PRIVATE LABEL STRATEGY AT AMAZON: CONFLICT BETWEEN ETHICS, SELLER RELATIONSHIPS, AND PROFITABILITY Assignment Questions: Q.1. Why companies like Amazon are interested in private labels? Q.2. Pleas
1 PRIVATE LABEL STRATEGY AT AMAZON: CONFLICT BETWEEN ETHICS, SELLER RELATIONSHIPS , AND PROFITABIL ITY “The success of any consumer -packaged goods company increasingly depends on how to handle the private -label challenge and the retailer relationships.” —Peter Brabeck -Letmathe, Chairman Emeritus, Nestle Group INTRODUCTION It was April 23, 2020 . The Wall Street Journal (WSJ) reported that Amazon used sensitive business information from third -party sellers on its platform to develop competing products under Amazon ’s private label brands. 1 Based on interviews with over 20 Amazon employees and the company ’s internal documents, the report alleged that Amazon unethically pulled competitors ’ data to gain a competitive advantage over individual sellers. 2 As Jeff Bezos, the chief executive officer (CEO ) of Amazon.com , Inc. , was preparing to testify before the US House of Representatives Committee, Russell Grandinetti, who ran Amazon’s internat ional consumer business, faced this dilemma: Should Amazon continue its private label brands? Private label brands yield a higher profit margin for the company and, owing to their exclusivity, offer an opportunity to increase brand loyalty and stickiness among customers. If Amazon had to continue its private label brands, it should work on finding ways to build synergy with third -party retailers while developing its private label brands. In addition , Grandinetti also had to handle ethical concerns . If these allegations were true, it would hurt Amazon’s reputation as the largest e-tailer and show Amazon in a bad light for falsifying facts and providing misleading information to the Anti trust Committee in 2019 .3 Th e renewed evidence provided in the artic le not only sparked controversy about Amazon’s private label strategy but , more broadly, brought to light the eternal conflict between ethics and profitability. Was Amazon culpable of violating marketplace ethics, or was it a victim of a ploy devised by dissatisfied employees? Had the indulgence of a handful of former employees in anticompetitive practices jeopardized its relationship with its business – to-business (B2B ) clients? Grandinetti needed to answer these questions in the next shareholders’ meeting. AMAZON: COMPANY BRIEF Founded in 1994 by Bezos, a former Wall Street executive, Amazon.com, Inc. was incubated as an online bookstore that promised to deliver books of all genres to readers located in any part of the world. Christened after the world ’s largest river, the firm indeed lived up to its name by growing into a mammoth e-commerce enterprise. By 2020, its portfolio of products included books, web services, music, an over – 1 Nadler, J. (2020 , May 1). Letter to Amazon CEO Jeff Bezos . The U.S. House Committee on the Judiciary. Retrieved March 28, 2022, from https://judiciary.house.gov/uploadedfiles/2020 -05-01_letter_to_amazon _ceo_bezos.pdf?utm_campaign=2719 -519 2 Mattioli, D. (2020, April 23). Amazon scooped up data from its own sellers to launch competing products. The Wall Street Journal. Retrieved March 28, 2022, from https://www.wsj.com/articles/amazon -scooped -up-data -from -its-own -sellers -to-launch – competing -products -11587650015 3 House Committee on the Judiciary. (2019, July 17). Online platforms and market power , part 2: Innovation and entrepreneurship [Video]. YouTube. https://www.youtube.com/watch?v=iZ0LduMwZec 2 the -top platform (an on -demand video streaming service delivered to consu mers directly “over the top” of the internet), e-payment services, grocery, apparel, and other consumables. A self -proclaimed “customer -obsessed” firm, Amazon lived by its 14 leadership principles (see Exhibit 1). Driven by the mission to become the Earth ’s most customer -centric company, the firm had three customer value propositions (see Exhibit 2). 1. Low prices Amazon offered products at a discounted price because of its lower cost structure. Operating online allowed it to reap higher profits by saving on leases, rentals, and maintenance costs associated with owning brick -and -mortar stores. 2. Fast delivery Amazon allowed its customers to choose the delivery speed such as standard delivery and same – day delivery. Further benefits, such as one -day/two -day deliv ery without the delivery charges, could be unlocked by subscribing to the Prime membership. 4 3. Broad -spectrum selection Amazon offered a large portfolio of products across various price points , which left the customer spoil ed for choice. It had an agile rec ommendation system in place that suggested complementary products or products purchased by other customers who made a similar purchase. This ensured that the customer was engaged with the platform and was minimally motivated to switch to a competitor. Amazon sourced most of its vast selection via three modes, namely, standard inventory, just -in-time inventory, and third -party sellers. In accordance with the tenets of corporate governance, Amazon.com mandated that its employees follow its “code of business conduct and ethics ”5 in their dealings with customers, sellers, partners, and coworkers. According to a declaration made by the firm: “Amazon is strongly committed to conducting our business in a lawful and ethical manner, including engag ing with suppliers who respect human rights, provide safe and inclusive workplaces, and promote a sustainable future.” 