Why Amazon Is Expanding Its In-House, Private Label Brands

The answer is pretty simple: to destroy the competition and improve its own margins.

Any other questions about the company's strategy? JL

Leslie Hook and Lindsay Whipp report in the Financial Times:

A key reason for Amazon to expand into private-label goods is to cut out the middleman and increase margins (which) is less than 3 per cent for North America, while its international retail sales generate steep losses. Amazon is using data to see what people are buying, what people are running out of, to utilise this to their advantage and go direct to consumers with their own branded product. Amazon mimic(s) best-selling products, and sell(s) them for a cheaper price.
Amazon’s biggest annual sale event — its Prime Day this Tuesday — will be more of an own-brand special this year.It may go unnoticed by many shoppers, but many more items will be sold under the online retailer’s own labels, with its brands bearing names such as Society New York (for women’s clothing), Happy Belly (for coffee), or Franklin & Freeman (for men’s shoes).The retailer has been quietly expanding its stable of in-house brands, a move that could help boost thin retail margins and pose a threat to traditional household names.

The most recent Amazon offerings are consumable products such as organic baby food and coffee, added last month, which mark its first foray into food. As private-label products, Amazon does not manufacture them itself, but controls the branding and specifications.

The move towards private label could have a big impact on companies such as Procter & Gamble, Clorox, Kimberly-Clark, and Edgewell, says Bernstein analyst Ali Dibadj.

However, he cautions that not all of Amazon’s in-house products were successful. Last year, it ran into problems with its in-house nappies, and decided to pull them after they earned poor reviews. “We’ve seen them fall flat in the CPG [consumer packaged goods] world before,” he notes.

While Amazon discloses little about its private-label brands, analysts have counted thousands of items that are now sold under them. The most visible is AmazonBasics, which was launched in 2009 and has more than 900 products, ranging from sheets to household electronics such as speakers.

One of the more successful efforts has been in apparel. Seven private-label fashion brands have been introduced as the site has become increasingly popular for buying clothes.

Popular in-house apparel includes commoditised items such as white socks or men’s khaki trousers, which are relatively easy to make. Higher end fashion has proven more elusive, though, and Amazon shut down its flash sale clothing site MyHabit earlier this year.

Morgan Stanley estimates that Amazon is the second-largest apparel seller in the US behind Walmart, helped by the shift to online buying of clothes. By 2020, Amazon could be the source of a fifth of US apparel sales, from 7 per cent now, a figure that is coming at the expense of department stores such as Macy’s.
A key reason for Amazon to expand into private-label goods is to cut out the middleman and increase its margins. The company’s operating margin for North American retail is less than 3 per cent, while its international retail sales generate steep losses. “Its move into private label signals that it’s working to make its retailing business more profitable,” says Michelle Grant, head of retailing at Euromonitor. “It’s not going to leave money on the table if it can be successful, especially when Amazon has more control over the distribution and shipping of these products.”

Amazon is muscling up in this area at a time when bricks-and-mortar stores from Walmart and Kroger to Whole Foods are competing fiercely in the private-label arena. This competition pushed store brand sales to a record of $118.4bn last year, an 18 per cent increase, according to the Private Label Manufacturers Association.

Retailers are becoming more innovative with their store brands, introducing higher end goods such as organic produce, rather than just using their brands as a way to lure customers focused on value. This reflects US consumers’ changing shopping habits — they will pay for quality, but are far more careful than before the financial crisis, executives have said. Combined with a millennial-led demand for organic food, store-brand organic ranges have grown particularly quickly.
Amazon’s push is particularly worrisome for competitors given the vast amounts of information it has about the items it sells on its site.
“Amazon is actually using data to see what people are buying, what people are running out of, and they are starting to understand that they can utilise this to their advantage and go direct to consumers with their own branded product, which I believe is the wave of the future,” says Chad Rubin, chief executive of Skubana, a company that helps Amazon sellers manage their sales.
One concern for his sellers is Amazon’s tendency to mimic the best-selling products in certain categories, and then sell them for a cheaper price.
With that in mind, analysts expect Amazon’s next push could come in basic household goods such as laundry detergent or shaving razors.