Amazon reportedly has a new tactic to boost its already massive online sales: asking companies to create new brands that will sell exclusively on its e-commerce platform. Since 2016, Amazon has steadily increased its private-label brands, offering in-house, generic versions of products like diapers, laundry detergent, and electronics accessories. These private labels aren’t just a profit generator for the e-commerce giant, they also give it additional leverage when negotiating product prices with big companies that sell products on Amazon, like Unilever and Procter & Gamble. But Amazon may no longer be focused on product development, according to a new report by the Wall Street Journal. Instead, it wants other, more established brand manufacturers to do the heavy lifting.
Amazon is asking companies to create new, Prime-exclusive brands
Asking other companies to create in-house brands is part of Amazon’s larger cost-cutting strategy.
Amazon is asking companies to create new, exclusive brands so it can cut down on its own manufacturing and product development costs, according to the Journal’s report, and some companies are complying. The e-commerce giant launched an accelerator program through which companies could develop new Amazon-only products last year; so far, they include a line of sweeteners from the sugar substitute brand Equal, a mattress brand from the startup Tuft & Needle, and two supplement brands from GNC. This move is part of Amazon’s greater strategy to cut costs and boost profits for Prime, and an indication of the influence the company — which controls half of all e-commerce sales, according to eMarketer Retail — wields over brands.
But while it’s a winning strategy for Amazon, which gets to increase its offerings while saving on manufacturing costs, is it a good deal for the participating companies?
It’s complicated.
On the one hand, brands that create exclusive products for Amazon get access to consumers who may otherwise turn to a competitor. Ken Martindale, the CEO of GNC, reportedly told investors that the Amazon supplements were a way of making up for lost in-store sales, according to the Journal’s report. Participating brands may also get placed higher on search pages, which researchers say can hugely affect sales, since Amazon sometimes puts its in-house brands higher on search results. “[Algorithms are] basically pushing customers to buy the top few products,” Ted Lappas, an assistant professor at the Stevens Institute of Technology’s School of Business, told me in December. “People never get to look at item six, or 16, or 20.”
But developing new products for Amazon isn’t cheap, and it’s clear that the company expects brands to handle the costs themselves. Equal’s “Sugarly Sweet” brand was developed in just 90 days — a process that normally takes one or two years, the Journal reported. And an unnamed discount retailer offered Amazon a discontinued coffee brand at “virtually no cost.” Brands are also responsible for shipping, and the Journal reports that both Equal and GNC’s shipping costs have gone up as a result.
This isn’t the only way Amazon is trying to cut the amount of money it spends on shipping. Prime customers may be familiar with its “add-on items” policy, which requires them to spend at least $25 on small, “low-priced items that would be cost-prohibitive to ship on their own.” (It’s worth noting that Amazon is also attempting to reduce its reliance on third-party shipping companies by increasingly handling shipping itself, which would give it further control over the entire distribution chain.) Last December, the Journal reported that Amazon was phasing out products that were expensive to ship and had low profit margins, which it internally referred to as CRAPs: things that “Can’t Realize a Profit.”
It also encouraged brands to design shipping-friendly packaging, which several did. Tide, for example, rolled out an “Eco-Box” packaging for its detergent that kind of looks like boxed wine. Smartwater, which is owned by Coca-Cola, changed its default order on Amazon Dash — a service that lets customers automatically reorder certain products — from a $6.99 six-pack to a $37.20 24-pack, which boosted the cost per bottle from $1.17 to $1.55.
For brands, spending extra money on packaging and product development may be worth the extra sales generated through Amazon. More than anything else, though, this latest news shows just how much influence Amazon has over brands.
