The grocery space just got a whole lot scarier. With margins already under pressure as more and more retailers, such as drugstores and dollar stores, selling food, Amazon.com (NASDAQ: AMZN), which was already delivering food via its AmazonFresh platform, will introduce its own private-label food line.
Up until a few years ago, the only products you would find in stores were those backed by large manufacturers that had been around for decades. Then retailers got the bright idea of essentially creating the generic-drug equivalent of just about any product – from food to Band-Aids. Now they could sell their private labels alongside the brands, at a discount, and make better margins.
The retailers caught on with a lot of foodstuffs. Obviously, they saw that Costco (NASDAQ: COST) had a great private label brand with Kirkland, and decided to mirror the strategy.
Now it’s Amazon’s turn. The retailer already had private-label stuff in electronics and accessories, and now it is turning to food. Using its Elements brand, Amazon appears ready to offer milk, cereal, baby food, vitamins, water, pasta, soup and coffee among other things.
One Factor is Critical
What are its prospects?
First and foremost, when it comes to private labels for anything, the top priority is quality. If your private label stinks, nobody will go near it. Private label is very much hit-or-miss. So the entire initiative depends on getting the right chefs with the right recipes, the right ingredients and a whole lot of testing.
If Amazon can accomplish this, it will have won the major battle. Nothing would be better than hearing the same exasperated gasps when people mention that Amazon’s coffee is “better than [insert great coffee]” as when I told people Costco made great food.
If anyone thinks that branded manufacturers will tell Amazon to pound sand, and refuse to sell their competing product on the website anymore, I have a bridge to sell you. Amazon can do anything it darn well wants, because it is the 8-million-pound online retailer. If anything, it will permit Amazon to leverage its deals with the brands, forcing them to accept less for even being listed on Amazon.
Billions in Amazon War Chest
For every investor who complains that Amazon isn’t making enough money, this is a perfect example of why I don’t care. Jeff Bezos has a war chest of several billion dollars. He can afford to experiment. If this initiative is even modestly successful, then it’s a victory. There is so much potential market share to grab that winning even a small portion of it could be lucrative.
I don’t think this is going to explode out of the gate, but nor is there a rush. This is Amazon’s equivalent of a captured start-up division. The company will be around a long time and has plenty of time to experiment and scale.
If it is successful, then grocery stores are going to be hurting more than they already are. Kroger (NYSE: KR) has net margins of only 1.59%. Supervalu (NYSE: SVU) comes in at 1.08%. Groupe Delhaize (NYSE: DEG) is a paltry 0.17%. The last thing any of these chains need is competition from a company with no storefront.
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