While the Amazon.com, Inc. (NASDAQ:AMZN) stock price has been roaring higher recently — shares are up 39% year-to-date — there’s still an elephant in the room. He’s been there for years, and investors are getting sick of the poor pachyderm.
The elephant’s name is Unprofitability, which has been plaguing AMZN intermittently for years now, despite all the company’s success.
Last year, the company lost a whopping $241 million on $89 billion in revenue. The only reason people still believe in Amazon stock is because at any moment Bezos could flip a switch or two and start posting multibillion-dollar profits.
Call me crazy, but I think the newest of Amazon’s zany-sounding initiative could help the company break even consistently. What is this zany plan? AMZN plans to sell its own private-label foods through its website.
Private Labels Mean Higher Margins
It’s not at all unusual for large retailers to develop their own private-label brands and piggyback on the success of similar products. All of Amazon’s biggest competitors, from Costco Wholesale Corporation (NASDAQ:COST) to Wal-Mart Stores, Inc. (NYSE:WMT) to Target Corporation (NYSE:TGT) prominently feature their own private label-brands in their stores, hawking everything from groceries to garments.
AMZN doesn’t want to get left in the dust. According to a Wall Street Journal report this morning, sources said that Amazon was
“…preparing to broadly expand its fledgling lineup of private-label brands to include an array of grocery items such as milk, cereal, and baby food as well as household cleaners…”
The report also said that Amazon has been in discussions with private label food manufacturers, including TreeHouse Foods Inc. (NYSE:THS). The products will be sold under Amazon’s Elements brand name, and may also include “coffee, soup, pasta, water, vitamins, dog food and household items like razors and cleaning products,” according to the article.
Details on when exactly such a product rollout would occur are murky, but AMZN will likely integrate them with Amazon Fresh, its grocery delivery service.
Private-label foods, similar to generic drugs, boast higher margins than their branded rivals, because there’s little focus on marketing and developing a brand.
Campbell Soup Company (NYSE:CPB), for instance, has spent decades building a brand and millions of dollars advertising to maintain and build so-called consumer “mind share.” But when AMZN makes a generic chicken noodle soup, it will do so more or less effortlessly. As long as it doesn’t taste like crap in a can, some consumers will just opt for the cheaper Elements-branded soup above Campbell’s.
The real trick isn’t making these private label products, it’s ensuring that they’re made well. If Amazon can stick the quality part of the equation, the last leg of the journey is making sure consumers know about and use its Fresh delivery service.
So while there are a few hurdles to conquer before this initiative moves the needle for AMZN stock, the ball is rolling in the right direction. I’m going to watch and see how this plays out over the next year or so, but I expect it’ll be a net positive for shareholders.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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