Is Amazon's private label a threat?
With global sales of $280 billion, Amazon is the e-commerce industry’s benchmark for efficiency and reliability — a pioneer in AI-driven search and recommendation engines that is known for creating highly personalized product experiences. This is complemented by a sophisticated distribution network that provides affordable, next-day delivery to millions of locations daily.
So it is true that Amazon is a master of online fulfillment, but it is not quite a powerhouse in private label or physical retailing — yet — two factors it wants to change.
First, in 2017, Amazon acquired Whole Foods (and its store brands such as the esteemed 365 Everyday Value brand). Then the retailer launched its cashierless Amazon Go stores in 2018 and has been expanding since with locations in Seattle, Chicago, Washington, D.C., and in California.
Now, there’s Amazon Fresh, the e-tailer’s full-fledged grocery format that just opened its doors Aug. 27 in Woodland Hills, Calif. A North Hollywood location is set to follow, as well as two stores outside Chicago. The stores offer various ways for shoppers to shop from using an Amazon Dash Cart, a smart cart that syncs up with the shopper’s Amazon app, mobile payment, as well as traditional checkout experiences. The grocery store also launched two brand-new private brands: Fresh, a meat, seafood, bakery, salsa and fresh food brand, and Cursive, a line of red and white wines.
The Amazon Fresh stores also carry 365 Everyday brands, Amazon Brand Solimo items, Happy Belly dairy products, Wag pet care, Amazon Kitchen prepared foods, Amazon Elements supplements and more. The concept showcases the retailer’s true potential of its private label in the brick-and-mortar space.
And when it comes to private label, Amazon is also facing the lingering investigation by the U.S. House Judiciary Committee into its alleged use of third-party seller data to enhance its private label products, a policy Amazon said it does not tolerate but one that CEO Jeff Bezos couldn’t guarantee has not been broken during testimony late July. He said during his opening statement that roughly 60% of its sales come from third-party sellers and it hosts more than 2.5 million third-party sellers in its online marketplace (more on the investigation in the sidebar on page 20).
That aside, over the past decade, Amazon has been slowly building an online private label program across multiple categories. In 2019, this business grew 28%, generating sales of $1.3 billion, per Matt Pace, senior director, client insights and account management at 1010data, in the company’s “1010reveal” report. Amazon itself has said that private label currently only accounts for less than 1% of its total sales, far less than a traditional grocer hovering around 25% of sales from store brands.
Of its private brand portfolio, fashion is the leading category. Coresight Research reported that of the nearly 150 private brands under Amazon, three-fourths are apparel. However, in CPG, Amazon’s private label growth is outpacing that of its total private label business. CPG grew 81% in 2018 and represents about 10% of Amazon’s private label offerings, according to Numerator’s April 2019 report, “Amazon’s Private Label Proliferation.”
Still, traditional retailers and their private label suppliers are not losing sleep. Amazon’s private label success across various food, beverage and CPG categories has been mixed, with most activity in convenience-driven categories (e.g., diapers) and opening price point products where shoppers can be brand agnostic.
“Nobody has called out in the market place that business is being damaged by Amazon’s private labels,” said Gene Bornac, senior vice president of retail at Envista. “[Basic] consumables are open for them to take. These are boring, everyday products that tend to be in mass off-price categories.”
But there are areas of dominance.
Batteries, marketed under its largest private brand umbrella, AmazonBasics, are Amazon’s top battery label with a 30% share of category sales on its site, according to 1010data. Amazon’s private label diapers and baby wipes, Amazon Elements and Mama Bear, command 9% of category sales.
Sales of Amazon Brand Solimo, encompassing CPG and other categories, grew nearly four-fold to $81 million in 2019 and is Amazon’s second-largest private brand, said 1010data. Another brand, Presto!, saw sales nearly double in 2019. Presto! includes paper goods, laundry detergent, kitchen items and other products. Presto! paper towels (11% share) and Presto! Toilet paper (10% share) are the number three and five brands in their categories (note that numbers are pre-coronavirus).
