How Amazon is luring shoppers with its private label business

‘Data That No One Else Has’

Amazon’s advantage over traditional retailers is its knowledge and access to data from its platform.

Take word searches. About 70 percent of the word searches done on Amazon’s search browser are for generic goods. That means consumers are typing in “men’s underwear” or “running shoes” rather than asking, specifically, for Hanes or Nike.

For Amazon, those word searches by consumers allow it to put its private-label products in front of the consumer and make sure they appear quickly. In addition, Amazon has the emails of the consumers who performed searches on its site and can email them directly or use pop-up ads on other websites to direct those consumers back to Amazon’s marketplace.

Some of this data is also available to big brands or vendors selling on Amazon’s platform through a program called Amazon Retail Analytics Premium. But it is expensive, with vendors paying 1 percent of their wholesale cost of goods sold to Amazon or a minimum of $100,000 to get access to a database that lets them see to some, but not all, of the data Amazon has compiled.

“Amazon has access to data that nobody else has,” said James Thomson, a former Amazon executive who now works at Buy Box Experts, a consulting firm that advises companies on how to build their brands and sell products on Amazon. “I can’t just walk into a store and say, ‘Excuse me, did you look at this brand of cereal this morning and decide not to buy it?’ Amazon has that data. They know you looked at a brand and didn’t buy it and they’re not going to share that data with any other brands.”

With that data, Amazon is able to conduct regional or one-day price tests, dropping the cost of its goods in certain markets to discover at what price more customers purchase the item.

And while traditional retailers can readily scan their sales data and understand what size shirts and colors sell and which ones don’t, Amazon has hundreds of reviews of competitors’ products on its website, providing customer feedback on how the shirt looked after five washes or how it fit different body types.

“Amazon can analyze those reviews and figure out why customers were dissatisfied with a certain product,” said Cooper Smith, an analyst at research firm Gartner L2. “Amazon can then turn around and create a private label for a similar product but improve upon it based on what customers say.”

When Amazon introduces a new private-label product, it doesn’t go all in. It often uses a technique analysts call “test-and-repeat,” ordering a small batch of product from its manufacturers, testing demand and then, if the product is successful, reordering a bigger batch of product as well as expanding its assortment.

Again, here, Amazon has a big leg up on traditional retailers. Most retailers appeal to one segment of consumer — the budget, midmarket, or higher-end shopper. Amazon can offer a variety of private-label goods, positioned toward shoppers in different categories, says Deborah Weinswig, the founder and chief executive of Coresight Research.

For instance, through Amazon’s Pinzon brand, it offers a queen-size hypoallergenic mattress topper for $40.37. But it also sells a mattress topper through its AmazonBasics private label for $22.99.

Similarly, Amazon sells men’s button-down shirts under both the Amazon Essentials and Goodthreads labels. Analysts at research firm Gartner L2 found, on best-selling products, the Goodthreads apparel cost 60 percent more.

But, perhaps more important, Amazon has utilized a reviewing program called Amazon Vine for many of its private-label goods.

Amazon Vine, or Vine Voices, are very active reviewers on the Amazon marketplace who are then invited by the company to participate in its Vine program, which identifies them as influential reviewers. In exchange for free products, which they disclose receiving, the reviewers agree to write evaluations on Amazon’s site.

Amazon has actively used Vine Voices to help introduce its private label brands. An analysis of more than 1,600 products across ten of Amazon’s private-label brands, including AmazonBasics, Amazon Essentials, Mama Bear, Pinzon, Goodthreads, and others, showed that about half had Vine reviews. Of those 835 products, more than half of the first 30 reviews were from the Vine program, according to ReviewMeta.com, an online tool that helps customers identify inauthentic reviews.

While, for the most part, the Vine and non-Vine reviews were similarly rated, in a handful of cases, the Vine reviews were significantly better. For instance, Vine reviews for Amazon’s Mama Bear diapers and baby products averaged 4.36 stars; non-Vine reviews averaged 3.82 stars.

