Following the playbook of countless retailers, Amazon.com Inc. is preparing to broadly expand its fledgling lineup of private-label brands to include an array of grocery items such as milk, cereal, and baby food as well as household cleaners, people familiar with the matter said.
Amazon’s planned expansion in the private-label business mirrors a more traditional retail model where name-brand products are sold beside store-owned goods. Private labels have become a vital business for mass-market retailers, generating stronger margins and building loyalty with consumers who no longer view generic products as lower quality.
In early May 2015, Amazon sought trademark protection for more than two dozen categories under its Element brand, including coffee, soup, pasta, water, vitamins, dog food and household items like razors and cleaning products. Diapers and baby wipes—the latter of which is still on the market—were Amazon’s first line of Elements, available to customers who pay $99 a year for a Prime unlimited shipping membership.
Amazon Element private-label brandname (Click Image To Enlarge)
Amazon has approached some private-label food manufacturers seeking a partner, according to people familiar with the matter. Those discussions included TreeHouse Foods Inc. of Oak Brook, Ill., one of the larger private-label producers, with $3 billion in sales last year, said one of the people.
Amazon declined to comment. A spokesman for TreeHouse declined to comment on any talks with Amazon but noted the company does “business with all of the nation’s top retailers and operates in 15 grocery categories.”
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The business isn’t without challenges. Amazon must rely on outside manufacturers to design the products and then vouch for the quality, as it did when it launched its Elements brand of diapers last December. The next month, Amazon pulled the diapers from its site, citing a flawed design—customers had complained about quality issues.
Many of Amazon’s coming private-label products will be ingested, making quality-control a critical issue.
The Seattle retailer has long dabbled in private labels. Besides diapers and wipes, it has offered all customers batteries, USB cables, backpacks and even ceramic plates under the Basics label, noted for its spartan black-and-white color scheme. And Amazon sells patio furniture and linens under its Strathwood and Pinzon brands.
Not all of Amazon’s private-label ventures have been winners. It discontinued a line of cookware endorsed by a Seattle chef in 2012 and a tool line, in addition to the diaper snafu.
Never before has Amazon ventured into perishable goods. By rolling out a broad portfolio of private-label products, Amazon could yield higher profit margins, while also gaining leverage with its largest suppliers to pare prices—though many of Amazon’s vendors also produce private-label goods.
Rivals ranging from Costco Wholesale Corp. to Target Corp. to Walgreens Boots Alliance Inc.offer an array of store-brand products with names including Kirkland, Archer Farms and Nice, respectively. Private labels made up about a third of Target’s $73 billion in sales last year.
Eddie Yoon, a principal at brand consultancy The Cambridge Group, says.
“It makes a lot of sense for any retailer to get into private label. Private label has a lot of room to grow in terms of sales and can attract a new value-focused customer.”
Mr. Yoon said that despite their lower price tags, private label merchandise tends to have higher margins than name-brand goods for both retailers and manufacturers because of savings on marketing and brand development.
Market researcher Information Resources Inc. estimates private-label packaged goods was a $120 billion market in the U.S. in 2014, up 2.1% from a year earlier. Private-label merchandise represented about 18% of money spent on all packaged goods in the U.S. last year.
For the year ending 2014, Amazon reported a $241 million loss on $89 billion in sales, has been pushing to expand sales of food online, including through its Fresh grocery delivery. And last year it rolled out Prime Pantry, which allows customers to order small items that the company generally only offered in bulk, such as a single shampoo bottle or bag of potato chips.
Private-label goods also could bolster Amazon’s reputation as a lower-cost retailer. IRI estimates that private-label products are, on average, 28% less expensive than their name-brand equivalents.
Amazon’s diapers were about 10% less per diaper than the priciest offerings from Procter & Gamble Co. or Kimberly-Clark Corp.—makers of Pampers and Huggies—but 25% more expensive than P&G’s Luvs and Target Corp.’s Up & Up brand, according to an analysis in December by Sanford C. Bernstein & Co.
It couldn’t be learned how Amazon may price its private-label food goods, when they may be released or whether they will be sold exclusively to Prime members, as the baby wipes are.
But it seems likely Amazon would sell them through its Amazon Fresh grocery delivery service, available today in a handful of U.S. cities.
It also appears Amazon will be transparent about where its Elements products come from, as it has done with the diapers and wipes. The trademark filing mentions the slogan, “Every pack has a story.” Amazon’s page for its wipes details how they are produced by manufacturer Nice-Pak Products Inc., starting with the process of moistening them with purified water from the White Lick Creek Aquifier in Mooresville, Ind.
COMMENTARY: A huge market opportunity awaits online retailer Amazon as it plans to launch its own private-label brands of perishable groceries including milk, cereal and baby food. However, the e-commerce giant must overcome challenges in quality, the distribution logistics of perishables and customer preferences that the firm hasn’t previously faced.According to Amanda Nicholson, professor of retail practice at Syracuse University’s Whitman School of Management, “There’s plenty of room for growth [in online grocery deliveries] … in a time-pressured society Twitter ,” She noted that upscale supermarket chains like Wegmans have built that reputation over time, but her optimism came with a crucial rider:
"With food items, especially private-label brands, consumers need a sense of faith that this is going to be a good product, and that takes some time to build,” she said,“I don’t think Amazon has that automatic advantage at all.”
According to Wharton management professor Daniel Raff, Amazon will benefit from the refinement over the years in the business model for home deliveries of online grocery orders. He pointed to two critical factors for success — warehouse locations that can guarantee freshness of produce; and sophisticated routing and planning of transit schedules to ensure timely deliveries. He noted that Amazon has been building warehouses on the outskirts of major U.S. cities.
