November 10, 2010, 2:42 PM
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Who wins the Amazon/Diapers.com price war? Everyone

Mark Brohan

Research Director

It’s the consensus among several online retail analysts and web merchants that Amazon.com ended what was shaping up to be a pretty nasty price war in the diapers and baby item replenishment niche when Amazon, No. 1 in the Internet Retailer Top 500 Guide anted up $500 million on Monday to acquire Quidsi Inc., the parent company of Diapers.com

Generally in a brutal war there’s bodies and casualties everywhere but in this case I think both sides can lay claim to a victory.

Since Amazon.com entered the space in September 2009 with the introduction of Amazon Moms, a loyalty program for mothers of toddlers and young children that features free two-day shipping and discounts of up to 30% off diapers and other related items, there’s been a brewing price war.

When Quidsi, No. 85 in the Internet Retailer Top 500 Guide, under the direction of founders Marc Lore and Vinit Bharara burst onto to the web retailing scene in 2005 with Diapers.com, the company has been on a sales tear. In 2010, Lore told me he thought Diapers.com and its related web sites—Soap.com and BeautyBar—would most likely generate $300 million, an astonishing increase of 11,900% from annual sales of $2.5 million five years ago.

In just over five years Lore and Bharara built Diapers.com into a niche retailing powerhouse by successfully executing on a business model that delivered high volume, but low margin baby replenishments to busy Moms in less time.

By taking the process online and steadily building a fulfillment base that could pick, pack and ship a reorder in as little as 20 minutes and guarantee two-day delivery to more than 70% of the continental U.S., Lore and  Bharara made it easy and convenient for Mom to spend less time loading the kids into their car seats and driving to the store to get another bulky package of Pampers. Instead, she could order online, take advantage of a unique user community to share parenting experiences, trials and tribulations with friends and family, and get plenty of “how to” advice.

In its short history, Diapers.com had built up a base of several million loyal customers. When the big chain retailers shunned diapers and related baby products as an online space that wouldn’t generate sustainable revenue, Lore and  Bharara saw an opportunity and made Diapers.com prosper.

But in large measure because of Amazon’s entrance into the market, I don’t know how long that prosperity would have lasted. In the last year, there’s been a budding price war between Amazon.com and Diapers.com. It’s hard to win a price war when your rock bottom price for a big pack of Pampers is $45 and Amazon, the world’s biggest online retailer, can offer the same item at $39.

It’s the opinion of several Amazon watchers, including ChannelAdvisor CEO Scot Wingo, that Amazon, with its deep pockets, savvy merchandising teams and formidable technology base, would have won the price battle hands down over Diapers.com. Avoiding a long price war also may have been one of the reasons that brought Quidsi executives to the negotiating table, says Wingo. “Diapers.com was growing at greater than 100% a little over a year ago—Amazon recognized the opportunity here and launched Amazon Mom in September of 2010, quickly becoming Diapers.com’s largest competitor,” he says. “For the past two months Amazon has been embroiled in a price war with Diapers.com, so I imagine that either Amazon found this space more difficult than they expected and went the merger and acquisition route, or they tried to acquire Diapers.com to no avail, so they strong-armed them with a price war until Diapers.com gave in to the acquisition.”

So even if Amazon.com won the price battle, I see both sides winning the war. When the deal, which is expected to close next month, is complete, Amazon will have added another successful niche retailer to its ever growing merchandising base. In Quidsi, Amazon is getting a company that truly owned its niche because it single handedly invented the niche. Quidsi’s superior customer service program will blend in nicely with Amazon. The biggest online retailer also gains access to another generation of shoppers—young moms and their kids—and a leadership stake in what some analysts see as easily a multi-billion dollar web merchandising category. “This is a $10 billion category that is sustainable and growing quickly,” says Wingo. “The Diapers.com acquisition makes Amazon a clear leader in the $10 billion, and rapidly growing, consumer goods e-commerce category. It will be interesting to see how competitors like Wal-Mart Stores, GSI Commerce and eBay react as well as what the traditional manufacturers such as Procter & Gamble do.”

For Quidsi, the acquisition by Amazon gives them the opportunity to operate nearly independently, but with a new parent company with the best personalization technology in the business and an almost unmatched fulfillment program. It took five years for Diapers.com to build up a pick, pack and ship program that offered same-day delivery to customers in Manhattan and other parts of New York. But In no time flat via Amazon Prime’s daily delivery service, Quidsi should be able to roll out to multiple other large cities, including Philadelphia, Seattle, Boston, Washington, DC, Baltimore, Las Vegas, Chicago, Indianapolis and Phoenix. Amazon’s bigger resources can also help Quidsi fast track its business development cycle, which includes the launch of more niche sites such as one for toys, which is potentially scheduled for early next year. “We are excited to be part of a company that will help us to serve an even larger audience,” says Lore.    

In what could have been a “take no prisoners” price war between Amazon and Diapers.com, I reiterate my earlier observation that both sides win. The only real losers I see in this deal are the competitors who stand to lose business to an Amazon/Diapers.com accelerated ground game. Anyone else in the baby space up for a potential merger or acquisition?

Comments | 1 Response

  • Having been entrenched in the diaper wars since the early 1980's as Marketing Director for Huggies, I've seen so many "huge" competitors implement the EDLP diaper strategy. Giving away diapers is how Toy's R Us grew their toy business. Give away the diapers, get mom in the store and maybe she'll by a toy or game. That worked fine for about 10 years until diapers became a really important part of the product mix and needed to justify its existence. This led to higher diaper prices at TRU which reduced the draw. At the same time WalMart came on strong in toys and TRU was caught with a double whammy - losing money on diapers and declining toy sales. Sears also tried this strategy. At the time they were the #1 retailer. They brought in diapers and gave them away, lost $10 million year one on Huggies alone and quickly got out. The winner in the Amazon/diapers.com transaction were the diapers.com guys. Like those that have come before, Amazon will tire of losing money diapers. Its a game that no retailer has ever been able to win. Moreover, diapers are part of the strategic baby care category at WalMart and they won't sit back and let Amazon take share. Plus, they aren't going to let Amazon eat into baby products via online. They will put a stop to that. At $500 million (+ $45MM debt), this is a very dubious buy on the part of Amazon. As they say... history repeats itself. Assuming you can break even on diapers (history shows this has rarely ever happened by anyone who wanted to be the leader), imagine how many baby care products you'd have to sell just to get your bait back. It sounds good on paper, but the reality is its never worked.

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