Blog Post - Frank Kochenash , Oct 7 2019

Amazon's private label ambitions

Amazon's private label ambitions

There was some hand-wringing over Amazon's private label actions last week. With the launch of a new shoe under its 206 Collective brand, Amazon launched a shoe that looks very similar to Allbirds. But retailers launching private label brands is nothing new. In fact, Amazon itself pointed out earlier this year that private label products account for less than 1% of its sales, while also highlighting that other retailers may realise 25% or more of their sales from private labels.

Indeed, in the excellent book Retail Disruptors, the authors point out that in the CPG category, private labels account for 21% of total sales in the US and 37% of total sales in Europe. Further, this book goes into great detail describing how the strategies of Aldi and Lidl (among others) are upending grocery retail by offering assortment that is more limited and highly dominated by private label store brands.

So, if private labelling is a well-known strategy with a long history, why do Amazon's actions attract such attention, especially when it's only 1% of their sales? I think there are 3 basic reasons:

First, scale historically was on the side of brands, not retailers. brands used the scale of mass communications (i.e. TV and print) to build nationally-known brands while retailers were comparatively fragmented. Each retailer could develop its store brands but only a rare few could challenge the national brands. The fragmentation of media consumption behaviours and the personalisation of media (e.g. Facebook and Instagram feeds) make it more difficult and expensive to build and sustain national brands.

Second, the physical shelf was always an opportunity for national brands. Even when faced with private label competitors, the mental availability built by national advertising could reliably nudge many consumers toward the national brand. However, the highly personalised listings and recommendations of Amazon and its comparatively limited "shelf space" (i.e. the size of a mobile phone screen or no shelf at all when interacting with Alexa) erode the value of advertising-built mental availability. Basically, Amazon is using scale of a different sort to its advantage.

And thirdly, Amazon represents a different kind of brand. Amazon seems a sort of everyman's Costco, combining trust and perceived quality with mass scale, convenience and value.

Now, these are only 3 suggestions that may explain the outsized attention on Amazon's private label aspirations. I am not saying Amazon will succeed because of these three. They succeed in some categories and not in others (and their record is far from perfect). But we should keep in mind that Amazon (and following in its steps, eCommerce brands more generally) only needs to take a few percentage points of market share to create serious damage on manufacturer brand P&Ls.

But if my logic has some truth to it, then at least one key implication for brands is that they need to consider different approaches to building brands (and creating new ones) that can thrive in an environment where media consumption is more fragmented, but distribution is more consolidated through large at scale eCommerce platforms like Amazon.