Nicholson and Raff discussed the opportunity Amazon faces in private-label food deliveries on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.) Amazon’s plans were first reported by The Wall Street Journal in late May.
Amazon already offers private-label brands in products including cables and batteries, but this is the company’s first attempt to extend that to perishables. As part of its plans for private-label food items, Amazon sought trademark protection in early May under its Element brand for products like coffee, soup and pasta, according to the Wall Street Journal report. The U.S. market for private-label packaged goods was worth $120 billion in 2014, the story said, citing research firm Information Resources.
“There is plenty of room for growth [in online grocery deliveries]… in a time-pressured society.” – Amanda Nicholson
The Quality Threshold
Ensuring quality will be the biggest challenge Amazon will face in food deliveries, said Nicholson. She recalled Amazon’s abortive launch last December of a brand of diapers under its Elements brand. Amazon had to withdraw the product from its site a month later after customers complained of quality problems.
Unlike with delivering books or music, the quality bar is set much higher for food items, said Nicholson.
“When we are talking about melons or fruit or private-label yogurt, most of us have very specific likes and perhaps dislikes.”
Also, in certain food categories like melons, avocados and other fruits that can easily become bruised, most customers may want to see what they are buying, said Raff.
He explained.
“The secular change over the last dozen years or so in grocery merchandizing, and in the investments grocery store operators are making, has to do with the general shift in consumer preferences toward higher-quality fresh produce. Vendors would be aware that customers who experiment with online grocery shopping would be very sensitive to the quality that is delivered. So it is probably worth it for the stores investing in the quality of such products in the beginning in order to generate consumer loyalty.”
Learning from Mistakes
Raff recalled the rise and fall of Webvan, an online grocery business based in Foster City, Calif. Launched in the thick of the dot-com boom in 1996, it went bankrupt five years later. Webvan became a part of Amazon in 2009 and focuses non-perishable groceries.
Webvan was “a great idea,” but it failed because of distribution problems, said Nicholson. Nevertheless, Raff said.
"Its experience inspired entrepreneurial minded people. It strongly suggested tha1t once people figured out how to do the infrastructure properly, something like [Amazon’s latest move] might be coming. We know now that this sort of service is commercially feasible.”
Nicholson pointed to FreshDirect, an online grocer based in Long Island City, New York, that was founded in 2002 and serves markets in New York, New Jersey and Pennsylvania and appears to have gotten its business model right. “FreshDirect keeps its edge by focusing on its food route,” she said. She noted that the firm’s founders have experience in the supermarket and grocery businesses, “which is helpful.”
“Vendors would be aware that customers who experiment with online grocery shopping would be very sensitive to the quality that is delivered.”–Daniel Raff
Follow the Money
Customer satisfaction is key to online grocery deliveries — but the business also has to make money. Nicholson said.
“The crucial thing in home deliveries is [to ask]: Is it worth delivering?”
Clearly, each customer’s order has to cross a value threshold before it becomes worthwhile to the retailer, she added.
The arithmetic gets more complex with same-day delivery. Raff said that while “same-day delivery was cheap, prices [of products] were higher than they would otherwise be,” citing research by some stock analysts.
Raff also wondered how Amazon might use the customer data it collects. He recalled a controversy Amazon faced some years ago where it supposedly experimented with data on customer search behavior to adjust prices of goods “in a way that is [more] favorable to Amazon than … to the consumer.” He said that in the ensuing negative publicity, some found this to be “a somewhat more sinister side” of the company.
In any event, Amazon could be a winner with its grocery delivery business if it scores on two fronts, according to Raff. One is about persuading customers of the convenience, reliability and quality of its offerings, he said. The second aspect is about getting consumers “habituated with their orders arriving in hours rather than days later,” made possible with Amazon’s warehousing network and transportation infrastructure.
Raff said.
“[Eventually], all categories of consumer goods will fit into this general mindset — not just music or clothing or food. Amazon is really trying to be ‘the everything store.’”
Flat Growth
According to private research firm IRI, private-label market penetration rates in dollars and units sold have not changed since 2011.
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According to IRI, private-label market shares vary considerably by channel. The grocery channel leads with a 22% market share, followed by Club chains (18.1%), Drug chains (16.3%) and Mass Supermarket chains (15.2%).
While pure-play private-label grocers like Trader Joe's and Aldi have made strong gains, and mass supermarket chains like Kroger's and Safeway are selling more private-label premium grocery products, not all grocers have faired well.
According to IRI, more than half of package foods major categories have had flat private-label share growth since 2011. This reflects the trend of overall flat consumer dollar and unit sales since 2011.
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Amazon has to truly standout not only in price and quality, but in uniqueness as well. It will be competing against some well established firms with loyal customers. Amazon will have to provide a strong magnet to get these consumers to switch to its private-label consumer packaged goods and fresh foods. Amazon will need to differentiate itself in other ways besides price, quality, freshness and delivery. It needs to expand the market for private-label products, by offering products that are not presently sold under a private-label, otherwise it will have to rely on marketing wizardry to steal market share from existing venors of private-label products. Some possiblities include gourmet frozen meals, fresh organic foods and organic packaged products. The company needs to start promoting its Element private-label brand. This means spending on advertising and promotions, and positioning its private-label products as "right-now" products that appeal to busy consumers who don't have time to shop or hate to shop.
Courtesy of an article dated May 28, 2015 appearing in The Wall Street Journal, an article dated June 9, 2015 appearing in Knowledge@Wharton, and an article dated June 11, 2015 appearing in Market Realist
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