Amazon.com (NASDAQ:AMZN) is the Don Corleone of online retail. Either you bend to its will or you come to regret it -- sometimes both.
The infamously competitive e-commerce power has toppled numerous industries and bankrupted many competitors in its all-consuming pursuit of e-commerce dominance. And now, as one observant journalist at Bloomberg has identified, Amazon has again demonstrated why doing business with the company has its own risks.
The rise of AmazonBasics
Amazon has slowly and methodically expanded its own private label brand in recent years. AmazonBasics launched in 2009 to little fanfare, as the company's initial experiment mainly focused on commodity items such as batteries. Several years passed with little additional action. E-commerce software provider Skubana has investigated the rise of AmazonBasics. According to Bloomberg, Skubana characterizes Amazon's period of inactivity with AmazonBasics, as one where the company "slept quietly as it retained data about other sellers' successes."
AmazonBasics has roared back to life in recent years, launching a series of products in categories ranging from grill covers to ladies' cashmere sweaters. What's more, Amazon has developed a number of additional private label brands beyond AmazonBasics, many of which center on the company's fashion offerings. For example, Amazon's women's retail efforts are marketed under its own Lark & Ro branding.
Kiss the ring
In all, Bloomberg says the Skubana report estimates that AmazonBasics now offers over 900 products, of which 284 were launched within the past year. Estimates from KeyBanc analysts put Amazon's total private label offerings at greater than 1,800 products. Either way, this growing trend demonstrates the hazard retailers face when dealing with Amazon. It also speaks to the company's increasing clout.
For many smaller manufacturers, Amazon's place at the epicenter of online commerce makes selling their products through the internet giant a necessary evil. Thanks to its ever-expanding footprint, Amazon is increasingly becoming the default destination for any online shopping, a fact most alarming to search giant Alphabet. The potential sales volume Amazon can offer is too great to pass up for many product manufacturers. However, as AmazonBasics illustrates, it could also mean digging one's own grave.
Amazon's willingness to experiment, its dedication to low prices, and its strict adherence to data, all mean that the company won't hesitate to switch from distribution partner to direct competitor when it sees an opportunity to profit. Under the right circumstances, private label goods carry substantially higher profit margins than the usual markup retailers use to fund their businesses. It's no accident that large retailers, such as Wal-Mart and Target, each sell their own private label brands alongside the third-party merchandise on their shelves.
Given Amazon's massive scale and efficient distribution, the company enjoys favorable business conditions to succeed with its own private label efforts. Amazon can then use the higher-than-average profit margins, associated with its budding private label efforts, to accelerate the speed of its famous flywheel strategy. This should, in theory, lead to greater market share and sales growth for Amazon.
The Bloomberg report cites an executive at one company whose product was recently targeted by a cheaper AmazonBasics version. As the executive put it, "We don't feel good about it. ... But there's nothing we can do." Indeed, this is Amazon's version of a catch 22.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.