A central marketing story of last decade was the rise of the ankle biters—startup brands collectively feasting on slow moving consumer brands despite their well-fed media budgets. Direct-to-consumer sales fueled by digital and social media were part of the story, but the endless digital shelf and low cost of entry at Amazon also played a major role.

But among the many changes wrought by the pandemic has been a reversal of fortunes for smaller competitors, which are increasingly losing share and getting outspent by bigger players at Amazon. The e-commerce giant is also drawing more older buyers, a demographic shift that is favoring bigger, established brands. Making matters worse, smaller brands that traditionally relied on cookie-based digital ad targeting and re-targeting to drive direct-to-consumer sales more than bigger ones will see that capability go away over the next year and need to rely even more on Amazon.

What’s happening on Amazon is in many ways a replay of what happened on Facebook last decade, as Sarah Hofstetter, president of e-commerce analytics firm Profitero, sees it. Ten years ago, organic social media helped upstart brands thrive, but then bigger brands began outspending them on Facebook, bidding up ad costs and making it harder for new brands to break through, Hofstetter says.

Focus has shifted in recent years to a growing number of new products invented largely to be sold on Amazon. But the surge of e-commerce caused by the pandemic led big companies to shift huge amounts of media dollars to Amazon. The result has been to hike costs that smaller players have trouble paying and pushing smaller brands down search result rankings in many categories, Hofstetter says.

For that matter, Amazon is becoming a bit more like traditional retail, where small brands never had much chance at high-visibility endcap displays. Amazon was different, often giving them more visibility, Hofstetter says. “Now they’re starting to get nudged out because of the money.”

Market share shifts

Nowhere is the change more noticeable than in the beauty business, which is among the segments of packaged goods affected most by the influx of startups over the past decade. Last year, the share shift from big brands to small lurched into reverse, with Amazon playing a key role, according to research by Evercore ISI based on Numerator data. 

While it was a tough year for makeup brands generally, as people going out less needed less makeup, it was a lot harder for smaller players. Niche brands with online shares below 0.5% saw their collective share of U.S. makeup sales fall five points to 31% last year, according to Evercore. Big established mass brands gained the most, particularly L’Oreal USA brands Maybelline and L’Oreal Paris, based in part on their strong Amazon presence. Coty’s Cover Girl and Rimmel also gained thanks largely to their strong presence on Amazon, according to Evercore.

Skincare fared much better than makeup in overall sales last year, but the category is even more fragmented online than makeup, with niche brands (each having under 0.5% market share) controlling 57% of the market last year. Here too big brands were the winners, gaining 2.1 share points collectively last year, according to Evercore.

In fragrance, niche brands did better, gaining share, but the middle brands were the losers, and the top 10 brands collectively picked up 10 share points. And in haircare, big brands including Procter & Gamble Co.’s Pantene and Head & Shoulders and L’Oreal’s namesake brand alongside salon staples Redken and Matrix all gained share online while niche brands collectively shed 7 share points.

Looking broadly across health and beauty categories—also encompassing deodorant, vitamins and oral care—the top three brands in each category actually gained share collectively in total retail, including brick and mortar. The leading brands' shares indexed at 104 in 2020 vs.100 in 2018, according to Evercore. But the big brands’ gains were actually faster in more fragmented e-commerce channels, indexing 45 in 2020, up seven points from 38 in 2018.

Greying of Amazon’s customer base

At least part of the tougher environment for startup brands and more favorable results for big established ones on Amazon owes to where the influx of e-commerce buying came during the pandemic. Boomers and Generation X accounted for most of the increased online shopping and brought with them preferences for older established brands, Evercore notes. 

The shift to older Amazon clientele continues this year. According to Numerator, Amazon’s share of overall CPG sales is up 1.4% among Generation X and 1.5% among Boomers so far in 2021 to 3.8% and 3.2% respectively. Amazon’s CPG share among Gen Z shoppers has actually declined this year, 0.6 points to 4.3%.

Worth noting is that Amazon’s share is much higher in some corners of packaged-goods, accounting for more than 10% of diaper sales. Overall, e-commerce has become a huge business in beauty, accounting for more than 30% of sales last year in the U.S., per Evercore.

L’Oreal’s ‘Internet Famous’ upstart

Certainly, Amazon still offers plenty of opportunity for challenger brands. For example, the retailer has an “Internet Famous” section highlighting the latest social-media product sensations, such as U.K. cleaner import The Pink Stuff, propelled to fame by TikTok testimonial videos generating millions of views. 

Then again, The Pink Stuff isn’t a new product in the U.K. It’s 20 years old. And many of Amazon’s other Internet Famous items aren’t exactly startups either. One currently on the list is a hydrating cleanser from CeraVe, which happens to be owned by L’Oreal, the biggest beauty marketer on earth. CeraVe became L’Oreal’s star of the pandemic last year, generating 89% sales growth. And if anything, CeraVe is a testament to beauty brands from big companies growing robustly on Amazon and beyond because they’re getting much better digital and social marketing support.

