Can Private Labels Drive Profitability For Amazon?

According to our estimates, the general merchandize segment is the most valuable segment for Amazon (NASDAQ:AMZN), accounting for more than 50% of its valuation. It now appears that the company’s investment in its private label products is likely to drive growth of this segment in the long term. A recent report from 1010data reveals that the AmazonBasics brand accounts for around one third of online battery sales and is witnessing a 93% year-on-year growth. Similarly baby wipes from Amazon Elements (a household items private label of Amazon available only to Prime Members) has gained a 16% market share in terms of dollars sold, among the top ten brands of baby wipes. Earlier this year, reports suggested that Amazon is looking to roll out new lines of private label brands in perishable foods. Private labels are more profitable for Amazon and a higher proportion of private labels in total merchandize sales can improve margins for the company. Amazon can also leverage its huge database to draw insights on consumer purchase trends and launch private labels in the most popular categories. However, an aggressive expansion of these labels  can threaten existing sellers on its platform which could impact its gross merchandize  value.

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Access To A Huge Database Can Give Amazon Private Labels A Competitive Edge

Given that Amazon has access to data around product searches and can identify product categories which are growing faster than others, the company can identify the right categories for its private labels. Apart from building its brand, private labels will ensure that Amazon fulfils consumers’ needs better, by ensuring that products in demand are fulfilled by private labels. However, the biggest advantage for Amazon in promoting its private labels is margins, because they tend to be more profitable. The company can improve its bottom line if the sales of private labels increase and can also leverage consumer data to boost these sales.

According to our estimates, Amazon’s EBITDA margin in the General Merchandizes segment will increase gradually from around 9.9% in 2016 to 10.6% by the end of our forecast period.

If through high margin private labels, Amazon is able to increase this margin at a faster pace, there can be an upside to our price estimate.

Amazon has an advantage in its private label strategy, given that it has access to consumers’ shopping behaviour and preferences. The recent study noted above reveals that its products are becoming increasingly popular among consumers, indicating that its strategy is working. The company is also investing in the high margin fashion business, which can drive profitability in the long term. The only downside to this strategy could be the threat of losing sellers on its platform since they have to compete with Amazon’s own private label. However, given the large selection and volume of products sold on its e-commerce platform, we believe this might not be a “real” threat. The private label strategy, if executed correctly, can drive profitability for Amazon in the long term.

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