The Private-Label Evolution
In this MarketFoolery podcast, host Chris Hill chats with senior Motley Fool analysts Taylor Muckerman and Jason Moser about a few of the market's biggest stories, and a few investing books for your to-read list. PayPal (NASDAQ: PYPL) turned heads with some bold new moves toward traditional banking, which could be a fantastic way to draw in even more young consumers. Amazon.com (NASDAQ: AMZN) has been quietly building up its own private-label brands, and they're just one of many companies to cash in on the trend toward private-label products. And finally, the guys close out with five books novice investors can check out to get a feel for the Foolish way of doing things. Tune in to find out more.
A full transcript follows the video.
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This video was recorded on April 9, 2018.
Chris Hill: It's Monday, April 9th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, senior analysts Jason Moser and Taylor Muckerman. Happy Monday, gents!
Taylor Muckerman: Same to you!
Hill: Are you doing well?
Muckerman: I think so.
Jason Moser: As well as can be expected.
Hill: What does that mean?
Moser: Well, I mean I was out lifting flagstones yesterday, laying out a new path on the side of our house so our dogs don't track a bunch of mud as they come in. At 45, I was thinking I might be a little bit sorer but feeling actually feeling pretty nice.
Muckerman: Looking spry.
Moser: I'm keeping in shape here.
Hill: Nice. And hey, painkillers never hurt.
Moser: Well, I'll remember that for when I get home later today.
Hill: We're going to talk retail, we're going to talk about investing books, but we have to start with the bank of PayPal. The Wall Street Journal is reporting that PayPal has been making moves toward traditional banking, which includes partnering with smaller banks to offer direct deposit, debit cards and other services. What do you think, Jason? Because this really seems like they are going in this direction. We love when companies innovate, and it's interesting how some companies innovate in private, and in the case of PayPal it's like, "Nope, we're doing this. We don't care who knows. We're doing this."
Moser: Yeah. Sometimes I like to communicate my feelings via gif form on Twitter. Every once in a while, a gif just pops in your head, though, that sort of internal gif. And the one that popped up was Mr. Burns from The Simpsons going, "Excellent." Because that's what I think of this, I just think this is outstanding in a number of different ways. I mean, this is a company we own in Million Dollar Portfolio. It's one I own personally. It's a part of the War on Cash basket. And we talk a lot about the competitive advantage in the network, right? And how the network for PayPal is actually a big part of that investing thesis. And I think this really takes it to another level. And it shows the position in the value chain that PayPal holds, and how it behooves other partners in that value chain to partner up with PayPal and become a part of that network. Because that network is already so big and so proven, right? I mean, PayPal has demonstrated, I think, its resilience in this payments space.
So, in PayPal's position here, they're not actually a bank, and they're not looking to become a bank, and that's OK. It's kind of like that Holiday Inn commercial, right? I'm not a doctor, but I did sleep at Holiday Inn last night. I'm not a bank, but I did sleep at Holiday Inn last night. That's kind of PayPal's feeling, because they're going to partner up with different banking partners in order to help establish a banking relationship. And the idea here is, this is not a banking account for everyone. I think the focus really here is primarily on the unbanked, folks who do not have a banking relationship currently. We've seen, these big banks are sort of changing their stance on a lot of the products they're offering consumers, leaning further away from free accounts and more toward nickel and diming a lot of consumers for fees here and there. And this aims to combat that a little bit with a market demographic that doesn't have those checking accounts yet.
Muckerman: Yeah. They're kind of already acting as a checking account for a lot of people, if you have a PayPal balance. So, maybe you roll that into a checking account. And definitely with Venmo, and the younger demographic there maybe just joining the workforce or gaining the need for a bank account as you enter your 20s and 30s. So, a familiar name for a lot of people in that younger demographic, and it seems like a logical next step for quite a few people. And the penetration that Venmo and PayPal already have in the online payments space exceeds Apple Pay and Google Pay and all those, so it's got that base already established.
