Amazon’s growing private label business is challenge for small brands

Peak Design has been making camera bags and accessories for a dozen years, relying on Amazon for the bulk of its sales. Last year, founder and CEO Peter Dering discovered Amazon was selling a bag that looked strikingly similar to Peak’s top-selling product, the Everyday Sling Bag.

“They copied the general shape, they copied the access points, they copied the charcoal color, and they copied the trapezoidal logo badge,” Dering told CNBC. “But none of the fine details that make it a Peak Design bag were things that they could port over because those things take a lot more effort and cost.”

Amazon even snagged the name, calling its own product the Everyday Sling.

What Amazon lacked in originality and quality it made up for in price. While Peak’s bag currently costs almost $90 on Amazon, the knockoff version from Amazon’s homegrown AmazonBasics brand was selling for about two-thirds less.

That motivated Dering’s team to respond with a snarky video, poking fun at Amazon’s questionable methods.

“You don’t have to pay for all those needless bells and whistles, like years of research and development, recycled bluesign-approved materials, a lifetime warranty, fairly paid factory workers and total carbon neutrality,” a man’s voice said in the video. “Instead, you just get a bag designed by the crack team at the AmazonBasics Department.”

The video went viral and in June was featured by HBO’s John Oliver in a segment on tech monopolies. Amazon later stopped selling its version of the bag, after Peak Design fans pummeled its ratings with a flurry of negative reviews.

For Amazon, whose expansive marketplace is in the crosshairs of regulators that are cracking down on Big Tech, stories like these from its private-labels division have caused added headaches. In 2020, the European Commission charged Amazon with using its size, power and data to push its own products and gain an unfair advantage over rival merchants that also use its platform. Earlier this year, Amazon said it would limit its use of marketplace seller data.

Meanwhile, the attorney general of California has filed an antitrust suit against Amazon, and the American Innovation and Choice Online Act being considered by Congress would crack down on Big Tech’s ability to leverage dominant market power at the expense of small businesses. The bill has yet to make it to a vote. 

But while Amazon may be pushing the boundaries of what’s acceptable in private labeling, there’s nothing illegal about copying brand-name products. It’s a business practice that, in some capacity, is widely used by most major retailers.

A private label is just like a store brand. A retailer finds a manufacturer to make an affordable “white label” version of a branded product. The manufacturer puts the retailer’s own brand on the packaging, and it then sells for an average of 25%-40% less than the national brand-name product, according to Kusum Ailawadi, a marketing professor at Dartmouth College who’s been researching private labels for 25 years.

“The history of private label, in the U.S. anyway, is very much a perception of low price and at best acceptable quality,” said Ailawadi, adding that the model dates as far back as the 1950s.

Retailers more recently have tried to change the view of store brands by focusing on something that captures a consumer’s interest. For example, Safeway has an O Organics brand and Kroger offers a line of baby products called Comforts.

Others put most of their products under store brands, such as Walmart‘s Great Value and Sam’s Choice lines or Costco‘s Kirkland Signature. In other cases, store names double as brand names, such as CVS and Trader Joe’s. Many such products are copycats.

“They will put it next to the national brand with whom they are trying to compete, with a me-too packaging, a similar look and then even have a big sign that says, ‘Buy basically the same product or better at 30% lower price,'” Ailawadi said. “Some of the practices around private label that are now under scrutiny by Congress and other people have not only been around a long time, they are perfectly acceptable practices.”

But Amazon is doing something different, according to Stacy Mitchell, co-executive director of the Institute for Local Self-Reliance, an activist group that fights big corporations. She said Amazon brings a powerful data engine to the table.

“Amazon has developed a lot of these private labels by gathering data, essentially spying on the companies that have to rely on its website in order to reach consumers,” Mitchell said. “They also know what search terms people are using, what they’re clicking on, how long their mouse is hovering in a certain place. And so they are able to analyze all of that data for a level of insights that simply are not available to your typical chain retailer.”

Amazon also has more power to steer shoppers to particular products than a typical brick-and-mortar retailer.

