Is Amazon set to become the next big CPG powerhouse?

Discussion
May 29, 2015

Amazon, as most know, got off to a rough start in developing its Elements premium private label line for Prime members. Shortly after launching baby wipes and disposable diapers under the brand, the e-tailing giant pulled the plug on the diapers due to complaints about the poor quality of the product. In true Amazon fashion, the diaper fiasco has not deterred the company as it is pursuing a broad launch of food and non-food items.

The expansion of the Elements private label follows a familiar path for most traditional retailers in the CPG space: use the private label to offer consumers an equivalent quality product at a better price while delivering higher margins to the seller. According to reports, Amazon is looking at more than two dozen product categories for the Elements line including baby food, cereal, coffee, dog food, household cleaning products, milk, pasta, vitamins and water.

Amazon private label

Source: amazon.com

According to Information Resources Inc., via The Wall Street Journal, private label sales ticked up 2.1 percent last year, representing 18 percent of total CPG sales.

A RetailWire poll in January, found 58 percent were somewhat (42 percent) or much less (16 percent) optimistic about Amazon’s prospects in private label CPG following its decision to discontinue the sale of its diapers.

How important will CPG private label be to the eventual success or failure of Amazon’s online grocery business? What will Amazon need to do to have its private label stand out from rival national brands and private labels offered by other retailers?

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Braintrust
"Personally, I think this makes all the sense in the world. The successes of Aldi, Trader Joe’s, Target, Kohl’s and others are evidence that an "exclusive" brand can win favor with customers. The strategy must include Amazon embracing these categories of Elements-branded products as BRANDS."
"As the Elements diaper launch proved, premium private label is hard — especially for high-involvement consumables like food and baby products. People care a lot about what they eat and put on their babies."
"I don’t think that private labels could cause Amazon’s online grocery business to fail, but it could certainly add to the success. They currently have a robust business and, as noted on the other discussion post today, they are constantly innovating and testing with delivery and convenience options."

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10 Comments on "Is Amazon set to become the next big CPG powerhouse?"


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Dave Wendland
Guest
6 years 11 months ago

Personally, I think this makes all the sense in the world. The successes of Aldi, Trader Joe’s, Target, Kohl’s and others are evidence that an “exclusive” brand can win favor with customers.

The strategy must include Amazon embracing these categories of Elements-branded products as BRANDS. If viewed as me-too national brand equivalents, it will be a much more difficult road to success. To launch as a brand requires solid brand management, advertising support and consistency. My only question is whether Amazon is truly prepared to commit the required resources.

Keith Anderson
Guest
6 years 11 months ago

As the Elements diaper launch proved, premium private label is hard — especially for high-involvement consumables like food and baby products. People care a lot about what they eat and put on their babies.

The economics of CPG e-commerce suggest high potential for private label. Just as they do offline, shoppers are looking for value. And Amazon and other online retailers are looking for margin.

With its third-party marketplace, position as the number one product search engine and premier repository of customer ratings and reviews, Amazon has an amazing insights and analytics engine to drive new product development based on customer demand and preferences.

The challenge will be in building trust and meeting or exceeding shopper expectations. This is a high-commitment business, and Amazon is comfortable with long-term, high-commitment investments. I don’t expect overnight success, but Amazon likely doesn’t either.

Zel Bianco
Guest
6 years 11 months ago

I don’t think that private labels could cause Amazon’s online grocery business to fail, but it could certainly add to the success. They currently have a robust business and, as noted on the other discussion post today, they are constantly innovating and testing with delivery and convenience options. That’s a great business model, but the same strategy cannot be applied to food (for yourself, your baby, and your pet) and household cleaning supplies. These are literally essentials and the bar is set high for safety, quality and effectiveness. Amazon should continue with its see-what-sticks innovation elsewhere, but Essentials need to be near-perfect from the start.

Max Goldberg
Guest
6 years 11 months ago

Amazon will master the art of private label. It may take a while, but it will get there. Once it does, look for a surge in sales. Amazon needs to perfect the quality of its private label offerings across all lines. The company needs to bring its private label products under the umbrella of trust that it has built into its brand.

