Why National Brands Have to Worry about Amazon
By Dale Buss
The food-retailing world will continue to reverberate with the impact of Amazon’s plan to acquire Whole Foods Markets and bring its ultra-efficient, price-stomping, brand-beating command of e-commerce to the aisles of more than 400 grocery stores that it will own across the country.
But CPG national brands, private-label suppliers, mainstream supermarkets, mass discounters, distribution networks and other players in the U.S. grocery business already are trying to digest the likely impact of Amazon.com Inc.’s plan to acquire the pioneer of better-for-you food retailing for $13.7 billion.
The biggest potential reverberation hinges on whether acquiring Whole Foods helps Amazon succeed in solving the particular challenges of delivering groceries to end consumers in the same way that the online behemoth already has revolutionized everything from book retailing to gift giving.
“The real issue is whether Amazon has solved the problem of delivery and distribution to consumers,” Brian Sharoff, president of the Private Label Manufacturers Association, told CPGmatters. “We don’t know the answer yet. First they have to go into business and function.
“But it’s possible Amazon has solved this, and if they have, the implications of that are almost like the day the Wright Brothers flew their little airplane. Then every other retailer will have to find a way to solve the same set of problems. If Amazon can do end delivery within an hour from its stores all over the country, that will attract a huge number of consumers, and it’ll be taking them away from other retailers who don’t have that potential to deliver.”
The impact of Amazon’s plans on national CPG brands likewise could be huge. They’ve already been battered lately by American consumers’ shift toward more fresh and natural options and away from heavily processed food – a phenomenon captured by hundreds of food and beverage upstarts and fed by Whole Foods. Store brands also provide increasing competition.
And more lately, CPG brands’ pricing has been pounded mercilessly by the accelerating competition between Amazon, which has plunged into food e-commerce and even bricks-and-mortar stores, and powerful retailers such as Walmart and Target that are determined not to be underpriced by e-commerce.
Now Amazon’s having a physical-retail base for extending its invasion of food retailing raises the prospect of even more price pressure on brands, which could manifest itself in a number of ways. A likely one: Amazon will leverage its negotiating expertise and the combined scale of its business to push for still-lower prices from CPG brands.
Even before being acquired by Amazon, Whole Foods was focusing on lowering costs – and ridding itself of its “Whole Paycheck” reputation – in the face of stagnating sales and increasing competition from Walmart, Kroger and other big conventional retailers that have greatly expanded their offerings of natural and organic foods.
Brands can respond in at least three different ways. First, said Ken Harris, managing director of Cadent Consulting, “The good ones will double down on brands and brand building with Amazon or without Amazon.” He told CPGmatters that “brands must figure out what they mean to consumers both in bricks and mortar and online, and cultivate that.”
James Thomson, a former senior manager in business development at Amazon and now partner at brand consultancy Buy Box Experts, said that brands “must figure out how to get much more nimble” now.
“If I’m a national CPG and I want to launch a new brand, it’ll still take me a year to 16 months,” Thompson said. “If I’m Amazon, I’ll get the product launched in 60 days, on a small scale after a couple of experiments. National brands are going to have to do that, too.”
In fact, Thompson said, “If I were P&G or Unilever, I would build a small team of people with a mandate to go build me 10 brands in the next year. These brands wouldn’t have to have the same financial requirements; they’d have to be nimble brands that are meant for testing purposes to try things out.”
Private label comprises another major area of impact for CPG brands as well as retailers from the Amazon-Whole Foods combination. Walmart, with its Great Value private label, and Kroger, with its Simple Truth organic line, have been performing well.
Already, major retailers have been pressing manufacturers for more private labels for their aisles. An additional factor is the rise in popularity of German chains Aldi, which already has a huge store footprint in the United States, and newcomer Lidl – both of them would like to get more private labels from American CPG companies.
“Major manufacturers will have to rethink their desire or lack of it to do private label,” Harris believes. “Then it becomes an opportunity cost: Can they do something different than what they sell, as a private label, and can they do it within their DNA?”
But Sharoff differed. “I don’t think most manufacturers of national brands will change their historic strategy just because Amazon is now selling goods through Whole Foods,” he said. “Some companies won’t, philosophically, do private label.”
There’s also some disagreement about just how significant Amazon’s ability to create private labels will be in the grocery space. Amazon’s efforts to create its own diaper line, for instance, haven’t fared that well. At the same time, CPG manufacturers’ iconic brands of diapers have been good sellers via Amazon.
“From an e-tailer point of view, Amazon has done a good job,” Harris said. “But they’ve also discovered that there’s a great deal of brand interest by consumers, and unless you actually have a better diaper than Pampers or Huggies, getting people to switch to a private label is hard to do.”
Sharoff insisted that the biggest issue for private label in the Amazon-Whole Foods deal will be whether Amazon will be able to leverage Whole Foods’ long-standing 365 private label to boost significantly the share of groceries that Americans purchase online, which stands at three to four percent now.
“Amazon probably will increase the number of products with the 365 brand, or whatever Amazon chooses to market, simply because it has a very large number of people who are Prime subscribers who will be exposed to products that Amazon hasn’t been able to offer,” he said. “But some consumers won’t want 365 because they didn’t like it when they tried it before, or they aren’t Whole Foods fans. But it won’t be a crucial issue.”
Thomson – who worked at Amazon – warned not to underestimate what Amazon might be able to do through its digital wizardry once it’s integrated with Whole Foods’ physical locations and presence in the traditional grocery business.
“Amazon already has access to phenomenal amounts of online data, and now it’ll be able to reach offline data,” Thomson said. “By putting that data together and localizing it to cities, Amazon will be able to get a good idea of what customers want – and also take that data and go off and build their own private-label products.
“And because Amazon doesn’t have the same profit requirement as most companies, they could build a private-label product that could wipe out a national brand.”
For example, Amazon has made a strong play for Eveready and Duracell customers with its Basic private-label battery brand, Thomson said. They’re 20 to 30 percent less expensive than the national brands.
“And that could happen to any brand at all in the grocery space,” he said. “Amazon CEO Jeff Bezos says, ‘Your profit is my opportunity.’ And if he believes some grocery brands are too profitable, Amazon will find a way to fill that need with a cheaper product that it builds itself.”