Being Remarkable · e-commerce · Strategy

Going private: Here comes Amazon’s next big wave of disruption and dismantling

While Amazon is often falsely blamed for all of retail’s woes, the “Amazon Effect” is both profound and well-documented. While the company’s overall market share is relatively low (under 5%), Amazon now accounts for nearly half of all e-commerce sales and its pricing and supply chain supremacy continues to put margin pressure across many categories of retail.

Yet, lost among the stories about the showdown between Amazon and Walmart or the impact of the Whole Foods acquisition or the company’s many stymied attempts to become a major fashion player is potentially an even bigger and more interesting narrative. What should be added to the list of things that keep both manufacturers and retailers up at night is Amazon’s rapidly evolving private brand strategy. The massive potential for a “go private” thrust to be another key component in what L2’s Scott Galloway has called Amazon’s systemic dismantling of retail and brands is huge.

Here’s why:

Private brands can have powerful consumer appeal. A well-executed private brand strategy allows for equal (or even better) quality products to be delivered at much lower prices. Store brands have moved well beyond the generic product days into being desired brands in their own right and have become significant lines of business for many retailers.

Private brands typically have greater margins. By controlling both the product design and supply chain–and avoiding the need for large marketing and trade allowance budgets–proprietary store brands can deliver a better price to the consumer and better gross margins for the retailer. Therefore the brand owner has a greater incentive to push its captive brands over national brands.

Amazon has already created a solid base of private brands. It turns out that Amazon already has a solid stable of proprietary brands. Some are more basic commodity items sold under the Amazon name. Some have their own identity, like Mama Bear and Happy Belly. Others tilt toward the more fashionable. With the Whole Foods acquisition, the company also controls the 365 Everyday Value brand which, rather unsurprisingly, is now available at Amazon. Recent reports suggest they are jumping into the athletic wear business.

Amazon’s private brands are on fire. While specific financial data is relatively sparse, most indications are that the company is thus far yielding strong performance with its own products. According to one report, many of these brands are experiencing hyper-growth.

The Amazon chokehold. Ponder for a moment the amount and quality of customer data Amazon can leverage to both design and target its own stable of higher margin products. Consider that more than 55% of all online product searches start at Amazon. Reflect on the reality that Alexa’s algorithms already give preference to Amazon’s private brands. Contemplate how easy it will be for Amazon to systematically design its website to feature the brands it wants to promote. Meditate on the freedom Amazon has to pursue the long game given its strong cash flow and Wall Street’s current willingness to value growth over profits.

Because of its sheer size, as well as the need to feed the growth beast, Amazon must both grab more market share in categories where it already has a material position, while also entering and penetrating significant new opportunity areas. At some point, Amazon will also have to demonstrate that it can make some decent money outside of its Amazon Web Services business. The opportunity in private brands serves both Amazon’s long-term revenue and margin objectives.

For the most part, Amazon’s private brand aspirations have operated under the radar. But from where I sit, it won’t be long before they reach critical mass in many key categories. And when they are ready to truly step on the gas–both from their organic efforts, as well as from what I believe will be at least one more major brick & mortar acquisition–another wave of brands (both wholesale and retail) will get caught in the wake.

For the competition, it’s time to be afraid. Very afraid.

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A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here

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Growth · Retail · Winning on Experience

Assessing The Damage Of ‘The Amazon Effect’

Since I anticipate being labeled a Luddite, a Socialist and a hypocrite by some, let me acknowledge that I firmly believe that Amazon has done a lot of good for consumers by expanding choice, making shopping far more convenient and by delivering extraordinary product value. I recognize that many retailers were long overdue for a swift kick in their strategy. I also remain a very good and loyal Amazon customer. And I anticipate that the Whole Foods acquisition will ultimately result in lower prices, an enhanced shopping experience and maybe even improve the availability of more healthful food options. These are all good things.

Yet, we can’t–and shouldn’t–ignore the profound effect that Amazon is having on just about every corner of the retail world they set their sights on. Amazon is the proverbial 800-pound gorilla. Their entry into a market segment reshapes shopping dynamics, upsets the supply chain and exerts tremendous pricing and margin pressure. Books came first and we know how that played out. But, one by one, other categories followed and the dominoes continue to fall. Store closings. Bankruptcies. Once proud and dominant retailers teetering on the brink. Now you can add small “natural” grocery chains to the list of established retailers that may well get Amazon-ed (which is the most polite way to say it.)

To be fair, we should not blame department store woes on Amazon. Clearly many malls and quite a few retailers were well on their way to oblivion before Amazon cracked the $25 billion mark. And the grocery market share that Amazon will pick up with the Whole Foods acquisition is a drop in the bucket, even when combined with Amazon’s existing volume. We also know that not everything Amazon touches turns to gold (I’m guessing you are unlikely to be reading this on your Amazon Fire).

Still it’s hard to underestimate the magnitude of the Amazon effect. E-commerce represents about 10% of all U.S. retail and Amazon is by far the largest player, with an estimated share of 43%. Last year, Amazon accounted for 53% of all the incremental growth of online shopping, which means they are only growing their dominance. To underscore how much Amazon has infiltrated the shopping zeitgeist, one study indicates that more than half of all product searches start on Amazon.

It’s also hard to underestimate the fundamentally different rules Amazon plays by. First and foremost, Amazon isn’t required by its investors to make any real money. In fact, despite being in business more than 20 years, Amazon only recently surpassed Kroger and Priceline (not the sexiest of retailers) in total annual profits.

As a core strategy to gobble up market share, Amazon (or more accurately its shareholders) provides huge subsidies to its delivery operation. According to one analysis, Amazon lost $7.2 billion on shipping costs last year alone. While this is clearly great for consumers, it puts many retailers in the untenable position of choosing between ceding market share to Amazon or lowering their prices to uneconomic and unsustainable levels. Most have chosen the latter strategy and are paying the price. The fallout is far from over.

It’s hard to argue against innovation. It’s hard to argue against greater choice, more convenience and lower prices. And clearly, long-term investors in Amazon have few arguments, while those that have hung in with Macy’s, JC Penney and the like are licking their wounds.

Maybe Amazon can sell all this stuff at a loss and make it up on volume. Maybe once they help put many, many retailers out of business and play a big role in the “rationalization” of commercial real estate, Amazon will continue to reduce prices, rather than exploit their emerging monopoly-like power. Maybe we’ll all be happy with fewer choices in retail brands. Maybe Amazon’s dominance will encourage a new wave of different and more interesting retail models to counter-act the homogenization of retail we are in the midst of.

Maybe.

On the other hand, perhaps we should all be careful what we wish for. Perhaps we should consider that the problem with a race to the bottom is that we might win.

A version of this story recently appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.