Hill: And that network effect that you're talking about, I think that gives them a lot of optionality, particularly, as you said, Taylor, younger people, once they get to a point in life when they are going to be needing like, "Oh, I'm actually at the point now, 10 years in the future or whatever, where I am looking to buy a home," and they are looking for equity, a line of credit, all that sort of things. So, in terms of PayPal, not that they necessarily say, "OK, yeah, we want to be Wells Fargo, but without the fake accounts."
Muckerman: Let's hope so, as investors. [laughs]
Hill: [laughs] "We want to be Wells Fargo, but with much higher ethical standards."
Moser: Well, they're simplifying this for a lot of folks. I mean, you look at this not just from a domestic perspective, but go global, right? I mean, the time that I spent living in Egypt and Kazakhstan and just even a couple of weeks ago in the Bahamas, I mean, you'd see everywhere that cash is still the main way that purchases occur. There's a lot of cash that changes hands. But now, instead of a business perhaps needing that merchant services relationship with a big bank and bringing in all of that equipment and making sure they have a connection and it's reliable and batching at the end of every night, all this stuff is very cumbersome -- now, they can just set up a PayPal account.
And everybody that's going wherever they go, everybody's got a phone. You don't even need a banking account. You have that connected to a card, and then you can pay pretty much wherever you go, utilizing PayPal. More and more places are recognizing that as just a wonderful substitute for that traditional merchant services relationship. It's cost-effective and it reaches a tremendous opportunity.
Hill: Where I was going with that was, right now you've got smaller banks that are partnering with them. It's easy for me to imagine, down the line, larger financial institutions saying, "OK, if we don't have a partnership with PayPal right now, we need to seriously consider it," just because their network becomes larger and larger over time.
Muckerman: Yeah, for sure.
Moser: I'm extremely curious to see what small Georgia bank is partnering with PayPal on that check capturing side. In that piece we were talking about, these little banks are remaining anonymous for the most part.
Muckerman: Yeah. It's interesting that they didn't name names.
Moser: There's a part of me that wonders if it's not Ameris Bancorp, which is a company I've talked about a lot here through the years, a small Georgia bank that has gotten a lot bigger over time and really made its way through the financial crisis in good working order. It's gotten a lot bigger here recently because of some acquisitions, and I think they're just relocating their headquarters to Jacksonville, Florida. I wonder if they still are considering that, the Georgia bank. I just would be fascinated to know. Anybody in PayPal investor relations feel like giving up a secret ...
Muckerman: [laughs] That's it.
Hill: I was going to say, I think you need to tap your network back in Georgia and do a little reconnaissance.
Moser: I'll be down there next month, so I'll make sure and ask the appropriate parties.
Hill: So, we've talked before about Costco (NASDAQ: COST) and their private-label brand, Kirkland, which has been very successful for Costco over time. This is an area where Amazon has largely stayed out of going the private-label route. Until now, it seems, because Recode is out with a story about how, after dabbling with private label in very small ways about a decade ago, Amazon has now got somewhere in the neighborhood of 70+ of their own private-label brands that they're doing. How much bigger can this get, do you think? There are a couple of things here. One, Taylor, it really does seem like, unlike Costco with Kirkland, where everything is branded Kirkland, so you know, "OK, that's the Costco private label," that does not appear to be the case here with Amazon.
Muckerman: Yeah, no. They have multiple different lines, but they are starting to put Our Brand in the search results, so if you notice, in your search results, you're seeing Nike for apparel and all these new vendors that they're using, but you also see, I think their new athletic line is Peak Velocity. So, you'll see Our Brands associated with that, to identify. But, apparel seems to be the bigger portion of what they're doing here, but now with the Whole Foods acquisition, they're going to have the Whole Foods 365 brand and other grocery brands. Then, you have AmazonBasics, like batteries and phone chargers, and even some baby, I don't want to say equipment, but clothes and food and supplements, under Amazon Elements. So, branching out. And I think they're testing and learning and already turning into several hundred millions of dollars or the revenue very early on.
Hill: And for the sake of context, Jason, we've talked before with Jim Sinegal, longtime CEO at Costco. I remember asking him point-blank about how big Kirkland could be, did he ever envision a Kirkland store on its own? And he just very clearly said, "No, we look at Kirkland as a great move for us, but in terms of percentages, we never want that to be more than 20% of overall sales." My hunch is, that is not necessarily the case with Jeff Bezos.