Amazon has the “ability to take one particular product and shove it on page 10 of the search results while giving another product, say, their own product, lots of space right there on the first page of search results,” Mitchell said. “We know that really alters and steers buying behavior.”

In 2020, Congress questioned Amazon founder and then-CEO Jeff Bezos about whether his company uses third-party seller data in making business decisions.

“We have a policy against using seller specific data to aid our private-label business,” Bezos said. “But I can’t guarantee you that policy has never been violated.”

An Amazon spokesperson told CNBC in September, “We do not use data about individual sellers that isn’t public to determine which private brand products to launch, and we have a policy to protect seller data that goes further than any other retailer we know of.”

How private labels are made is often shrouded in mystery, leading to speculation around certain products. For instance, Grey Goose has had to dispel rumors that it makes Costco’s Kirkland Signature vodka.

Ailawadi said some private labels are made by national brand manufacturers, who use their excess capacity to make products for others. Then there are specialty firms that only do private labels, and some store brands have their own devoted manufacturing facilities. Although Amazon released a list of more than 100 suppliers in 2019, it didn’t respond to questions about who makes its private labels today.

Amazon first entered the private-label business around 2009, with its AmazonBasics brand of staple goods such as discount batteries. It now has at least 118 private-label brands, according to data from e-commerce analyst company DataWeave. Some of its brands carry the Amazon name or logo, such as Happy Belly snacks, Amazon Collection jewelry and Amazon Essentials clothing. Others such as Solimo home products and clothing lines Lark & Ro and Goodthreads give little indication they’re Amazon brands.

Private labels make up just 3% of Amazon’s sales volume by dollar share in grocery, household and health and beauty categories, according to a recent study by Numerator. By comparison, private labels make up a whopping 77% of Aldi’s sales, followed by Trader Joe’s at 59% and Wegmans at 49%. 

Numerator data also found that AmazonBasics came in third for fastest-growing private label. That comes after a Wall Street Journal report that found Amazon drastically reduced the number of private-label items on its site in the first half of this year. The Journal reported that executives had discussed exiting the private-label business entirely to ease antitrust scrutiny.

In a statement, Amazon disputed that notion.

“We never seriously considered closing our private label business, and we continue to invest in this area, just as our many retail competitors have done for decades and continue to do today,” the company said.

Private labels clearly represent a lucrative opportunity. Target told CNBC that 12 of its 48 “owned brands” are each worth at least $1 billion. 

Although Amazon doesn’t share sales data on individual brands, seller consultant Jason Boyce from Avenue7Media said internal data from his firm shows that Amazon sells tens of millions of dollars in AmazonBasics batteries each month.

“I don’t think that there’s any credence to the fact that Amazon’s sunsetting AmazonBasics products that are doing well,” Boyce said. “Are they culling the herd for products that are doing not so well? Absolutely. And any good business would do that.”

Ailawadi says private-label goods bring in around 25% higher profit margins for retailers than national brands, because of savings on things such as packaging, marketing and promotion.

“There is nothing anti-competitive about comparing one product with another and saying that these products are very similar, and I’m selling you one at a lower price,” Ailawadi said. “That is as competitive as it gets.”

Internally, Amazon has to skate a fine line between creating profitable products that consumers want and protecting third-party sellers, who have become the lifeblood of the retail business. Amazon says third-party merchants make up more than 60% of its ecommerce business, and those businesses pay Amazon for services such as fulfillment and shipping.

Boyce said that “45% of every dollar goes back to Amazon” when an outside merchant makes a sale on the platform. “Why would they bite the hand that feeds them in that way?”

Not all of Amazon’s private-label efforts succeed. The company no longer sells a pair of shoes called the Galen that look eerily similar to AllBirds’ wool running shoes. With the Everyday Sling Bag, Dering says Peak Design came out on top thanks to all the media attention.

Dering has also learned one key lesson from the Amazon drama. He now gets a design patent for every one of Peak Design’s products, which number over 200. Each patent costs about $1,000, he said.

“I really recommend that for anyone who’s bringing a product that they don’t want to be knocked off,” Dering said.