Amazon.com, Inc.’s (AMZN) march toward total retail domination is gaining pace with its intention to sell its own brands of goods — from diapers to dish soap — giving the market yet another reason to be giddy about the long-term prospects of AMZN stock.
After all, Amazon needs to keep expanding into large and potentially lucrative businesses to maintain its rich valuation.
Investors are currently paying about 72 times forward earnings for Amazon stock. That’s not unreasonable for a company with a long-term growth forecast of 55% per annum, but neither is it easy to fulfill when you have a market capitalization of $335 billion and projected revenue of $160 billion next year.
But as we’ve seen with Apple Inc. (AAPL), multiples collapse when the market thinks you’ve lost your mojo. That’s why it’s good to open new fronts all the time.
Getting into the business of selling prosaic packaged goods and foods is a no-brainer for the world’s biggest e-commerce retailer. The nation’s supermarket operators and department stores love their private label brands, because much lower marketing costs gives them higher margins.
In hindsight, it was only a matter of time before Amazon expanded its private-label offerings this way. Hawking high-volume, ordinary consumer goods just makes sense.
Amazon’s Gain Is Another’s Pain
It’s also the last thing the nation’s consumer products companies and supermarket chains needed to hear. In an unfortunate coincidence for Procter & Gamble Co (PG), the Amazon news broke at the same time as word got around that Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) sold almost its entire stake in the consumer products giant.
Companies like P&G have been struggling to get shoppers to pay up for premium brands like Tide or Charmin ever since the financial crisis. In their stead, cash-strapped consumers have been opting for cheaper private-label brands. If all goes according to plan, Amazon is going to make this trend even worse.
According to The Wall Street Journal, Amazon will start rolling out items such as nuts, spices, tea, coffee, baby food and vitamins as early as next month.
Consumers won’t necessarily know that these are Amazon’s own offerings, since they will be sold under brand names such as Happy Belly, Wickedly Prime and Mama Bear. The company will also sell goods such as diapers and laundry detergents, WSJ reports.
Importantly, private-label products will be available only to Amazon Prime subscribers, who pay $99-a-year for special benefits. Growing the Prime segment is a pillar of Amazon’s long-term strategy because subscribers do so much more shopping on the site.
Amazon has dipped its toe in private-label goods in the past and flopped, but the sheer size of the market makes another try worth the risk. U.S. sales of store brands rose $2.2 billion to $118.4 billion, according to the Private Label Manufacturers Association, an industry group.
The bottom line is that anyone holding AMZN stock should be reassured by the company’s latest imperial power play. As for the rest of us … well, that’s another matter.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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