Moser: I wouldn't think so. I feel like with all this Costco and Kirkland talk, Mac Greer needs to come on the show and offer awesome some testimony here.
Hill: There is no bigger fan of the Kirkland private-label brand than Mac Greer.
Moser: And I mean, I think that says a lot, because I think if you're a retailer and you're not pursuing this strategy at this point, then the world is really passing you right by. And Amazon is going to benefit from this movement twofold, with Whole Foods and with Amazon. Nielsen research has some interesting data on this that shows that private-label growth is actually outpacing that of branded products. If you look at dollars spent on private-label products, that's a full year compound annual growth rate of about 1.7% vs. 1.4% for branded products. Now, the interesting thing is that the private-label growth is actually accelerating, and the branded label growth is going the other way. It's slowing down.
And I think there was a time ago, perhaps, where the perception was, at least, that private label was for households that were more cost-conscious, folks that were minding their dollars a little bit more. But there is data out there that shows, actually, that the higher the household income goes, the less they actually believe that private label offerings are only for folks on a tight budget. So, there's that stigma that is disappearing very quickly as well.
It's all to say that this is a big market that's getting bigger, and from a company's perspective, it can ultimately boost margins because, yeah, they're offering those products at a little bit cheaper cost, but they're not paying for that brand equity. They're not paying for that marketing. They're not having to communicate a certain message. And with a company like Amazon that really is just communicating that message of becoming the world's most customer-centric company, so no matter what they do, that's the goal, that's the aim, that's the line they're pitching. So, it just is a natural fit.
Muckerman: You see Target and Jet.comdoing this as well, so certainly bigger stores. But I wonder with Amazon, maybe if they start to alienate some of their third-party vendors by competing more directly with some of their products, that could be an issue there, seeing that top line shrink a little bit as private label grows. Hopefully it's not just a net zero effect where the private label just fills in the gaps as the third-party vendors get angry and leave. Hopefully it can be a growth driver rather than just a place filler.
Moser: And a company that's not a publicly traded company, but one that we're familiar with all here, Trader Joe's, they've executed on this strategy so well for so long, right? I mean, they have developed a brand name and that brand equity in Trader Joe's, and so much of that stuff is under that label, and it's all quite affordable.
Hill: Two things pop into my mind. One is, maybe a decade or so ago, starting to notice when I was at CVS or Walgreens, insert name of drug store, looking at medication, and then there would be whatever was essentially the house brand right next to it. And on the label, it would say, "This basically Sudafed. This is the CVS version of Sudafed."
Muckerman: It's the same exact thing, yeah.
Hill: And they would just call out on the label, like, "Yeah, this is basically the same ingredients," that sort of thing. The other is my personal favorite private-label brand that I've encountered recently, which is, Whole Foods has started selling a Spanish red wine called Death Metal Red.
Muckerman: I saw that, but I didn't realize it was Whole Foods private label.
Hill: Yes. I was in Whole Foods a couple of weeks ago with my son, and he noticed it, because it has a very distinctive lady with a unicorn. It's just one of those things you would just sort of look at and go ... this ... this is not necessarily ...
Muckerman: A gag gift. [laughs]
Hill: Yeah, it kind of like that. And then I looked it up and found two things. One, that this was a private label that was created for Whole Foods, and two, it actually got pretty good ratings in the wine community.
Our email address is marketfoolery@fool.com. From McKenna Hassey at Drake University in Des Moines, Iowa. She writes, "Hi, Chris. Quick question: if you could put a book in the hands of every member of the Drake Investment Club, what would it be? I'm looking for something interesting, applicable, etc. that could be helpful to any level of investor." It's a great question.
Muckerman: From my dad's alma mater.
Hill: Is it?
Muckerman: Yeah.
Moser: I follow her on Twitter. She is really doing well in her passion, race car driving. It seems like every week, she's just killing it. Congratulations, McKenna!
