One way in which Amazon differs from a conventional supermarket or a place like Walmart or Target is that it offers relatively little in terms of "store-brand" products. There's the Amazon Basics line of electronics accessories and there are Amazon Elements baby wipes, but not much else. But Greg Bensinger reports in the Wall Street Journal that's about to change, with Amazon prepared to roll out the Elements diapers that have long been rumored, plus a much larger array of products that will "include nuts, spices, tea, coffee, baby food and vitamins, as well as household items such as diapers and laundry detergents."
Why? Bensinger cites Bill Bishop, who runs a consulting company called Brick Meets Click, suggesting that "private-label goods boast higher profit margins than name brands because companies save costs on marketing and brand development."
Seeking higher margins would be a somewhat bizarre strategy for Amazon, which has historically had no profits whatsoever but recently stumbled into a high-margin web services business. My guess is that if Amazon goes big into store-label products they'll be priced aggressively to gain market share at razor-thin margins. The goal isn't really going to be making money, it'll be filling more trucks.
Amazon is trying to get better at delivery
Right now, Amazon is much more than a retailer of physical goods. But the retail of physical goods is still at the core of its corporate identity. And at the moment, the company is involved in a massive multifaceted push to get better at the delivery element of that.
For years, the company has offered free two-day shipping to Amazon Prime members. But these days, a wider and wider array of products is available for Prime one-day shipping or even prime same-day shipping.
This is an important strategic initiative for Amazon. If it can make one-day shipping the new normal, it'll make life that much more difficult for hypothetical future competitors. And to the extent that it can make same-day shipping a reality, it will be able to intensify the competition against brick-and-mortar retail and possibly dominate the buzzy but unproven on-demand delivery sector.
Mastering delivery means high fixed costs
The key thing here is that routinized one-day delivery is going to require a ton of infrastructure. You need warehouses near all the major population centers, the warehouses need to be staffed with people and/or robots, and you need to be putting tons of trucks in the field actually doing the door drops.
Amazon has lots of initiatives in the field ranging from drones to physical stores to try to support this ambition, but the ideas all have something in common — they are capital-intensive and involve high fixed costs.
That means that to make it work, you need to spread the cost across as many deliveries as possible. Making generic versions of household staples and selling them cheaply seems like an excellent way to do that. The fact that competitors are counting on these to work as high-margin items only means that the opportunity to steal a price advantage is real.
In most cases, obviously, the idea of earning nothing on each item sold and then making it up in volume is a joke. But for Amazon it's no joke. Each zero-margin item it sells helps create the infrastructure to meet more and more customer needs faster and faster.