CeraVe for most of its 15 years on the market was marketed mainly via dermatologist recommendations and didn’t even have an Instagram account when L’Oreal bought the brand in 2017, says Penelope Giraud, global general manager for the L’Oreal brand. Turning the usual social-fueled insurgent narrative on its head, the acquisition by L’Oreal actually helped improve CeraVe’s social media strategy and execution, which has included growing endorsements by “skinfluencers,” a strong presence on Twitter, and most recently TikTok videos developed under the guidance of S4 Capital’s MediaMonks, Giraud says.

'Hyper-competitive'

The Amazon shifts come as smaller brands, which have relied more than bigger ones on digital ad targeting and re-targeting, face the impending loss of personal identifying cookies by next year – something that will make retail data and advertising through retailers, including Amazon, even more crucial for them, Hofstetter says.

“We’ve noticed things have gotten a lot more expensive and frankly hyper-competitive from an advertising standpoint [on Amazon] as a challenger brand to some of the bigger brands,” says Halee Patel Newton, VP of e-commerce for Califia Farms, a marketer of oat milk, almond milk, cold brew coffees and juices. 

Hostetter says her company recently launched Profitero Pro, an analytics tool aimed at helping smaller brands even the score by managing their e-commerce distribution and marketing effort more efficiently. Newton says the tool is helping Califia identify and eliminate out-of-stocks, which, besides hurting sales can also hurt brands’ search rankings, as well as identifying keywords it should be buying ads against and tracking how its products are faring against those keywords in searches. Profitero Pro also helps Califia track its sales and competitive share across e-commerce retailers and spot where it needs to direct spending, she says.

Beyond brute force

Realistically, the bigger brands could use similar help working smarter on Amazon, but they’re gaining right now largely thanks to the broader shift to e-commerce sales and more ad spending, says Fred Killingsworth, CEO of e-commerce consultancy Hinge Global. While the brute force of increased spending will move product, big players still fall short on developing content and optimizing product descriptions to maximize Amazon search rankings organically, he says. 

“Brands realize they have to be there” spending on Amazon, Killingsworth says. “But they’re getting a lower rate of return on that spending. And they need to be looking under the covers to see what fundamental things they need to be doing to enhance their organic performance. Marketing should be an add-on vs. a crutch to prop things up.”

For Amazon direct vendors, sudden increases in ad spending can also lead to out-of-stocks because the retailer’s inventory algorithm doesn’t predict the sales surge, Killingsworth says. This in turn can lead to fines and in the worst-case damage a brand’s performance index to the point that it loses some of its warehouse space.

“If you’re a vendor on Amazon, there’s nothing informing that algorithm that you’re going to spend an additional $50,000 on marketing this month, and therefore Amazon doesn’t take that into consideration when ordering inventory,” he says. Out of 10 e-commerce audits of brands that Hinge has done in the past 30 days, he says, “there are a total of tens of millions of unmet customer demand, where there’s an intent to purchase but not enough product in stock.”

Tinuiti, a digital agency that works with challenger and bigger brands alike on Amazon, finds Profitero Pro helps by matching inventory and supply chain capabilities with ad spending, says Nancy McLaughlin, senior director-search and enterprise services for Amazon and marketplace channels. “We want to ensure what we’re putting spend behind not only has enough product to support the demand, but it’s something that Amazon is actively forecasting against, so we’re putting advertising to the right products.”

While McLaughlin acknowledges that more Amazon spending by big brands is making life harder for smaller ones, she says Amazon is also opening opportunities for smaller players to essentially do TV advertising via its streaming platforms.

Rescue from brick and mortar?

While Amazon will undoubtedly remain an important launchpad for new brands and channel for older ones, it’s far from the only alternative. And for some small brands, opportunity still comes from a very old channel – brick and mortar stores. Helping foster that move is RangeMe, an online marketplace that, for a subscription fee, provides a platform that links small brands with buyers for big retail chains via digital trade shows and virtual meetings. While founded in 2013, RangeMe obviously got a relevance boost from the pandemic as retailers largely shut down face-to-face meetings.

The platform was something of a lifesaver for Deanan Gourmet Popcorn, a Texas brand that saw its sizeable business through school and non-profit fundraiser sales decimated by the pandemic. RangeMe already had helped Deanan move into Aldi stores in Texas before the pandemic and more recently land a slot on QVC in April via a contest called The Big Find. On QVC, Deanan sold its 3,000 unit allotment in 10 minutes, says Karen Alexander, chief of business development, and also, unexpectedly boosted its Amazon business.

Deanan has been on Amazon for four years, and its business there has actually grown about 30% during the pandemic, Alexander says, in part as some former customers from its fundraisers looked for it there. It helps that the gourmet popcorn category isn’t flush with big-budget brands buying Amazon advertising. But even at that Deanan doesn’t show up among the more than 60 products on the first page of an Amazon category search listing. One thing that surprisingly drove Amazon business for Deanan was the QVC appearance. 

“We came in the next day and looked at our Amazon orders and wondered, ‘Oh, gosh, where did that come from?,” Alexander says, adding that she’s hoping for similar results from an upcoming follow-up appearance on QVC.

RangeMe now works with 70 of the 100 leading retailers and 200,000 mostly small suppliers, says VP-Marketing Brandon Leong. And while the company has been growing for years, the pandemic added a major boost as small brands hunted for visibility. “Before the pandemic we were a ‘nice to have,’” Leong says. “Once the pandemic hit, we were a must have.”