by Peter Andrews, One Click Retail
Revised October 17, 2018
By now you’d have to be pretty well insulated not to be aware of just how much Amazon has changed the face of retail. In August, Business Insider reported that Amazon now ranks as the third-largest retailer in America by sales, behind only Walmart (#1) and Kroger (#2). But what makes this especially impressive is the fact that, unique among the top 20, Amazon is the only eCommerce pure play retailer on the list. The eCommerce giant’s ability to control such an enormous share of US retail, and to do so through almost exclusively online sales, is an incomparable achievement.
In the summary of their report, Business Insider stated: ‘The top 100 retailers have hardly changed over the past several years, with the exception of Amazon climbing up the list.’ The success of Amazon is not just their ability to capture market share, it’s also their ability to grow so rapidly when virtually all of their competitors are stagnating (at least in relative terms). So it’s no wonder the Amazon story has had a huge effect on the entire retail market – every stakeholder is modeling their strategy at least in part on Amazon and watching their strongest competitor closely in the hopes of beating them at their own game.
The latest major shift in Amazon’s strategy is a big one. In the last couple of years, Amazon has steadily ramped up volume and visibility of their private labels. For the most part, these Amazon-owned brands started small, but in 2018 the eCommerce giant’s product lines are beginning to challenge the major established brands in key categories like diapers, coffee pods, and paper products. The impact of this on the landscape of American retail cannot be understated. Amazon’s dominance of the eCommerce sphere has forced brands to adopt an Amazon-first strategy in order to remain relevant, but now those same brands are facing off against the retailer’s own products in the fight for the digital shelf.
Simply put, competition has never been so fierce. In order to better understand Amazon’s private label strategy and to enable brands to respond and adapt effectively, let’s take a closer look at the key developments in this space and the effect this is having on the platform and on Amazon’s customer base.
Note on Private Labels & Exclusive Brands:
There are two different types of Amazon house brands, though the distinction may not be immediately apparent to shoppers. First, there are Amazon’s private labels, which are wholly owned by the retailer. These brands either include ‘Amazon’ or ‘Prime’ in the brand name, such as AmazonBasics, or are explicitly stated as an Amazon brand – for instance, the product titles of Mama Bear items now read ‘Amazon Brand – Mama Bear…’.
Second, there is a growing assortment of Amazon-exclusive brands, such as Basic Care (manufactured by Perrigo) and Earth+Eden (manufactured by First Quality). These brands are advertised by Amazon as ‘Our Brands’ (see below) but are not owned by Amazon and do not include the 100% refund guarantee for unsatisfied customers available from private label items.
Diapers: Mama Bear is Leading the Way
In tracing the development of Amazon’s private label and exclusive brand strategy, diapers is where we see the most action. For this reason, the diapers category can serve as a useful example for understanding this trend as a whole. After spending some time experimenting with a variety of private label diapers, Amazon has found success with their Mama Bear brand – and is running with it.
Mama Bear experienced relatively slow growth during the early part of this year, but from Q2 to Q3 of 2018, sales increased by over 40% to reach a weekly average of roughly $200K. Sales volume had already begun to climb when Amazon introduced a series of promotions in mid-July and early August, driving a post-promotion lift of nearly 20%.
Mama Bear also includes baby food and laundry detergent, but the diapers have proven to be the real crowd pleasers. While Amazon’s promotions were broadly applied throughout Mama Bear’s assortment, it was the diapers that really caught the attention of shoppers, many of whom bought the diapers for the first time at a discount but were quickly converted into repeat customers.
Well, we called it. In the Q2 2018 Private Labels update, we predicted that smaller brands like Honest Company and Bambo Nature were at risk of losing out to Mama Bear. As of September, Amazon’s private label controls the largest market share of the three brands, beating them with their significantly lower per-unit price:
|Diaper Prices||Mama Bear||The Honest Co.||Bambo Nature|
|Pack Size||4 x 54 (216)||176||6 x 28 (168)|
|Price Per Unit||$0.18||$0.27||$0.34|
Given that an infant goes through an average of 10 diapers a day, the cost savings of choosing Mama Bear over the competitors is nearly $30 – $50 a month or $300 – $600 a year!
Amazon Exclusive Diapers
In Mama Bear, The Honest Co. and Bambo Nature are facing a fierce new competitor, a unique challenge when the sales channel itself owns the competition. But First Quality has found a clever new strategy which solves this problem: rather than competing against Amazon, First Quality is working with Amazon by developing an exclusive brand for the retailer.
Earth+Eden, owned and manufactured by First Quality, is a brand new line of baby diapers available exclusively on Amazon. Given the popularity of Mama Bear diapers and the enviable growth since the brand’s launch, it’s a very smart strategic move for First Quality to capitalize on the benefits of being an ‘Amazon Brand’.
