Amazon’s rapid expansion into private label brands
Earlier today, TechCrunch published an article titled “Amazon to Expand Private-Label Offerings—From Food to Diapers” detailing Amazon’s successful push into private label brands covering lucrative categories ranging from batteries, mom & baby to even perishable food items. The concept of retailers selling their own private label brands has been around for ages, mainly adopted by grocery chains with the goal to increase margins for often low-profit consumer packaged goods (CPG) categories. It’s not so much players like Amazon are doing this but how and why they’re doing this that should ring some alarm bells with brands.
The ultimate bait and switch
Global ecommerce giants like Amazon and, increasingly, local Southeast Asian players like Lazada and MatahariMall are offering perks to entice brands to open stores and sell through their platforms. This strategy resembles Ladies Night at clubs, where women are offered free drinks to indirectly lure men, who, more often than not, end up with a headache, alone and having burnt a hole in their pocket at the end of the night.
With aggressive promotions and subsidies from their hosts, brands often see quick short-term gains in online sales. The extreme example here is 11.11, a man-made online shopping festival during which retailers compete in the Discount Olympics. Obviously, brands benefit from spikes in sales but little do they know that they’re actually selling their souls in the long-term. It’s like crack, it makes you feel great for a while but sooner or later it’s hollowing out your body.
With the massive amounts of data generated on a day-to-day basis, these ecommerce platforms can easily identify consumer trends, such as best selling products and categories beyond what brands are able to see themselves. This data is then leveraged by retailers to develop and introduce their own private label brands to compete with the brands they partnered with in the first place.
Once launched, these platforms could favor their own white-label brands by giving them more visibility through favorable product placements as well as top rankings on internal search result pages.
The bigger picture
Players like Amazon and Alibaba’s Tmall aren’t really traditional ecommerce retailers. Their main objective is to use competitive pricing, often subsidized, on retail products to acquire more and more users, which they then monetize through other means such as Amazon Prime subscription fees for Amazon and onsite advertising and Alipay transaction fees for Tmall.
Amazon’s new CPG brands like Happy Belly and Mama Bear are only available to Prime members in a move to incentivize joining its $99-a-year unlimited shipping program that’s fueling Amazon’s retail growth behind the scenes.
In a post-Alibaba acquisition world, ecommerce power-players like Lazada could potentially increase awareness of their own private label brands through better placements on their marketplace, eventually forcing other brands to pay more for advertising to rank higher and get traffic.
With private labels, Amazon and the likes of Lazada also have more “room” to play in terms of pricing, allowing them to maintain sustainable low prices, keep driving more users and spinning the flywheel.
Strategies for brands
Brands like P&G, Unilever and Nestle should look at ecommerce marketplaces as a relatively easy way to test selling online but in the long-term, brands are arguably better off selling direct-to-consumer where they have full control of the brand image, customer experience and, most importantly, user data.
A case in point is Coach. The luxury brand was one of the first brands to set up shop on Tmall in China but recently closed down its official flagship store, leaving the brand with only a brand.com and WeChat presence. Many luxury brands have expressed concerns about the mass-market image of some of the bigger marketplaces.
Brands don’t have to pick between marketplace and brand.com only. Some brands like L’Oreal have adopted a multi-channel approach where their marketplace presence generates sales for their more mass and lower price point items whereas their brand.com site sustains long-tail and higher average order value sales.
At the end of the day, marketplaces are a great way for brands to jump into ecommerce. However, brands should be aware of the pros and cons and especially long-term implications of such a decision.