Amazon Vine is also available to non-Amazon brands, but, specifics around how the program works are difficult to determine because Amazon doesn’t make it public. But many analysts say it is fairly expensive to participate, saying it can cost manufacturers as much as $5,000 to obtain reviews for one product, along with the cost of giving the product away. (The money to participate goes to Amazon; the Vine reviewers receive no compensation beyond the free product.)

A spokeswoman for the company said Amazon does not incentivize positive star ratings or attempt to influence the content of reviews. She also said that the company limits the total number of Vine reviews that it displays for each product.

“What’s happening on Amazon is different than you see in brick-and-mortar stores,” said Kevin Grundy, an analyst at investment bank Jefferies. “There, private label brands might take slightly more than 10 percent market share. Amazon’s private label brands are taking more than 25 percent of the online market.”

Mr. Grundy said when the contract for the AmazonBasics batteries, which are currently made by a manufacturer in the Far East, next comes up for bid, likely bidders could include Energizer and Duracell.

The next frontier? Alexa. Competitors and industry analysts are closely watching Amazon’s voice-operated platform, wondering whether Amazon will use that rapidly growing arena to further steer consumers to its own brands.

In a voice test of various categories using the Amazon Echo devices last year, researchers at Bain & Co., found in categories in which Amazon offered a private-label product, Alexa recommended those products 17 percent of the time. Noting that the private label goods represent only about 2 percent of total volume sold, the Bain researchers said, “the online retailer clearly positions its own private labels favorably in voice shopping.”

An Unfair Advantage?

Early last year, the Yale Law Journal published a note that was simply titled “Amazon’s Antitrust Paradox.”

The essay, written by a law student named Lina Khan, argued, essentially, that the current framing of the nation’s antitrust laws have not evolved to deal with the market power of technology giants like Amazon.

Just a few weeks earlier, The Capitol Forum, a Washington, D.C.-based news service that examines business and regulation, published a story arguing Amazon risked antitrust enforcement by the Trump administration for using its algorithms and platform to promote its own products over “those of merchants that are dependent on Amazon’s platform and with whom Amazon competes.”

The articles fed into a growing debate among economists and lawyers around whether Amazon is displaying monopolistic or anticompetitive behavior in its marketplace.

Amazon has two strong defenses when these issues are raised.

At least since the 1970s, courts have been very skeptical of antitrust plaintiffs who can’t show that the challenged conduct would cause prices to go up or quality to go down. In this case, Amazon can argue, quite vehemently that, through its platform, consumers are paying lower prices, say legal experts.

And while Amazon’s brands have quickly gained market share on its platform in some areas, in other segments, such as apparel, they account for less than 1 percent of the inventory sold. And when broadened out to include brick-and-mortar stores, its online share of the battery market equals less than 5 percent. Until Amazon’s share of the total market starts to reach closer to 40 percent or more, it is difficult to argue there is an attempted-monopolization case, say legal experts.

But if its private-label business grows as analysts expect it to do, could it face a legal challenge of whether it is a “monopsony”? In a monopsony, a large buyer controls a large proportion of the market and drives prices down.

“If Amazon is not making its competitors available on voice and Alexa, well, that sounds like possible exclusionary conduct to me,” said Mr. Sagers. “If a federal court could be convinced that there is a market for in-home, voice retail distribution and that Amazon controls it, then I think Amazon could be looking at a monopsony case.”

Still, others argue a dominant question in any sort of antitrust action has been whether the company’s actions or a planned merger would harm consumers.

“You have to show that the end game is some sort of consumer harm, either through higher prices or lower quality,” said Herbert Hovenkamp, an antitrust professor at the University of Pennsylvania Law School and the Wharton School. “And so far, Amazon doesn’t even show up on the radar screen when it comes to consumer harm.”

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