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Roundtable

Roundtable: The Questionable Morality of Amazon's Private-Label Business

The Wall Street Journal released an article this week with claims against Amazon for using Marketplace data to inform on their private-label business. Is what they're doing wrong? Rob Gonzalez gives his "rantifesto" on these accusations against the Amazon private-label business.

TRANSCRIPT

Peter:

Welcome to unpacking the digital shelf where we explore brand manufacturing in the digital age.

Rob:

Hi everybody. This is Rob coming at you from the digital shelf Institute remote headquarters in the Berkshire's. I'm filling in for Peter Crosby this week who is taking some well earned vacation and hopefully I won't screw this up too badly this week. In fact, there's one of my absolutely favorite topics in terms of the complexity of it and it is private label performance in COVID. But before we jump right in, there's a bunch of news related to private label even just in the last week. And before we jump into it, I first want to remind everyone that the digital shelf Institute is continuing to roll out our virtual summit series. The next session is May 12th featuring leaders from Boris E control a firm with significant expertise in e-commerce related legal and strategy challenges. For me, I've heard them speak a number of times. Channel management is one of the most difficult challenges that we hear from manufacturers over and over and over again.

Rob:

How do you even have hope of protecting map on Amazon? On Walmart? On three marketplaces with all those insane three piece sellers out there. These are experts in doing that. Denise Mahmuda, chief strategy and client success officer and Darren Garcia, a partner at the firm. We'll be speaking about gaining control, how a holistic approach to channel strategy is necessary to optimize and maximize your digital shelf. Again, this is one of the hottest topics over the last three, four, five years in executing an eCommerce strategy. I always learn something when I hear them speak, so I encourage everyone to join. That's May 12th on the digital shelf virtual summit series. Back to this week, the wall street journal has a story that Amazon is using sales data from marketplace sales, but that is a sales of third party marketplace sellers on amazon.com to inform its private label strategy.

Rob:

Horror. Senator John Josh Holly from the great state of Missouri wants a criminal investigation into Amazon's private label business. So the real question here is, is Amazon actually doing anything wrong? Is Amazon using data about three piece sellers on its platform to inform which products it should bring private label, something that's illegal or something that should be frowned upon or something that other retailers don't do. Yeah, there's a lot of opinions on this, but before we get into it, why is this such a hot topic right now? Why is it wall street journal covering private label right now with covert and everything that's going on? Well, the answer is that private label is doing awesome. We did and interview with Sam Gagliardi from IRI a few months ago where one of the primary topics was the fact that the share of category for private label across categories since 2008 has just kept increasing.

Rob:

Usually what you see is during a recession, private label sales and grow faster than brand sales because they're cheaper and consumers are in a recession looking to save money so they're going to buy the cheaper thing. And then when when the economy recovers brand sales and sales growth outpaced private label and you got this sort of a Seesaw effect since 2008 that hasn't been true. Private label sales have continued to increase. In fact, right before the COBIT recession started, we saw private labels at the highest share of category they've ever had. And since the coven, the recession has kicked off, it's not only accelerated. So Russell Redmond, the first from supermarket news, right sales of private label brands jumped by double digits, the 20, 21st quarter as us consumer stocked up on groceries and daily essentials during the initial phase of the coronavirus pandemic.

Rob:

According to data from the private label manufacturers association and Nielsen double digit growth, Sam Danley from food business news writes as many as 65% of us consumers said that they have tried new brands after sheltering in place became commonplace. The majority, 79% said that they did so because their usual product was out of state. And price sensitivity has also been a factor. There have been more willingness to try new private label brands than national brands. So not only are private label brands doing well in general and taking market share from a lot of the leaders over the last 10 years, but they're doing exceptionally well at this moment, which is, which is why the wall street journal is covering. However, this is not new news. What Amazon is doing is not, it's not illegal and it's not different from any other retailer. So Benedict Evans, who is was a partner at Andreessen Horowitz, one of the most important venture capital firms in the world in technology and now he's no longer with with Andreessen, but he's still covering a lot of technology.

Rob:

Brilliant guy out of London. He writes, some people are scandalized by this. Amazon is using its data and scale to compete with its partners. However, every big retailer does exactly the same thing using the same data. And this has been a normal part of retail since world war II. Private label is terrible, 20 to 30% of sales at most big chains. They all use data. And for all its scale, Amazon is still smaller than Walmart in the USA and many other retailers elsewhere. I mean, I think about Kroger, for example, Kroger's 84 51 division was bought out. It was bought from Dunnhumby to give Kroger better analytics on consumer behavior. And Kroger specifically has a strategy to drive 40% of gross from private label brands. Costco, it's big, big secret profit center is Kirkland, which is a really incredible private label brand. And I, I, I don't remember the exact percentage off the top of my head, but I thought 25% of Costco sales were Kirkland products.

Rob:

So Amazon in comparison, only 6% of their sales or less are a private label. Right now it's a very small single digit percentage. Costco, Kirkland, Walmart, they all use data from their own sales, from IRI, from Nielsen, from any source they can get to figure out where they should be investing in more private label because the private label products for those major retailers are better margin for them. It's a, it's a better deal. And, and what Amazon is doing is no different. And in fact they're doing it at a smaller scale than these other guys. Krishna Thakur from grocery dive, right? Mass retailers club and dollar stores showed the strongest gains in store brand sales during Q1 for these retailers, store brands gained 16.6% in dollar sales. Supermarket saw a 12.7% increase in dollar volume for their store brands and drugstore saw a 13% boost.

Rob:

This is happening everywhere. It's not an Amazon thing. My favorite reaction from this and in particular from Senator Josh Holly's claim that Amazon should be investigated in a criminal investigation is from reason magazine. Reason magazine has the excellent subtitle of free minds and free markets and the writer Billy Binion, right? In an article titled, Senator Josh Hawley wants a bogus criminal investigation into Amazon, the lawmaker says that the company's data practices violate any trust law. They do not. I think that about sums it up. One of the things that's been interesting in the tech space the last 10 years is, especially the last three four years, is what people have been calling the tech lash. A lot of skepticism about Facebook in particular, but also Amazon and Google over privacy and over potentially monopsony mystic strategic strategic decisions that they're making better, any competitive and so on and so forth.

Rob:

And it's been, it's been popular to hate on these hate on these large tech companies. Elizabeth Warren and other former us presidential primary candidates and the democratic party were really spending a lot of time calling out the big tech companies Mmm. As, as part of their, part of their campaigns. Josh Holly's doing the same thing right here. I think what they're basically doing in broad strokes is getting airtime. It's popular hate on the big tech companies. It's still popular to hate on the big take big tech companies even since COBIT. But what Amazon is doing is no different than any other retailer in this case. And in fact, they happen, they seem to be worse at it than some of the retailers that have had experience doing this for decades. So private label on the rise, hating on Amazon by politicians still on the rise and you're seeing both of those things in the headlines.

Rob:

I personally am not reading too much into it other than, you know, politics being politics and media being media. I, I think it's, it'll be interesting to see what Amazon's private label business looks like over the next two, three, four, five years, whether they can produce a private label brand as iconic as Kirkland or not. We'll see. Those are all really interesting questions, but they, they have nothing to do with, with any competitive behavior. So that's it. I hope you enjoyed this new format of Rob's rent, a Festo for the digital shelf Institute. As always, if you enjoy the show, please leave a review wherever you get your podcasts. Thank you so much for listening and for being part of our community.