Dan Frechtling
Guest
6 years 11 months ago
Quality gets Amazon in the game. Recommendations are how it wins. Amazon will close its quality gaps. It will promote the categories where it has already achieved parity, like wipes, while it fixes laggards, like diapers. Or it will exit categories where it can’t compete at an acceptable margin. Amazon’s recommendations are the well-known secret. Collaborative filtering and other algorithms have raised recommendations to a high science. It is able to insert suggestions into all phases of the purchase process, from pre-purchase to comparison to selection to checkout to post-purchase. It can reference what’s in the shopper’s cart, what the shopper has rated favorably in the past and what the shopper has previously purchased. It can observe what similar shoppers have purchased, rated and so on. It can suggest best sellers and most highly rated items. And it will test and refine its way to success. Given all the above, I don’t know why Amazon would limit sales to Prime members only. I suspect Amazon has more to gain by selling to all shoppers rather… Read more »
Gordon Arnold
Guest
6 years 11 months ago
This is an interesting discussion with much to consider for the entire retail industry. While many consider private labeling an important step in grocery sales I am not so sure this is true to the e-commerce side of the business. Amazon would be a resource for creating many interesting reports and market tests for this venture. Private label branding is offered in most grocery stores as an economical quality alternative to name brand product or to explore new product expansion into broader, higher or lower market opportunities. The common denominator in all offerings is the alternative approach. Amazon has left us with no doubt that product knowledge and the creation of a successful private brand is still far from their reach with the limited talent they have for this push. But are they venturing into an aspect of the business that they can support and grow with the resources and market awareness they currently own? Much of the data supporting this market decision comes from the study of brick-and-mortar sales and this is short on… Read more »
Li McClelland
Guest
Li McClelland
6 years 11 months ago

Confidence by consumers in participating in online retail (Amazon, Zappos, etc.) from the very start was centered on seeing brand names with reputations they already knew being sold either more cheaply or more conveniently than driving to a store. Especially with groceries and personal supplies, people have strong preferences. Even if they offer money back guarantees on their new CPG, many purchasers will not want to take the chance. I had hoped the diaper fiasco taught Amazon a lesson. Apparently not.

Kai Clarke
Guest
6 years 11 months ago

This is a tremendous profit builder, assuming Amazon can manage to build house-branded products with better quality for less cost than their nationally branded counterparts. Costco, Safeway and so many others have managed to build great private labels while increasing their operating income, yet many retailers don’t understand manufacturing and have issues bridging the gap successfully. Amazon will eventually discover this depending on the focus they put on building their housebrand.

Arie Shpanya
Guest
6 years 11 months ago

I’m not very optimistic about Amazon’s CPG prospects. Amazon wants to be the lowest price, but (as seen in the diaper attempt) there are products that need to be high quality to function.

Amazon has to have something beyond a low price to stand out. When they have a super low price on an item, someone along the way is paying for it. If that person is the consumer, in terms of low quality goods, this will just lead to another flop for Amazon.

Shoppers trust Amazon for a number of reasons, but it will take time for them to consider buying Amazon brand goods when the retailer is offering a competitor’s trusted product for just a bit more. To be a successful CPG brand, Amazon will really have to prove itself.

Supriya Chaudhury
Guest
Supriya Chaudhury
6 years 11 months ago

Amazon has clearly shown its ability to play the long game. Private label is a logical and strategic move for the retailer. And while the diaper endeavor may have been a misstep, it’s something that Amazon will learn from. Investment has also not been an issue with the retailer.

I suspect building up the right bench with branding and product skill sets that are CPG oriented will not be un-surmountable. It’s a big watch out for branded manufacturers. Private label is a challenge in the physical shelf, but even more so online with no shelf or immediate adjacencies to capture shopper attention and consideration. How do you win search against the retailer when the retailer owns the algorithm?

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Braintrust
"Personally, I think this makes all the sense in the world. The successes of Aldi, Trader Joe’s, Target, Kohl’s and others are evidence that an "exclusive" brand can win favor with customers. The strategy must include Amazon embracing these categories of Elements-branded products as BRANDS."
"As the Elements diaper launch proved, premium private label is hard — especially for high-involvement consumables like food and baby products. People care a lot about what they eat and put on their babies."
"I don’t think that private labels could cause Amazon’s online grocery business to fail, but it could certainly add to the success. They currently have a robust business and, as noted on the other discussion post today, they are constantly innovating and testing with delivery and convenience options."

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