concerned about the return policy. I’m not concerned about shipping or how long it’ll take. I know I can get super fast shipping very, very easily. I can just go, there’s a massive array of choice. I can select and not think about it, not enter data or information everywhere.

I mean, it’s horrible if you’re concerned about concentration. It’s horrible if you want smaller brands to succeed on their own, but as a consumer, it’s hard to pass up the value. It is really, really interesting.

But some brands that are on Amazon are also worried about competition from Amazon.

That’s actually been a big deal. It’s been raised in various governmental circles as well, because Amazon of course has great information, detailed information — probably more information than many of the brands that are on the platform — about what’s working, what’s not working, how many products are in a competing space.

And do you worry about that somewhat? Is that a concern? 

Mike Frekey: It’s always going to be some level of a concern. I think the exciting side of that for me, is any level of competition is just going to, I think, breed the best grounds for how can we get the best products at the best prices for all of our consumers.

I think where I’m really excited about that case for Perch is our ability to find a scale in many different ways to allow us to compete at every level, including with the likes of an Amazon.

I think the areas that are a little bit more difficult for that are when Amazon is competing in the ad auction and not just in the ad auction saying, ‘Okay, it’s Amazon paying Amazon for a place.’ [laughter]

But you’ll occasionally see the widgets  from our brands being any of those Amazon-owned brands that will be given placement above not just organic listings, but also above other ads. And so that creates a very challenging environment to find as much success as if Amazon wasn’t doing that.

But I think from there, there’s also, we’re now identifying an area where, okay, generally speaking, it is cheaper to be targeting a product and place your ads on that product, to conquest it, than it is to go after a specific search term at the highest top of search level.

And so if we know that Amazon’s going to be sort of jumping the line, now, are we creating some strategies to do product targeting directly on their brands that are sort of doing that line jumping, where we can still hit that end-of-day consumer one step down in the funnel at a cheaper click.

So there are always going to be ways that we can get around this. 

John Koetsier: This is a really interesting topic and I don’t think a lot of people know that advertising is a big, fast-growing, and very lucrative business for Amazon, because we think of it as a retailer; we think of it as a cloud vendor and a variety of — maybe a streaming service — a variety of other things like that.

But they have a large and growing ad ecosystem. I haven’t reported on it recently, but I think the last time I did it was about $5 billion, maybe $7 billion of annual value they were capturing in advertising. And this is interesting, right, because if you look at the history of retail, you might’ve paid or given something up to a retailer for shelf space.

Well, with unlimited virtual shelf space, what is the currency? It’s attention, right? And how do you pay for it? With advertising. Talk a little bit about that model and what that means, and how important advertising is to get your product as a brand visible on Amazon.

Mike Frekey: I love  this topic. One, because I’m the ads guy, but also I do want to echo your point about how important Amazon’s advertising is to their bottom line. I’ve been investing in Amazon for quite some time now and that’s really been my number one reason why I think people are often getting tripped up with the sexy options for how are they trying to grow their business, the streaming sides of it … but really advertising is just such a high margin space for them, where they can make every single interaction on their site a profit-driving one for the company, even if no cash is changing hands. There’s always going to be that way for Amazon to make their cut. And, granted that does make it a very engaging pay-to-play sort of environment for us on the seller side too. 

John Koetsier: I’m just wondering what does it mean to place your product on Amazon? Do you have to support it with advertising? Is that essential? Are you just going to get buried in most categories if you don’t advertise? 

Mike Frekey: That’s a great question. I am looking at any level of … you’re not trying to be a mom-and-pop seller that is supporting your livelihood, hopefully putting your kids through college and making your money that way, but you’re trying to build a brand that is going to be a dominant player in a category.

You cannot do that without advertising.

I think especially over the past six months, I’ve seen Amazon’s commitment to growing the number of ad units has skyrocketed. You know, back — I remember to 2016 there would be at most two sponsored product ads at the top of any given search, occasionally you do searches where there were no ads whatsoever.

And since then, I’ve now found instances where there are six sponsored product ads in a row, the sponsored brand ad at the very top, additional non-organic widgets; so I’ve found the high review products related to this search, which is an ad placement, and then affiliate placements as well.

So, in order to actually benefit from your number one organic rank to a point right now you have to be lucking into a spot where you’re either not having so many widgets showing up on top of you, which doesn’t happen as often, or you want to make sure that you are cutting through that noise by having visibility at each row. So are you owning that sponsored brand ad? Are you showing up with at least one listing in the sponsored product ad and then as people are sort of scrolling down.

