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A former Amazon employee has a warning for brands

A report last week suggested that Nike was close to inking a wholesale partnership with Amazon, causing many to cringe just thinking about the effects such a deal would have on struggling retailers. Nike, however, would come out ahead, as it could potentially see an additional $300 to $500 million in sales.

Former Amazon employee Elaine Kwon, however, says the deal is a bad move on Nike's part. While such a partnership might be lucrative right now, she says it will ultimately hurt Nike. Amazon's bullish strategy to out-price competitors isn't great for a company with Nike's brand recognition and customer allegiance.

"Wholesale with Amazon ends up creating a downward spiral of brand equity," Kwon says during a recent call with Racked. "Most brands don't think about it this way, but when you are directly wholesale, you forfeit any and all pricing control, and it becomes problematic because of the way Amazon matches prices — not just across the site, but from across the web. There is serious concern to be had about how Amazon's pricing will affect Nike's business and image in the long run."

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For a brand working with Amazon, there are two options: Vendor Central and Seller Central. With Vendor Central, companies sell wholesale directly to Amazon and are given brand-specific pages; with Seller Central, companies sell as third-party vendors on Amazon's marketplace. Many brands have moved to the former; they're automatically included among the brands Amazon Fashion promotes, which gives them extra exposure. The latter, on the other hand, just drops them into Amazon's giant pool of sellers. Kwon says quite frankly, however, that Amazon's wholesale arm actually leaves many companies "bleeding" because of Amazon's promotional pricing strategy (Amazon did not respond for comment for this story).

Despite Jeff Bezos telling the New York Times in 2012 that fashion brands wouldn't fall into Amazon's aggressive pricing game, many brands have experienced the opposite — no doubt one reason many luxury brands still aren't selling on the site. (While Amazon says it doesn't price-match, its official statement is that "sometimes lower prices are offered as part of a promotion, and other retailers will decrease their own prices in response. As a result, Amazon will decrease their price during the promotion, and after the promotion the price may be the same or even lower than the original promotional price in order to offer consistently low prices.") Back in April, NYU professor and business intelligence firm L2 founder Scott Galloway told Racked that "no one looks at Amazon and thinks that it's a great partner. It's considered the evil empire."

While Kwon agrees that working with Amazon is unavoidable for most — the company's e-commerce revenue is reportedly going to grow 50 percent by 2021 — she also saw firsthand what wholesaling did to fashion brands over the course of her almost-three years inside Amazon. While working on the Amazon Fashion team from 2014 through 2016, Kwon advised several luxury brands like Gucci, Versace, and Salvatore Ferragamo. She watched "huge luxury brands that had worked hard for decades to build a quality brand" see their products get serious markdowns because of Amazon's pricing system. It wasn't that Amazon was specifically seeking to mark down the luxury items as much as the site had to compete once "the same items were being flooded by a gray market," Kwon explains.

"It was problematic because three months down the line, the items were marked down and all of a sudden it became the standard. Amazon begins to lose money on the product, and so we went back to companies, telling them that they either had to make up for the loss or lower the price to supplement what they are doing," she says. "As someone who had to have these conversations, I've seen that it's devastating to the business."

Kwon adds that she often did cost-analysis assessments when beginning to work with new fashion brands at Amazon, and even though she found that many companies were about to get into a partnership that was a "lose-lose situation," Amazon, of course, was never one to turn away business.

Kwon also says Amazon isn't always the most supportive retail partner. Even though Amazon Fashion has a large team dedicated to its wholesale business, she says that, like every other tech-first business, it's focused more on stats, sales, and profits and losses (P&L) than on building relationships: "It's not how a traditional retailer like Macy's functions. At [Macy's], each buyer comes with a team, and they each have accounts. At Amazon, it's more like one person focuses on the P&L of 300 brands, so you can imagine the sheer volume. Half of those brands emailing you every single day is too much on one person's plate, and so there are quite a few that don't even get to talk to Amazon on a monthly basis!"

Kwon knows better than anyone that Amazon has giant ambitions in fashion, and that doing business with the company is necessary. She's now running a startup called Kwontified, where she works with brands to get them out of an Amazon wholesale partnership and instead onto Amazon's marketplace, which she considers the better business move . (Kwon was not able to share other brands she is currently working with due to their sizable business on Amazon.) The shift from wholesale won't just benefit brands because it gives them control of their pricing; Amazon's marketplace actually drives most of the company's profit.

"Amazon is giving more attention to wholesale, and that side of the business has a lot more overhead, but the marketplace is actually the side that is growing organically and is making more money," says Kwon. "Nike is choosing a side of the business that is, in many people's eyes, a losing side. From an insider's point of view, it's a head-scratcher. I wonder if anyone asked Nike, 'Are you sure you want to do this?'"

There's a better way for Nike to work with Amazon, Kwon adds. The brand could focus on building a stronger marketplace page, which would still give it access to Amazon's perks, like Amazon's fulfillment network and having access to its Prime members. Instead, Nike might now soon find itself "trapped on the vendor side." It might have enough capital to weather the losses that come with wholesaling to Amazon, but other brands that might try to follow in its footsteps, however, will likely not have the same luck.

Correction: This story was updated to accurately describe Kwontified's relationship with brands.