The Bottom Line on Amazon’s Private Label Consumables

After years of rumors and innuendo, Amazon.com finally seems poised to launch a large-scale push into its own lines of consumables in categories like snacks, coffee, baby food, diapers and laundry detergent, triggering uncertainty and fear among leading CPG brands.

Some concern is justified.

“Your margin is my opportunity,” goes a famous aphorism of Jeff Bezos, Amazon’s founder and CEO.

Private labels, especially value-tier and opening price point lines, are a tested tactic for keeping prices low, a pillar of Amazon’s growth model. Amazon’s own labels could certainly increase the downward pressure on the prices of branded products.

However, lower prices likely aren’t Amazon’s only motivation. The economics of retailing grocery and consumables products are challenging in nearly any model, and even more so online. As Amazon steadily progresses along its path to sustainable profitability in its retail business, private labels are a key lever for margin enhancement.

As Amazon develops its own brands, it may have some key advantages. With arguably the world’s largest selection, Amazon knows better than most retailers what sells (and what doesn’t). Since all orders are placed from registered accounts, Amazon can analyze households’ consumption over time, identifying patterns that go beyond basic basket analysis.

Search log and clickstream data are also invaluable demand signals, and Amazon’s massive volume of product ratings and reviews and customer questions and answers can yield rich insight into product benefits and features that shoppers prefer or find lacking.

And in contrast to physical stores, Amazon’s search-dominated pathway to products could put its private labels on more even footing with national brands. In physical stores, private labels are often relegated to the bottom shelf, where motivated shoppers will find them but others may not. On Amazon, the results for unbranded search terms like “diapers,” “beef jerky” and “detergent” could give favorable placement to the retailer's new product lines.

How should brands respond?

As the dynamics of doing business with Amazon evolve, brands are appropriately exploring how to respond. Here are five ways:

1. Drive innovation. While retailers’ own labels have occasionally introduced new innovation to a category, they tend to be fast followers. As ever, innovation will be key to brands advantage over private label, and suppliers may need to deploy innovation to Amazon sooner than they have historically.

2. Optimize price pack architecture. As the value equation at Amazon evolves, brands will need to explore ways to optimize packaging, pack size and bundling to enhance value and economic viability.

3. Execute on the fundamentals. With a new competitive element, brands must execute on fundamentals like discoverability in search results, providing complete and compelling product content, encouraging and responding to product reviews, and maintaining stock availability.

4. Selectively pay to play. Sponsored search results and other vehicles are another powerful defensive lever. Brands will need to measure the yield on these investments carefully.

5. Bring insight and expertise. In the endless aisle of its core retail business, Amazon operates more like a platform than a partner. However, with the expansion of limited-assortment consumables programs like Prime Pantry, Prime Now and Amazon Fresh, Amazon likely lacks the market and category expertise that suppliers can bring through traditional disciplines like category management. Brands should take an active and strategic role in influencing Amazon’s view of the category and the role of private labels.

The ultimate impact of Amazon’s new private labels will take time to emerge, but brands should position now to defend their equity and optimize performance.

Keith Anderson is vice president of strategy and insights at Profitero, where he helps global brands and retailers gain a deeper understanding of their online presence to optimize online and in-store sales.