Because to a point, some people — I’m not one of them, but some people will see an ad and say, ‘Well, I don’t trust that. I want to go down to something that is an actual, like, this is what Amazon thinks is relevant to me.’ And when they find that, then they’ll click it. And when they see that that product organically is the same as the sponsored ones, there’s an additional level of — I’m not sure if it’s an implicit trust, or what, but I’ve measured the same thing on Google.

When you’re showing the top organic listing in Google, plus a text ad, plus a Google shopping ad, you will just have a significantly better click-through rate overall, conversion rate overall. There is a level of trust that just carries over when you’re being seen so commonly.

John Koetsier: I’ve seen that as well. I’ve actually measured that as well in different contexts, but it makes a ton of sense, right?

It’s kind of surround sound marketing, you’re available wherever somebody is looking.

The re-invigorated antitrust muscles of the U.S. government under the Biden administration is probably going to have a field day looking at this sort of thing once they get done looking at iOS and Android and the App Stores and Google Play and everything like that. It’s an interesting world we live in.

I want to talk a little bit about the future, a little bit about the brand of the future and retail of future. How do you see that playing out? 

Mike Frekey: I think this goes really into the … how do I say this … when I’m thinking about retail of the future, I’m viewing the direction of more brands going towards aggregators because of what it means that they can do.

One, we’re talking about — I’ll be very ad focused — the rising cost of business, or just advertising. Owning any of these placements, especially when we find something that works, that’s going to drive the cost up and then eventually we’ll hit some sort of a bubble where the ads are no longer worth running based on efficiencies that you’d be hitting.

And I think where that bubble is extended is when a company goes in that changes the rules of, well, how are you measuring efficiency?

Where I think a standard one-brand seller has to be more conscious of their end-of-day profit, I think an aggregator is able to go into the space. They may have some loss leader brands. They may have some brands that are a lot more efficiency focused that enables them to spend more across their entire portfolio.

I think they’re able to look at things from more of a basket-building and brand-building perspective that is lost on smaller sellers where it’s okay to not be profitable day one on a product, on an entire brand, as long as you’re trying to build this machine that is connecting with consumers and is able to — I think we’re seeing this with a really exciting case right now, one of our brands, Baby Merlin, that is a very exciting brand that people do know; one of the, I believe, the top-selling baby swaddle on Target.

And it’s a brand that was sort of built with a shockingly low ad commitment, and what that team was able to achieve on its limited budget is truly remarkable. And now what we’re able to do is, one, be putting in our resources behind growing it, going after more of that influencer space. But, two, we’re able to now add in other baby products in the Perch portfolio. So we’re now able to do cross-sells between our swaddles and our baby books, soft, can be ready for life, wonderful product. And… 

John Koetsier: Yeah, absolutely. I mean, when  you’re aggregating like that then you just are going to get more data on what’s working in the marketplace. You’re going to get more data on what could be a complimentary product.

You’re also probably going to develop closer and closer relationships with your customers as much as you can — you’re mediated by platforms, but as much as you can — you’re going to get first-party data, and that’s just going to make you smarter and enable you to cross-market over time.

Now, we have to cut this to a close, but I can’t end without mentioning your office or man cave or whatever it is. It’s almost like you like sports or something like that. I don’t know, I think I see a Miami Dolphins uniform up there … what else am I seeing here? 

Mike Frekey: Yeah, so I’m a huge football fan. That is my number one, so I have a handful just all-time, either all-time players or all-time names. I will call out the Miami Dolphins one. That is, you may have heard of him, Karim Abdul-Jabbar. No-no, not basketball Kareem Abdul-Jabbar. Miami Dolphins running back, Karim Abdul-Jabbar, led the NFL in rushing touchdowns and then got sued by actual Kareem Abdul-Jabbar. Great story.

John Koetsier: [laughing] We have to get it sometime. Well, Mike, thank you so much for your time. I do appreciate it. It is a fascinating, complicated, high-stakes world of modern retail. And I appreciate you kind of pulling back the veil on some of the things that are going back on there. Thank you.

Mike Frekey: Well, I appreciate you having me, John, and happy to come back anytime.

John Koetsier: Excellent.

Interested in tech and the future of everything? So am I

Made it all the way down here? Who are you?!? 🙂

The TechFirst with John Koetsier podcast is about tech that is changing the world, including wearable tech, and innovators who are shaping the future. Guests include former Apple CEO John Scully. The head of Facebook gaming. Amazon’s head of robotics. GitHub’s CTO. Twitter’s chief information security officer, and much more. Scientists inventing smart contact lenses. Startup entrepreneurs. Google executives. Former Microsoft CTO Nathan Myhrvold. And much, much more.

Subscribe on your podcast platform of choice:

 


Want weekly updates? Of course you do …