6 PRIVATE LABEL BRAND STRATEGY Third -party companies developed private label products and sold them under the brand name of specific retailers. These products yielded a higher profit margin for the company and, owing to their exclusivity, offered an opportunity to increase brand loyalty and stickiness among the customers coupled with low marketing and distribution costs. The private label business had become popular among retailers and was estimated to scale up to US$25 billion annually by 2022. 7 4 Prime members enjoy unlimited free, fast delivery on eligible items, video streaming, ad-free music, free in-game content, exclusive access to deals and more. https://www.amazon.in/amazonprime 5 Amazon.com , Inc. (n.d.). Code of business conduct and ethics . Retrieved March 30, 2022, from https://ir.aboutamazon.com/corporate -governance/documents -and -charters/code -of-business -conduct -and – ethics/default.aspx 6 https://d39w7f4ix9f5s9.cloudfront.net/19/e6/ac3db9894085bf29f6240403cd00/amz -susty -062220 -eng -supplychain.pdf 7 Marino -Nachison, D. (2018, June 4). Amazon: A $25 billion private label business ? Barron ’s. Retrieved March 30, 2022, from https://www.barrons.com/articles/amazon -a-25-billion -private -label -business -1528131628 3 In 2009, Amazon ventured into the private label space by debuting with Amazon Basics in the consumer electro nics category. Initially focused on expanding the groceries, household goods, and apparel categories, Amazon went on to launch private label brands across numerous other segments such as beauty, books, and toys. Amazon launched over 100 private label brand s, but most of them did not fare well in the market and accounted for about 1% of sales. 8 Amazon Basics, Amazon Essentials, and Amazon Collection were the firm’s most popular private label brands (see Exhibit 3). Grandinetti, in an official communication in December 2018 , stated: “We believe that over the next several years, Private Brands will be one of the most important growth and profitability drivers in the consumer business and can achieve 10% penetration of the company ’s consumer business worldwide over the next five years.” 9 ALLEGATION OF ABUSING DATA PERTAINING TO THIRD -PARTY SELLERS WSJ called out Amazon in April 2020 for collecting and abusing proprietary information from stand -alone third -party sellers who listed their products on its platform. Interviews conducted with over 20 ex – employees involved in Amazon ’s private label business, coupled with evidence collected by WSJ , showed how Amazon could use this data to gain a competitive advantage in terms of pricing an item, copying popular features, and assessing whether to enter a particular product category (see Footnote 2). “We knew we shouldn ’t,” said an ex -employee who admitted having abused the data to launch competing products that put Amazon ’s private label business in a position of advantage. “But at the same time, we are making Amazon -branded products, and we want them to sell.” (See Footnote 2.) Using this information allowed Amazon to target the right customer and take advantage of their buying cycle. One of the most glaring pieces of evidence against Amazon ’s practices surfaced when the firm launched three trunk orga nizers in October 2019 under the Amazon Basics private label brand. Fortem, a Brooklyn – based independent third -party seller, launched a similar trunk organizer in March 2016 on the Amazon Marketplace, which went on to become the top seller in the category on Amazon. The private label employee who brought this plagiarism issue to light admitted that it was a “standard operating procedure” 10 at the firm to extract data on competitors and independent sellers to adjudge whether to launch a new product line. He added that consumers’ buying behavior was not the only lead that drove Amazon ’s private label strategy. The Justice Department, Federal Trade Commission , and Congress investigated whether Amazon was abusing its scale and reach by virtue of its platform ag ainst its competitors and independent third -party sellers. 2 The WSJ article succeeded in creating an antitrust investigation initiated by the European Commission against Amazon in 2019 for similar conduct. 11 The situation looked grim as it made Amazon ’s 8 Lamb, K. (2021, July 2). The complete guide to Amazon’s private label brands . Pattern. Retrieved March 30, 2022, from https://pattern.com/blog/all -you -need -to-know -about -amazons -private -label -brands/ 9 Reuters . (2021 , October 13). Ama zon copied products, promoted own brands at the expense of other sellers, documents show . Business Today. Retrieved March 30, 2022, from https://www.businesstoday.in/latest/corporate/story/amazon -copied – products -promoted -own -brands -at-the -expense -of-other -sellers -documents -show -309291 -2021 -10-13 10 Brachmann, S. (2020, May 7). Congress asks Amazon ’s Bezos to testify on use of third -party seller data . IPWatchdog . Retrieved March 30, 2022, from https://w ww.ipwatchdog.com/2020/05/07/congress -asks -amazons -bezos -testify -use -third -party -seller – data/id=121466/ 11 European Commission. (2019, July 17). Antitrust: Commission opens investigation into possible anti -competitive conduct of Amazon . Retrieved March 30, 2022, from https://ec.europa.eu/commission/presscorner/detail/en/IP_19_4291 4 dual role as a seller of private label products and a marketplace operator questionable. It cast doubt on Amazon ’s B2B strategies at large and questioned the credibility of its “code of business conduct and ethics .” Moreover, the complaint against Amazon challenged the firm’s ethical foundation. AMAZON ’S RESPONSE TO THE ALLEGATION The Justice Department, Federal Trade Commission, and Congress summoned Amazon officials . In its response, Amazon issued a written statement affirming that, like other retailers, it used aggregate data to offer its customers the best experience. However, it strictly prohibited its employees from using nonpublic, seller -specific data to determine which private label products to launch. 