What Amazon’s Private Label Business Means for Retailers

Amazon.com has more customer search and purchase data than any e-commerce business. It can build a private-label brand in six months using these data. Amazon’s private-label products have access to the best merchandising and targeting on the marketplace. And the brand doesn’t even need to be profitable. How do national brands compete with this?

According to Business Insider, Amazon offers everything from burgers to beauty products under its collection of 34 private-label brands. According to an analyst note from SunTrust Robinson Humphrey, those brands racked up around $2.5 billion in sales for Amazon in 2016 alone. Combined, sales of those products could add $1 billion to its gross profit by 2019, Morgan Stanley analyst Brian Nowak said in a research note issued in early December.

Third-party sellers thought for a while that creating their own private-label products would counter the impact that Amazon would have on their businesses. By creating its own private-label products, Amazon competes against its third-party sellers and weakens national brands that may be wholesaling to Amazon. Amazon realizes it can become the seller of a similar looking product at better margins or, better yet, meaningfully lower prices, enabling Amazon’s brands to become category leaders based on sales and reviews.

The Private Label End Game

Besides generating additional revenue, the real reason for these private labels is to provide Amazon with an advantage over branded products. The advantage is that Alexa picks Amazon private-label products over branded products when customers voice search for products. (A trend that some say will reach majority share of search types by 2019.) That provides Amazon with a revenue stream that cannot be touched by rivals or brands.

Amazon also uses supply and demand by making some of these private-label brands only accessible to Prime customers. Thus, customers who want to purchase these products require a Prime membership, which is yet another avenue for Prime membership growth.

Brands Need to Be Aware

As long as Amazon refines its skills in building private-label brands quickly, national brands will need to play catch up starting with these three areas:

1. Being prepared to launch new brands in under the usual two- to three-year cycle that's currently seen with national brands.
2. Considering the launch of private-label brands that are generating annual revenue only $20 million to $50 million, not the usual $500 million to $1 billion threshold used by national brands currently. This is yet another mind shift that brands will need to make to counter Amazon’s current private label momentum.
3. Ensuring all of their existing brands’ product listings are properly optimized, and supported with appropriate levels of advertising spend on Amazon.

James Thomson is a partner of Buy Box Experts and co-author of the new book, “The Amazon Marketplace Dilemma: A Brand Executive’s Challenge Growing Sales and Maintaining Control."