Emails published by the House Judiciary Committee this week confirm the accusation that critics have met well against Amazon: that the company’s aggressive price cutting for diapers in 2009 and 2010 was designed to reduce emerging rivals.
That rival, Quidsi, had gained traction with a site called Diapers.com that sold baby supplies. Amazon had good reason to worry. As journalist Brad Stone wrote in his 2013 book on Amazon, Bezos ’company didn’t start selling diapers until a year after it made Diapers.com. At the time, diapers were considered bulky and low-margin to be delivered profitably.
But the founders of Quidsi figured out how to do it. They optimized their packaging for baby products and stores positioned near metropolitan areas. That not only allowed them to get cheaper shipping rates – it also allowed them to provide overnight shipping for most of their customers – in many cases, faster than Amazon’s own shipping.
Quidsi’s plan was to gradually expand into other retail categories, the same as Amazon had done a decade earlier. If Quidsi’s growth remained uncontrolled, the company could have become a major rival to Amazon. But Amazon assured that this did not happen first by launching a brutal price war, and then by buying the company. The new emails provide an insight into Amazon’s thinking during this fight.
At Wednesday’s hearing before the House Judiciary Committee, Rep. Mary Gay Scanlon (D-Pa.) Confronted Bezos about Amazon’s aggressive diaper cutting. Bezos replied that he does not remember the specifics.
“What I can tell you is that the idea of using diapers and products like that to attract new customers who have new families is a very traditional idea,” Bezos said.
When Scanlon asked how families benefited from Amazon raising prices after they started a major competitor, Bezos replied, “I don’t agree with that premise.” He noted that there were many other places to buy diapers, including several brick and lime retailers.
“They are our biggest competitor in the diaper space”
By early 2009, Quidsi’s growth had attracted the attention of Amazon executives. “They are our biggest competitor in the diaper space,” Amazon executive Doug Herrington wrote in an email obtained from the House Judiciary Committee. “They keep the price pressure on us. Apparently they have lower delivery costs than we have.”
A few minutes later, he wrote that “we need to compare pricing on these men regardless of cost.”
According to Stone, an Amazon executive met with the founders of Quidsi in 2009 and encouraged them to consider selling the company. The founders failed. Soon after, Amazon lowered its diaper prices by as much as 30 percent.
But Quidsi kept growing. By 2010, the company had gained the loyalty of thousands of young parents and had reached $ 300 million in revenue.
In June 2010, Quidsi announced that it was expanding to a second product category with a new site, soap.com. This caught the attention of Jeff Bezos, who asked several subordinates for their thoughts in a June 8 email.
“Because of the strength and expertise of diapers.com, soap.com is our most important short-term competitor in the hpc space,” Herrington responded to Bezos and other Amazon execs (HPC is apparently reference to “health and personal care” – one of Amazon’s Product Categories).
“We’ve already started a more aggressive plan to win“ against diapers.com in the diaper / baby space, ”Herrington continued. In addition to offering “leading market prices on diapers,” Herrington wrote, Amazon was preparing to launch a new “Amazon Mom” program that offered parents deeper discounts on diapers and related products if the customers sign up for a subscription.
Amazon is speeding up the pressure
Quidsi’s founders didn’t want to sell their company, but Amazon’s diaper price war was starting to hurt Quidsi. Growth was slowing, and Quidsi was having trouble raising additional capital to further expand.
On September 14, the founders of Quidsi flew to Seattle to meet with Amazon and discuss a possible acquisition. As Quidsi’s founders were sitting in a meeting with the Amazon brass, Amazon hit Quidsi in the gut. He announced a new program called “Amazon Mom” that offered a free Prime service and an additional 30 percent discount on diapers if users sign up to get them through the monthly “subscribe and save” program. of Amazon. This was a bigger discount than Amazon offered on many other Subscribe and Save items.
This put Quidsi in an unsustainable situation, as Stone writes:
That month, Diapers.com listed a Pampers case for $ 45; Amazon priced it at $ 39, and Amazon Mom customers with a subscription and Save can get a case for less than $ 30. At one point, Quidsi executives took what they knew about discount rates. shipping, considered in the wholesale prices of Proctor and Gamble, and calculated that Amazon was well on its way to losing $ 100 million over three months in the diaper category alone.
Amazon’s losses could be really bigger. During Wednesday’s hearing, Scanlon said internal documents obtained by the committee showed Amazon was losing $ 200 million a month from diaper products.
Amazon knew Quidsi’s dry bleeding. An internal email later in September discussed the price cuts Quidsi was forced to make to compete with Amazon Mom’s new discounts. “Expect to lose a lot of money in the next few years,” wrote executive Peter Krawiec. “This will make it worse.”
Quidsi didn’t have the money to fight a long-term price war with Amazon, and venture capitalists didn’t say they would give Quidsi more money to fight what seemed like a hopeless battle. So in November, Quidsi reluctantly signed a merger agreement with Amazon.
“I don’t remember”
When Stone was writing his book, an Amazon executive told him that (in Stone’s words) “everything Amazon subsequently did in the diaper market [after mid-2010] it was planned in advance and not related to the competition with Quidsi. “But the newly released emails contradict that statement. Herrington specifically listed the launch of Amazon Mom as part of Amazon’s” aggressive “plan to win” against diapers.com. “Later in the same email, Herrington wrote that” as far as this plan reduces the main diaper business for diapers.com, it will slow down the pace of soap.com adoption. “
Amazon’s claim is also difficult to look at the company’s shares after the acquisition. Stone notes that “a month after announcing the acquisition of Quidsi, Amazon closed [Amazon Mom] program for new members. “Then a few weeks later, as the Federal Trade Commission was giving the deal a closer scrutiny, Amazon reopened Amazon Mom – but at smaller discounts. In fact, Amazon raised its prices. diapers shortly after acquisition.
When Scanlon asked if Bezos was signed when raising diaper prices after the acquisition, Bezos promised ignorance.
“I don’t remember anything,” he said. “We compare competitive prices. I believe we followed diapers.com.”
The FTC finally approved the deal. Amazon initially allowed Diapers.com to continue as a separate service but closed it in 2017.