E-commerce data analytics firm Marketplace Pulse recently conducted in-depth research on private label brands on Amazon (NASDAQ:AMZN). The conclusion seemed unfavorable for Amazon stock. According to the firm, Amazon’s private-label brand portfolio actually has more duds than studs.
The research suggests that Amazon’s private-label business isn’t growing. That could be the reason why Amazon’s e-commerce growth machine has cooled rapidly. Indeed, over the past several quarters, Amazon’s e-commerce business has gone from a 20%-plus grower which dominated the digital retail world to growing just above 10% and ceding market share to other digital retailers.
But there’s another big takeaway from Marketplace Pulse’s report, one that is bullish for Amazon stock. Namely, the report included a quote from an Amazon spokesperson who said that Amazon’s private-label products represent less than 1% of the company’s total sales.
That’s tiny. At other large retailers, the private-label business represents 30% or more of total sales. Thus, the bullish takeaway from the report is that Amazon’s private-label business, with the right execution, could grow by leaps and bounds over the next several years.
That would be big for Amazon stock. Most importantly, it would wake up the Amazon e-commerce- growth machine, reinvigorate investors’ enthusiasm about Amazon stock, and spur more investors to buy AMZN stock. Furthermore, it would boost the company’s margins, add firepower to what is already turning into a robust profit-growth outlook, and help AMZN grow into its valuation.
Overall, a private-label surge could turn into a big deal for Amazon stock. Here’s a deeper look.
Amazon’s Private-Label Business Is Tiny
Amazon is a big company. With over $230 billion of sales last year, Amazon is the second-largest retailer in the world, behind only Walmart (NYSE:WMT).
But, for such a big retailer, Amazon’s private-label business is really small. Amazon’s private-label business represents less than 1% of its total sales. That means that Amazon’s private-label business generates less than $2.3 billion of annual revenue.
That’s small. Over at Costco (NASDAQ:COST), the Kirkland brand alone represents nearly one-third of its total sales, or about $40 billion. Similarly, one-third of Target’s (NYSE:TGT) total sales in 2018, or about $25 billion, were from owned and exclusive brands,. At Kroger (NYSE:KR), private-label -brand-unit share hit 30.5% in the fourth-quarter, which, at an annualized rate, represents about a $34 billion business.
At many other big retailers, the private -label business runs anywhere from 15%-30%-plus of total sales, equating to $15 billion-$40 billion-plus of annual revenue.
Next to those figures, Amazon’s sub-1% private label penetration rate and roughly $2 billion private-label business are tiny.
Amazon’s Private-Label Business Could Be Really Big One Day
Amazon’s private label business could be really big one day.
The math is pretty simple. An average private-label penetration rate of 25% on all of Amazon’s 2018 revenue, excluding the sales of its cloud business, implies a private-label business of nearly $52 billion, versus its private-label business of about $2 billion today. That represents a 25-fold increase in private label sales. That’s huge. Furthermore, it equates to an additional $50 billion revenue opportunity, for a company that reported $232 billion of sales in 2018. That means that AMZN could grow its top line 20%-plus by expanding its private-label business.
Private-label products are made and sold by the company itself, reducing the role of middle men. Thus, private label sales increase margins. That means that, if AMZN increases its private-label business to 20% of its revenue, its bottom line would get a favorable bump of much more than 20%.
In other words, this isn’t small peanuts. It’s a big deal.
Now, the big question is: can AMZN do it? Can it turn a relatively small private- label business into a $50 billion-plus behemoth? The short answer is: yes. AMZN has done it before with other businesses, and it will do it again.
The company has the data, reach, reputation, and brand equity necessary to sell Amazon-branded products on a large scale. The Marketplace Pulse research report partly corroborates this thesis. Although many of Amazon’s private-label brands are duds, the ones with the name “Amazon” attached to them are doing very well, the report stated. That speaks volumes about this company’s brand equity and reputation.
Meanwhile, AMZN hasn’t yet figured out a way to consistently utilize its wealth of consumer preference and shopping data to help it sell private-label products. But it’s only a matter of time before the company does so. When it does, the company’s private-label business will boom, especially considering that AMZN can put those products in front of millions of shoppers.
So it does seem like only a matter of time before Amazon executes on its tremendous opportunity to create a huge private-label business.
The Bottom Line on Amazon Stock
Amazon stock is a long-term winner, mostly because of this company’s multiple, large growth levers. One underappreciated big growth lever is Amazon’s opportunity in the private-label business. AMZN currently has one of the smallest private label businesses of any major retailer. With the right execution, that relatively small private-label business could become very large and raise the company’s top line by 20%-plus and add far more to the bottom line.
All in all, investors should stick with Amazon stock for many reasons, including its $50 billion private-label opportunity.
As of this writing, Luke Lango was long AMZN, COST, TGT, and KR.
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