First Quality originally specialized in adult-incontinence products but has had some success with their Cuties-brand baby diapers launched in 2007. But Cuties is a relatively small brand on Amazon and the new and exclusive Earth+Eden line is a perfect opportunity to increase their market share. The new diapers are made with all-natural raw materials and their product pages share many visual and terminology similarities with Cuties:
While still in its early phase, sales for these diapers tripled within a few weeks of its late-August launch. This growth was driven by some kick-start promotions (15% off) spread across several weeks but can also be attributed to the high visibility afforded by being labeled as an ‘Amazon Brand’.
Health & Personal Care: The Bigger Picture
After diapers, the next major frontier for Amazon’s house brand strategy is Health & Personal Care. There is some overlap between the two, as some Baby Care items may fall under the HPC category such as the Amazon Elements line of baby wipes. But that private label, one of the retailers largest, specializes mostly in the nutritional supplements space.
For the Amazon Elements (AE) brand, the company works closely with a variety of hand-picked manufacturers to develop their assortment of products. This includes Arizona Natural Supplements, which manufactures AE herbal and mineral supplements, Nice-Pak which manufactures AE baby wipes, and Glanbia which manufactures both AE and OWN PWR protein powders. This is an interesting approach in that Amazon leverages the extensive industry experience of manufacturers in order to enter into a market with mature, refined products.
Total sales remain well below the top established brands such as Optimum Nutrition and Garden of Life, but Amazon’s private label sales grew rapidly from Q2 to Q3 2018, increasing by 45% for herbal supplements and about 40% for vitamins and also collecting consistently-high customer ratings. Although it is still too early to predict the long-term sales ranking of these products, it is worth noticing the impact of promotions on the sales of these new items on Amazon. For example, Amazon’s new OWN PWR line of protein powders launched in late August and was promoted with 15% off coupons throughout September, leading to a 5x increase in sales throughout the month.
One of the key approaches taken by Amazon in their private brand development is to target niches heavily controlled by third-party (3P) sellers with little first-party presence. For instance, when AmazonBasics launched back in 2009, it initially focused on generic electrical necessities like charging cables and batteries etc which were primarily only available via 3P sellers at the time.
Today, Amazon Elements is utilizing the same strategy to get ahead of the latest trends. In our recent AMZ Effect article on over-the-counter (OTC) medication, we reported that the Pain Relief category drove the most growth on Amazon in the first half of 2018 (55% YoY), boosted in part by an influx of third-party sellers offering alternative pain medications such as turmeric-based supplements. In the meantime, Amazon Elements has introduced their Turmeric Complex with Black Pepper and Ginger capsules, which quickly gained a strong foothold and now ranks as the #8 bestselling turmeric supplements and counting.
Amazon Exclusive OTC
In the above-mention OTC article, we mistakenly described Basic Care as a private label brand. In fact, Basic Care is another example of the growing list of Amazon-exclusively brands. Basic Care OTC medications are owned and manufactured by Perrigo, which also owns GoodSense, but still reaps the benefits of being sold as an ‘Amazon Brand’. Among these benefits is that on the product detail pages of major brands such as Advil, Amazon will place a highly visible ad titled ‘Similar from Our Brands’ which shows an equivalent (and often lower-cost) item from Basic Care.
In Q3 2018, Basic Care averaged nearly $250K in weekly sales, led by antacids ($85K) and Pain Relief ($65K). While Perrigo’s GoodSense still seems to be its retaining strong sales in the antacid category, the same manufacturer’s Amazon-exclusive brand is already winning in market share as of Q3 2018. This illustrates the competitive advantage of being an Amazon-exclusive brand, giving manufacturers a significant boost to their visibility compared to other brands (even their own) by being labeled as an Amazon Brand.
Baby Care and HPC are not the only categories in which Amazon is making strides with their house brands – Presto is now one of the top brands in both bath tissue and paper towels and has a growing foothold in detergents and hand soaps – but the company’s far-reaching investments in these two key categories illustrates their broader approach to house brands today and going forward.
Amazon’s strategy is embedded in its logo: A to Z. It truly wants to be a part of its customers’ spending and while it offers the manufacturers its platform to sell on Amazon (an increasingly large and crucial piece of the retail landscape), it is also on the lookout for opportunities that allow it to expand into new sectors. While Amazon has the ability to displace smaller brands, it understands the value of the loyalty consumers feel toward long-established brands in attracting those shoppers to the platform. Some may think that becoming the #1 bestseller in every category is Amazon’s endgame, but it’s much more likely that Amazon is primarily interested in working with brands for the mutual benefit of all parties. This way, both brand and retailer can benefit from each other’s expertise and the loyalty of each customer base. Many manufacturers are already reaping the benefits of working with Amazon by manufacturing private label items and Amazon-exclusive brands and understand that if you can’t beat them, now is the time to join them.
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