Amazon’s private label coffee pods, trash bags and motor oil are gaining ground. But private label vitamins, supplements, beauty, body care, dog food and salty snacks are “struggling to gain traction,” 1010data said.
If Amazon’s brick-and-mortar stores take off, private label sales could further escalate, driven by added exposure and the ability to physically merchandise higher end private labels. This subsequent brand awareness could also buoy online sales.
Amazon already has massive online reach. Today, more than 55% of searches begin on Amazon, Bornac said. “And 100 million households have Prime. This gives them a massive leg up.”
Already, sales of Amazon’s opening price point basics are driven by some shoppers’ brand agnosticism. Chris Perry, vice president of global education at Edge by Ascential, said 66% of consumers click the first search results that appear. “When you type ‘trash bags’ on Amazon, there’s three sponsored ads for national brands and one for Solimo. So, some private brands can disproportionally win online.”
Amazon under investigation
For more than a year, the House Judiciary Committee has been looking into digital markets, including how Amazon allegedly uses data from third-party sellers to fuel private label brands it develops. However, in late April, following a report from The Wall Street Journal, congress stepped up pressure against Amazon on the issue.
Congress leaned on the article and its claims of Amazon collecting third-party seller data to develop competing products. Amazon denied its use of third-party seller data in this way, citing an internal policy against it, and CEO Jeff Bezos said in a letter that the “use of store data is the norm across retail.”
The Judiciary Committee continued to call for Bezos to testify and finally got its wish during a hearing July 29, along with CEOs form Apple, Google and Facebook. Bezos couldn’t guarantee that Amazon had not broken the policy.
As for the argument from the traditional retailing side, Paul Armstrong, a writer about Amazon, including a newsletter “What Did Amazon Do This Week,” said that the concern is Amazon views the third-party sellers that use its platform — and put money directly into Amazon’s pockets — as research to build a competing private label and not as a joint partner, which is where a traditional grocer may partner more with a CPG. He said Amazon uses its wealth of data to continually inform decisions such as recent forays into health and food. “Traditional retailers don’t have the scope, variety, and resources to do what Amazon can because of the size and ubiquity of goods on Amazon,” he said. “An unfair advantage that multiple government organizations and external entities are looking at closely. The costs to develop these for brands that aren’t Amazon are much higher for these companies, Amazon is effectively getting free research and insights that companies pay hundreds of thousands of dollars for.”
TRADITIONAL GROCERS CARRY BETTER BRANDS
For traditional retailers, a key factor that minimizes competition with Amazon is that they have stronger, lifestyle-driven private brands that are are not driven by price alone.
Bornac pointed out Target’s Good & Gather. Introduced August 2019, it emphasizes dairy products, produce and other foods sans artificial ingredients. “It’s less generic and more lifestyle focused, speaking to quality ingredients. It’s competitive with ‘real’ brands.”
Well-developed private brands from Target and other grocery, mass and club retailers have dedicated followings. According to Cadent’s 2019 consumer survey, “Building Private Label Brand Equity,” 54% of millennials said their store choices are influenced by the retailer’s brand. But consumers do not make these associations with Amazon’s private brands, certainly not outside its apparel lines, where there is some consumer loyalty.
“Building loyalty takes time,” said Anthony Laudiero, vice president of operations at Manassas, Va.-based Consorzi Foods, which supplies private label pasta and other Italian fare. “I associate Amazon with efficiency, not food. With stuff I’m agnostic on, like kitchen tools or batteries, I’ll buy Amazon private label. I don’t know that I’d buy specialty Amazon tea. I’d buy it at Kroger or Whole Foods.” (Whole Foods’ 365 brand is offered on Amazon.)
Kroger, Target and other retailers have spent decades building trust in private labels, allowing them to create successful specialty lines. Cadent said 44% of these lines are driven by trends, particularly organic. This further differentiates them from Amazon.
Cadent found consumers value awareness, trustworthiness, uniqueness, quality and clear positioning in private labels. The top five overall rated brands to emerge from Cadent’s study were Publix’ Premium and Greenwise, Kroger’s Simple Truth and Private Selection, and Albertsons’ O Organic.
