Amazon concentration is broader than revenue concentration

If Amazon represents 30 percent of company revenue, the board will notice. But revenue percentage alone understates the dependency. A brand may also rely on Amazon for customer discovery, inventory velocity, advertising demand, product reviews, pricing reference points and cash conversion.

The board therefore needs to understand Amazon concentration as a system of dependencies.

Six forms of concentration

• Revenue concentration: how much sales volume depends on Amazon.
• Contribution concentration: how much absolute contribution comes from the channel.
• SKU concentration: whether a small number of ASINs drive a disproportionate share of performance.
• Inventory concentration: how much working capital is committed to Amazon-specific inventory positions.
• Demand concentration: whether paid and organic marketplace discovery has become the brand’s primary source of customer demand.
• Operational concentration: whether accounts, data, advertising or fulfillment depend heavily on one platform or a small number of employees.

The wrong question

The wrong board question is, ‘Should we reduce Amazon?’ A strong channel should not be weakened simply to make a concentration chart look better.

The better question is, ‘What happens to the investment thesis if Amazon economics, policies or performance change materially?’

Scenario testing

I would ask management to model a few plausible shocks: a meaningful increase in marketplace fees, a sustained decline in conversion, loss of the Buy Box on key products, a temporary account disruption, rising advertising costs, or a shift in fulfillment economics. The board does not need a prediction. It needs to know whether the company has options.

Risk can be worth accepting

Concentration can be rational when the economics are attractive and the company understands the dependency. The governance problem is not concentration itself. It is concentration that is poorly measured, poorly priced or assumed to be permanent.

What good governance looks like

A board should see concentration trend lines, channel contribution, key dependencies and mitigation choices. Management should know which risks it is deliberately accepting and which it is actively reducing. That is a much more useful discussion than setting an arbitrary Amazon revenue ceiling.

I work with PE sponsors, CEOs and boards where ecommerce, marketplaces or channel complexity can materially affect enterprise value. If that is a capability gap on your board, I am always interested in comparing notes.

James Thomson – former Amazon executive, four successful exits, board member/investor, and author of two books on marketplace governance and brand strategy.