Emails released by the House Judiciary Committee this week confirm an accusation that critics have long launched against Amazon: that the aggressive lowering of diaper prices in 2009 and 2010 was designed to weaken an emerging rival.
That rival, Quidsi, had gained popularity with a site called Diapers.com that sold baby supplies. Amazon had good reason to be concerned. As journalist Brad Stone wrote in his 2013 book on Amazon, the Bezos company didn’t start selling diapers until a year after Diapers.com did. At the time, diapers were viewed as too bulky and low-margin to be profitably delivered.
But Quidsi’s founders figured out how to do it. They optimized their packaging for baby products and set up warehouses near metropolitan areas. That not only allowed them to get cheaper ground shipping rates, it also allowed them to provide overnight shipping to most of their customers, in many cases faster than Amazon’s own shipping.
Quidsi’s plan was to gradually expand to other retail categories, as Amazon had done a decade earlier. If Quidsi’s growth had continued without control, the company could have become a major rival to Amazon. But Amazon made sure that didn’t happen, first by launching a brutal price war and then buying the company. The new emails provide insight into Amazon’s thinking during this fight.
At Wednesday’s hearing before the House Judiciary Committee, Representative Mary Gay Scanlon (D-Pa.) Confronted Bezos about Amazon’s aggressive diaper price cut. Bezos replied that he did not remember the details.
“What I can say is that the idea of using diapers and products like that to attract new customers who have new families is a very traditional idea,” said Bezos.
When Scanlon asked how families benefited from Amazon raising prices after driving out a major competitor, Bezos replied, “I don’t agree with that premise.” He noted that there were many other places to buy diapers, including numerous traditional retailers.
“They are our biggest competitor in the diaper space”
In 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 by the House Judiciary Committee. “They keep the price pressure on us. They apparently have lower compliance costs than we do.”
In a follow-up a few minutes later, he wrote that “we need to match the prices of these guys regardless of cost.”
According to Stone, an Amazon executive met with the Quidsi founders in 2009 and encouraged them to consider selling the company. The founders declined. Soon after, Amazon cut its diaper prices by as much as 30 percent.
But Quidsi continued to grow. By 2010, the company had earned the loyalty of thousands of young parents and had reached $ 300 million in revenue.
In June 2010, Quidsi announced that it would expand to a second product category with a new site, soap.com. That caught the attention of Jeff Bezos, who asked several subordinates for their opinions in an email on June 8.
“Given diapers.com’s strength and competencies, soap.com is our most important short-term competitor in the hpc space,” Herrington told Bezos and other Amazon executives (HPC is apparently a reference to “health and personal care “, one of Amazon Product Categories).
“We have already started a more aggressive ‘plan to win’ against diapers.com in the diaper / baby space,” Herrington continued. In addition to offering “market leading prices on diapers,” Herrington wrote, Amazon was preparing to launch a new “Amazon Mom” program that offered parents greater discounts on diapers and related products if customers subscribed for a subscription.
Amazon raises the pressure
Quidsi’s founders didn’t want to sell their company, but Amazon’s diaper price war was starting to hurt Quidsi. Growth slowed and Quidsi struggled to raise additional capital to continue expanding.
On September 14, Quidsi’s founders flew to Seattle to meet with Amazon and discuss a possible acquisition. While the Quidsi founders were sitting in a meeting with Amazon Brass, Amazon hit Quidsi in the stomach. Announced a new program called “Amazon Mom” that offered free Prime service and an additional 30 percent discount on diapers if users signed up to get them through Amazon’s monthly “subscribe and save” program. This was a greater discount than Amazon offered on most other Subscribe and Save items.
This put Quidsi in an unsustainable situation, as Stone writes:
That month, Diapers.com listed a Pampers case at $ 45; Amazon priced it at $ 39, and Amazon Mom customers with Subscribe and Save could get a case for less than $ 30. At one point, Quidsi executives took what they knew about shipping fees, taking prices into account wholesale from Proctor and Gamble, and calculated that Amazon was on track to lose $ 100 million over three months in the diaper category alone.
Amazon’s losses may have been even greater. During Wednesday’s hearing, Scanlon said internal documents obtained by the committee showed that Amazon lost $ 200 million in a single month for diaper products.
Amazon knew it was bleeding Quidsi. An internal email later in September discussed the price cuts Quidsi was forced to make to compete with the new Amazon Mom discounts. “They hope to lose a lot of money in the coming years,” wrote executive Peter Krawiec. “This will make things worse.”
Quidsi did not have the money to wage a long price war with Amazon, and venture capitalists were reluctant to give Quidsi more money to fight what seemed like a desperate battle. So in November Quidsi reluctantly signed a merger agreement with Amazon.
“I do not remember that”
When Stone was writing his book, an Amazon executive told him that (in Stone’s words) “everything that Amazon did later in the diaper market [after mid-2010] It was planned in advance and unrelated to competing with Quidsi. “But the recently released emails contradict that claim. 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 this plan weakens the core business of diapers for diapers.com, it will delay the adoption of soap.com.”
Amazon’s claim is also difficult to match with the company’s post-acquisition shares. Stone notes that “one month after announcing the Quidsi acquisition, Amazon closed the [Amazon Mom] new member program. “Then, a few weeks later, when the Federal Trade Commission was analyzing the deal unexpectedly, Amazon reopened Amazon Mom, but at lower discounts. Indeed, Amazon Diaper prices went up shortly after the acquisition.
When Scanlon asked if Bezos had signed the increase in diaper prices after the acquisition, Bezos promised ignorance.
“I don’t remember that at all,” he said. “We match competitive prices. I think we follow diapers.com.”
The FTC finally approved the deal. Amazon initially let Diapers.com continue as a separate service, but closed it in 2017.