Hill: One of the reasons I like following McKenna on Twitter is because it reminds me of how tired I am. [laughs] It's entirely possible that she never sleeps. We'll just go around the table. I'm going to start just by throwing out a free book that anyone can get. It is The Motley Fool Guide to Investing for Beginners. It's an e-book and you can get it by going to our podcast center, which is at fool.com/podcasts. Go to fool.com/podcasts, and on the right hand side, you'll see a link right there, you can download The Motley Fool Guide to Investing for Beginners. It's free. So, that's one. Jason, what do you got?
Moser: It's a good question, I'm glad she asked it. And whenever I get this question, I immediately start thinking about books that are right in line with our investing style, because I think there is something that we have to at least acknowledge in that we think about things a bit differently than probably a lot of the financial media does out there. We take a much longer timeline, more business-focused, focusing on leadership, competitive advantages and things like that. I've actually got two books that I think can help from those perspectives there. Robert Hagstrom's The Warren Buffett Way. Pretty easy read, and it's not like a big long history of Warren Buffett. It's a good focus on his way of investing and why it matters to him and how it works. I think it's easy to incorporate in our everyday investing lives.
And then, Peter Lynch's One Up on Wall Street, I think is one that we talk about often here. Peter Lynch, a fund manager who has an exceptional track record. And again, his track record, I think, is because he approaches investing much the way we do -- or, rather, maybe we approach it much the way he does. [laughs] Business-focused. I think there's that quote out there that, this isn't a lottery ticket, it's a piece of a business.
They're a little bit dated, perhaps, but the principles are sound, and I think you can bring that style of investing forward to today. They're really easy reads, fun reads and extremely helpful.
Muckerman: Yeah. One Up on Wall Street is, I think, the first investing book I ever read, just digging through boxes of my dad's old books and came across that one.
Moser: And they're just relatable, right? You could sit there and recommend some Benjamin Graham text, but I mean, that's just not relatable, it's not pleasant reading for most people.
Hill: Nothing against Benjamin Graham.
Moser: The Intelligent Investor is kind of how Buffett framed his view on the world, and so I think you're going to get a lot of that out of just reading The Warren Buffett Way, and it's more fun.
Muckerman: Right on. I like William Thorndike's The Outsiders, a book that started as a project where William Thorndike was going to make a presentation at a conference, and then turned it into an eight-year long project of interviewing everyone associated with eight different CEOs that excelled throughout history -- Warren Buffett being one of them, of course. But, the key ways that these guys were connected -- and gal with Katharine Graham from Washington Post -- but, master capital allocators had outperformed their peer group by leaps and bounds because of that. Really brought share buybacks into the fore, but they excelled at it, in terms of buying in large chunks at opportune times, rather than pre scheduled share buybacks like you see these days.
Hill: One other book I'll throw out there, which last time I checked is not free, is The Big Short by Michael Lewis. And the movie is great. I enjoyed the movie a great deal, but as is almost always the case, you get more from the book than you do from the movie. Particularly for college students who are in an investment club, I assume any college student who is in an investment club is very seriously considering this as a career option. So, the reason I would recommend The Big Short is because one of the things that is illustrated in that book so brilliantly by Michael Lewis is the risks associated with a groupthink. And not only those risks, but just how difficult it is for any professional investor to fight against that tide, because so often the people who are, for lack of a better word, the stars of this book are the people who are openly ridiculed for most of the book because they are the real-life people who say, "No, actually, America's housing is propped up, and it's all going to come crashing down." And time after time after time, they are mocked, laughed out of the room.
Muckerman: And they bet their livelihoods on it.
Hill: Exactly. So, I think for any investor, but particularly for any young investor, it's a good illustration of just how hard it can be to be an independent thinker in the professional world of investing.
Moser: Like they say, investing is just really one big disagreement, right? [laughs]
Hill: [laughs] Exactly. Alright, Jason Moser, Taylor Muckerman. Guys, thanks for being here!
Moser: Thank you!
Muckerman: You got it!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon and PayPal Holdings. Jason Moser owns shares of Apple, Nike, PayPal Holdings, and Twitter. Taylor Muckerman owns shares of Alphabet (C shares), Amazon, PayPal Holdings, and Twitter. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Nike, PayPal Holdings, and Twitter. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Costco Wholesale and CVS Health. The Motley Fool has a disclosure policy.