Kroger’s Private Selection — along with its HemisFares brand — emphasizes mid- to upper-tier gourmet foods. “HemisFares involves very curated, specialty foods, including handmade pasta from a specific part of Italy,” said Laudiero, whose company supplies Private Selection pasta. “Nobody cares where Amazon gets plastic cups.” HemisFares also includes delicacies like truffle Afredo pasta sauce and green castelvetrano olives.
Amazon has dabbled in some private label gourmet items. Under its Wickedly Prime label, it launched specialty teas that included ded pu’er, a fermented Chinese tea, and wulong, a semi-oxidized tea. Without a strong record in private label, they “didn’t seem to move,” said Jason Walker, marketing director at Firsd Tea North America. “They were too niche, too premium and out of the average consumer’s range. Their Solimo brand tea is in a better price range, with more popular flavors like green tea with a little mango flavor.”
Walker, who supplies Fairway, said “tea with a twist” performs better than exotic offerings. The Fairway Collection offers classics like English breakfast and jasmine green tea; its Urban Forager line emphasizes teas with digestive and wellness properties.
Amazon is more effective in coffee. In addition to its successful coffee pods, AmazonFresh Organic Fair Trade Peru Ground coffee is one of the site’s top-rated brands. “They’re still finding their way,” said a private label coffee supplier. “The AmazonFresh name helps generate loyalty. There’s organic coffees, fair trade certified and different roasts. I’m impressed with their portfolio. Clearly they’ve done their homework.”
SNACKS, JUICE & FRESH FOOD
Some categories simply seem to struggle online. Snacks, for one, are generally purchased close to time of consumption, with consumers “grazing” store aisles to make decisions.
“You don’t pantry load them,” said Scott Reindel, vice president of business development and retail strategy at Trophy Nut in Tipp City, Ohio. “The snack aisle has the highest conversion rate in the store. It’s a treasure hunt. It’s hard to do that online.”
Juice has also been challenging. An Amazon private label juice supplier said Amazon has struggled to meet production minimums and only offers core items. Product weight is also a problem. “It’s a slow build and they’re not really innovating. They want to add flavors, but that’s probably a year from now.”
Doing business with Amazon is challenging since Amazon interacts differently than traditional retailers and suppliers. “They try to avoid in-person meetings and aren’t very personable,” she added. “All work is by phone and they don’t give you access to people.”
Amazon has struggled with private label fresh food, too. The business is regional and not all warehouses can accommodate it. “They get good ratings on some consumables, but private label food penetration is extremely low,” said Bob Anderson, president and CEO of Store Brand Consulting. “Building food warehouses is expensive and they have to regionalize them. Plus, people can’t sample the food. Amazon has a huge private label learning curve.”
A FUTURE THREAT?
Down the road, Amazon’s private labels could present more competition for traditional retailers, particularly if it rolls out myriad grocery stores and creates aggressive marketing around the brands in Amazon Fresh and Amazon Go stores. “Ten years from now, I wouldn’t be surprised if they have 2,000 stores,” said Bornac. “They see the disadvantage in not having physical stores.”
The COVID-19 crisis could also help Amazon’s private label. In addition to not wanting to visit physical stores, many consumers turned to Amazon’s private labels because national brands were sold out on Amazon and elsewhere as consumers hoarded certain products. Many new customers may continue purchasing Amazon’s private labels.
During the crisis, Amazon also de-prioritized non-Prime customers and deliveries on merchandise not in high demand to maintain better in-stock positioning on desired items. “This demonstrates Amazon’s ability to react compared to other retailers,” said Bornac. “If their private labels meet demand, they’re ahead. We’ll be in a different situation in a few months. The question is, ‘how will customers remember the experience?’”
Overall, some experts believe Amazon is still testing the waters. “They’ve launched about 400 private labels over the last few years,” said Perry. “Some do well, some don’t. It’s all about figuring out what works. Then they’ll move ahead.”