Using Private Label to Boost Sales: Amazon plans new line of Food Products

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Picture Source:(REUTERS/Rick Wilking)

Using Private Label to Boost Sales: Amazon plans new line of Food Products

Amazon is reportedly planning to launch a new line of food products using private labelling. This isnt new to Amazon. Besides diapers and wipes, it has offered all customers batteries, USB cables, backpacks and even ceramic plates under the Basics label, noted for its spartan black-and-white color scheme. And Amazon sells patio furniture and linens under its Strathwood and Pinzon brands.

What is Private Labelling

According to ReferenceforBusiness.com, Private labeling is when a retailer purchases products from various manufacturers and then markets those products under its own brand. Private label goods are often referred to as “store brands,” as opposed to the “name brands” that are sold under the brand name of the manufacturer. For example, the consumer products giant Procter and Gamble manufactures peanut butter and sells it under the brand name Jif, while the supermarket chain Kroger purchases peanut butter from smaller manufacturers and sells it as Kroger brand peanut butter. Private label products tend to be less expensive than competing name brands, largely because of reduced advertising expenditures.

Private Label Success Stories

According to a 2014 Neilson Global Private Label Survey, Private labelling is most developed in Europe, particularly in the Western markets. Private label accounts for $1 of every $3 spent in the consumer packaged goods (CPG) market. Switzerland has the highest private-label share (in the region and around the world) at 45%, followed closely by the U.K. and Spain at 41% each. Private label is less developed in eastern and central Europe, where share varies greatly from a high of 24% in Poland to a low of 5% in Ukraine.

With dollar shares of 17.5% in the U.S. and 18.4% in Canada, North American private label is just above the average global share of 16.5%. Since the recession ended, growth of private-label brands in the U.S. has been fairly flat as name brands stepped up both promotional activity and innovation efforts to protect share positions and to drive growth. The country’s private-label share increased only 1.3 percentage points between 2009 and 2013. In Canada, private-label share has also been stagnant because shoppers have increasingly turned to promotions to save and name brands drove more sales through savvy pricing strategies.

Among the top 10 store brand retailers, Aldi, H-E-B and Kroger are best at converting U.S. store brand buyers to purchase in their stores. And only Dollar General, Safeway and Stater Bros. convert less than 90 percent of the store brands buyers.

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Graphic Source: Neilson

To gain this type of market share, most of the top 10 store brand retailers listed above outsource the production of store brands, but some retailers like Kroger and Safeway invest heavily in manufacturing their own store brands. Most of these top retailers also invest in marketing, merchandising and analytics to further drive their sales, but these companies’ actual engagement in these activities varies widely.

Many of the top 10 retailers use their websites to increase online engagement and support their store brand offerings. Some, including Aldi and Kroger–have gone as far as incorporating unique sections devoted to their store brands on their websites. Others, however, make users search for rather limited information on their store brands.

Amazon has also had successes with private labelling but not all of Amazon’s private-label ventures have been winners. It discontinued a line of cookware endorsed by a Seattle chef in 2012 and a tool line, in addition to the diaper snafu.

This will be the first time that Amazon will venture into perishable goods. According to the Wall Street Journal, By rolling out a broad portfolio of private-label products, Amazon could yield higher profit margins, while also gaining leverage with its largest suppliers to pare prices—though many of Amazon’s vendors also produce private-label goods.

Rivals ranging from Costco Wholesale Corp. to Target Corp. to Walgreens Boots Alliance Inc. offer an array of store-brand products with names including Kirkland, Archer Farms and Nice, respectively. Private labels made up about a third of Target’s $73 billion in sales last year.

Market researcher Information Resources Inc. estimates private-label packaged goods was a $120 billion market in the U.S. in 2014, up 2.1% from a year earlier. Private-label merchandise represented about 18% of money spent on all packaged goods in the U.S. last year.

Amazon, which last year reported a $241 million loss on $89 billion in sales, has been pushing to expand sales of food online, including through its Fresh grocery delivery. And last year it rolled out Prime Pantry, which allows customers to order small items that the company generally only offered in bulk, such as a single shampoo bottle or bag of potato chips.

Private-label goods also could bolster Amazon’s reputation as a lower-cost retailer. IRI estimates that private-label products are, on average, 28% less expensive than their name-brand equivalents.

Amazon’s diapers were about 10% less per diaper than the priciest offerings from Procter & Gamble Co. or Kimberly-Clark Corp.—makers of Pampers and Huggies—but 25% more expensive than P&G’s Luvs and Target Corp.’s Up & Up brand, according to an analysis in December by Sanford C. Bernstein & Co.

It has not yet been revealed how Amazon intends to roll out this particular private label strategy.

But according to several sources, it seems likely Amazon would sell them through its Fresh grocery delivery service, available today in a handful of U.S. cities.

It also appears Amazon will be transparent about where its Elements products come from, as it has done with the diapers and wipes. The trademark filing mentions the slogan, “Every pack has a story.” Amazon’s page for its wipes details how they are produced by manufacturer Nice-Pak Products Inc., starting with the process of moistening them with purified water from the White Lick Creek Aquifier in Mooresville, Ind.

Winning Strategies for Private Labelling

If youre an entrepreneur seeking to venture into the world of private labelling here are some winning strategies from Neilson:

  • Invest in Marketing Activities to Build Private Label Equity
  • Offer Premium and Standard Price Tiers
  • Innovate to meet customer needs
  • Develop joint cross-promotion activities between name brand and private label products
  • Create integrated shelf sets to show products side by side
  • Consider Private Label placement options where there is category white space
  • Highlight the value for money provided
  • Increase in-store visibility of private label products

Have you experimented with private label sales. Send us your comments.

 

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