Amazon.com (NASDAQ:AMZN) is a growth machine and investments in Amazon stock keep seeming to pay off. Much of that growth comes from some pretty high-tech endeavors.
From getting out of the home and into your car, providing a ton of web services and hosting as well as tackling the world of digital advertising, Amazon has plenty of avenues to keep the revenues coming far into the future. However, one of biggest future revenue drivers at Amazon could be very low-tech.
We’re talking about private-label and store-branded products.
Amazon is taking a page out of old school retail and is quickly filling its online catalog full of wholly-owned branded products as another way to keep boosting sales. And in this case, it boosts margins as well.
For investors, it’s another reason to own Amazon stock.
Amazon Stock and Generic Goods
There’s a good chance that in your cupboard, refrigerator or medicine cabinet, you have some sort of store-branded product: aspirin from Walgreen’s (NYSE:WBA), maybe sandwich bags from Target (NYSE:TGT) or even Kroger (NYSE:KR) branded soda.
The point is that generic and store branded items have been around for a long time. Often, they come with lower price points, so consumers loved them. Retailers love them as well as they generally come with much higher margins per unit than the branded equivalent.
Over the years, retailers have gotten a bit sneaky with their store brands. Target, for example, owns a host of brands that don’t include its trademark bullseye on the label. This provides consumers with the illusion that they are getting a more premium product, while still getting some value.
Now Amazon wants in on the action.
Amazon has quickly and quietly amazed a huge catalog of wholly-owned private brands, 125 of them to be exact. Those private brands now encompass more than 6,825 different products.
Some are easy to spot, such as its Amazon Basics or Amazon Essentials. Others are much harder to see. Quickly searching for home furnishings on Amazon will return items by Rivet or Stone & Beam. How about Presto in dish soap or paper towels?
Amazon has plenty of reasons to do this of course.
For one thing, margins remain very fat on store branded items and Amazon gets to keep that margin all to its self. Secondly, thanks to its huge logistics network, Amazon is quickly moving towards being the leader in end-to-end retail. That is, moving from design and manufacturing to sale to ultimately delivery.
Moreover, controlling all the steps along the way, allows AMZN to pull in more than just having Procter & Gamble (NYSE:PG) produce an item.
Private Label and Amazon Stock
The juicy thing is that all of this isn’t just Amazon selling generic ibuprofen, it’s the way they are doing it.
We’ve already discussed how Amazon is starting to win at digital advertising. For example, search for the word “detergent” and Tide is the first pick. PG paid Amazon a hefty fee in order for that to happen. However, the second selection is often an Amazon house brand. Just like how Kroger may place its butter right next to Land O’ Lakes packages.
That spot is a good place to be, and it gathers a lot of eyeballs. So much so, that according to research by Cowen & Co., Amazon is able to quickly gain 25 to 40% market share on an item within six months of launch.
That’s 100% due to the fact that Amazon is able to push its own products. The crazier thing is that now, firms like PG and those in lower search results are willing to pay Amazon more in ad fees to move up the list and get out in front.
And it still gets juicer for Amazon.
The company knows more about people shopping habits than anyone. The data they have on you is insane. Because of this, the firm is able to quickly move into private label products that have a very good chance of selling well.
When it does, it’s very easy for them to reel you in with ads, software-generated product suggestions and a gentle nudge from Alexa. “I know you usually buy Dawn, but what about trying Mountain Falls this order?”
The best part is that all of this is working. Analysts at SunTrust suggest that Amazon will generate around $7.5 billion in revenues from private label brands throughout 2018. Because of its continued moves, that number is set to explode higher and reach $25 billion by the time 2022 rolls in.
The Bottom Line on Amazon Stock
All in all, Amazon is taking a page out of old school retail playbook with using generic and private label brands. The difference is in the execution. With its product placement and ability to grow sales on its pages, the firm really has a huge potential revenue driver in its hands.
Even more so, when you consider that competing firms may have to pay Amazon fees to boost their sales on the site. It’s just another way, Amazon stock is a must own for the long haul.
Disclosure: As of the time of writing, Aaron Levitt held no position in any stock mentioned.