The Strategy Behind Amazon’s Private Label Push: Customer Loyalty, Supplier Leverage, and Long Term Margins

Amazon created its first private label brands about a decade ago. But lately, something’s changed — Amazon is ramping up its private label brand portfolio in a massive way. What’s going on? Big picture, we think there are three vectors to Amazon’s private label efforts: customer loyalty, supplier leverage, and long term margins.

A Customer Loyalty Strategy

Consumer products companies have spent billions of dollars over decades to build brand loyalty. Why? Because building brands works: customers with a brand affinity stay loyal over time.

Along those lines, we believe Amazon has decided it is a strategic priority to build customer loyalty and preference through the development of private label and exclusive brand products. In a world with an ever-increasing number of “microbrands” and DNVBs, Amazon is betting that customers who find quality products on Amazon that they can’t get anywhere else will become more loyal to Amazon and spend more on Amazon over time because of their loyalty to those private brands.

From this perspective, Amazon is incentivized to build private brand products in as many categories as possible. This is generally good news for private label manufacturers who have built their businesses serving large retailers like Walmart and Target (and who are now increasingly shifting their efforts to serving Amazon) — though they are more easily replaceable than owners of established consumer brands.

In our view, there’s no reason why Amazon shouldn’t offer a private brand option (if not multiple private brand options) for most product categories it sells. Some will succeed, and others won’t. In addition to creating loyalty to private brands, the overall effect of increased selection and value should strengthen Amazon’s position as a first-stop destination in consumer shopping habits, driving traffic and sales for all Amazon vendors and sellers.

A Supplier Leverage Strategy

Amazon Prime has built significant loyalty and habit in consumer purchase behavior since it launched in 2005 — not through retail brand loyalty, but through the sunk cost psychology of pre-paid shipping. It’s one of the amazing business accomplishments of our time.

But Prime is not without its vulnerabilities. Chief amongst them: most of the brands that Amazon sells are owned by other companies. The probability that some companies that own the brands that Amazon’s customers have built loyalty to over time might at some point have sufficiently different incentives than Amazon is non-zero.

For example, one fundamental strategy conflict: brands might increasingly feel like Amazon is not offering the differentiation they want for their products on its marketplace.

Amazon aggregating everyone else’s value chain into their channel, while diluting external Brand value in general, is sort of scary… Just wonder when this starts to rub off on already established brands. Amazon wants a Brand-Free future where they hold the keys to the consumer’s purchase point, on their terms. (Jordan Rice, via Twitter)

The question of whether Amazon and other technology platforms have the potential to change the fundamental nature of brand psychology and create a “brandless” future is an interesting one. The increasingly sophisticated private label efforts from Amazon and others will affect some product categories more than others: categories that are more easily commoditized will see faster and greater disruption, while customers will always have enduring affinity for truly differentiated products.

Big picture, there appears to be a sense of urgency at Amazon to build out its private label portfolio as quickly and broadly as it can to accelerate the process of introducing its customers to its own brands so that, in the long run, if some brand owners decide their incentives aren’t sufficiently aligned with Amazon’s, Amazon will be able to fulfill (ideally large portions of) that demand with (ideally very comparable) private brand products to satisfy as many customers as possible. The better private brand alternatives Amazon can create, the more leverage it will have with suppliers.

A Long Term Margin Strategy

Jeff Bezos is reputed as saying, “Your margin is my opportunity.” Given Bezos’ and Amazon’s long term perspective, margins that look terrible to many other businesses can look attractive to Amazon. That steely view has led Amazon to make investments others haven’t.

Once Amazon establishes more of its own brands and builds loyalty to them over time, it should be able to extract attractive gross margins from the sale of those items, especially compared to the low margins it and most retailers usually earn when selling third party brands.

Could Amazon someday even create luxury brands? (And if so, could Amazon even only offer some brands through certain types of its own physical retail stores one day?) Maybe, but first it must prove that it can move beyond low-emotion private label brands like “AmazonBasics” that primarily compete on price and create a portfolio of brands that have sustaining appeal to different customer segments.

If it can, then private label could be a significant source of margin for Amazon over time — that Amazon can then use to invest in its next “low-margin” business.

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