12 Bezos recorded a statement before the House Antitrust Subcommittee in his first appearance before Congress and confirmed the same. Bezos, however, added that he could not guarantee that the policy had never been flouted (see Footnote 8) and main tained that the firm continued to investigate the allegation levied upon it by WSJ. Amazon further refuted the allegation by stating that private label products contribute a scant 1% of their total sales , which is way less than that of other retailers such as Macy ’s and JC Penny, whose share of private label sales is about 25%. 13 However, Amazon Basics had seen major growth in recent years. As of April 2020, the label was growing at a steady 47% year -over -year for the past 12 months. As Bezos stated, while these brands made up less than 1% in the category, they contributed to 9% of sales (in clothing) (see Footnote 8). AMAZON ’S PRIVATE LABEL BUSINESS IN INDIA Amazon went live with its marketplace in India in 2013 (see Footnote 9). However, the firm incurred millions in losses owing to the low usage of credit cards in the country and logistical challenges that impacted last -mile delivery. Thus, it embarked on a strategy to market private label brands, such as Amazon Basics, and inc luded some new brands tailored to India to ensure business sustainability. Amazon tasted great success with private label brand business in India in 2018 as these reached record sales and an elevenfold jump over the previous year during the annual promotio n, the Great Indian Festival. 14 Amazon predicted private brand sales would reach nearly US$600 million by 2020 in India. It had a goal to offer its own brands in 20% to 40% of all product categories on Amazon.in by 2022 , as these would yield more margins than national brands (see Footnote 14) . Amazon mimicked popular brands in the apparel and kitchenware categories to give its private label brands such as Solimo, Symbol, and Xessentia an unfair advantage. Reuters investigated several internal documents of the firm, which revealed that it influen ced search results so that its private label brands showed up among the top three recommendations to customers browsing www.amazon.in . (see Footnote 9). The investigation further revealed that it was an official busines s strategy to identify “reference” or “benchmark” products to be copied later and sold on the platform. John Miller, the renowned shirt brand led by the nation’s “retail king, ” Kishore Biyani, was one such reference product 12 Amazon Public Policy [@amazon_policy]. (2020 , April 25). We’ve been clear w/ the committee that Amazon prohibits use of individual sellers ‘ data as WSJ alleged [Image attached] [Tweet]. Twitter. https://twitter.com/amazon_policy/status/1253769684425625601?s=12 13Garbato, D. (20 20, September 21). Is Amazon’s private label a threat? Store Brands. Retrieved March 31, 2022, from https://storebrands.com/amazons -private -label -threat 14 Kalra, A., & Stec klow, S. (2021, October 13). Inside Amazon ’s systematic campaign to boost its private brands in India. The Economic Times . Retrieved March 31, 2022, from https://economictimes.indiatimes.com/tech/startups/inside -amazons – systematic -campaign -to-boost -its-private -brands -in-india/articleshow/86991891.cms?from=mdr 5 whose measurements Amazon tracke d to replicate the “neck circumference and sleeve length” (see Footnote 14) of the shirts manufactured under Xessentia. Initially, the brand mimicked an American brand, Arrow. But one in every 12 Xessentia shirts was being returned for sizing issues. Amazon employees conducted a “deep dive” into over a year’s worth of data from Amazon.in, including customer complaints and return numbers for Xessentia, Arrow, and seven other brands. They found that brand John Miller had far outsold Xessentia shirts, despite carrying “a similar” average selling price , and had half the rate of return s for quality and sizing issues. The company realized this customer is different from the Louis Philippe customer and does not prefer the latter’s fit. Hence, Xessentia followed the measurements of John Miller to gain wide acceptance (see Footnote 14) . Ac cording to an internal Amazon document titled “India Private Brands Program ,” the employees working on the private label brands teamed up with the manufacturers of the “reference” products to study the “unique processes” that impact the end quality of the product. The acquired know -how was dubbed “tribal knowledge.” (See Footnote 9.) The Solimo line from Amazon offered items exceeding or matching the quality of competing brands but were at a 10 %–15% lower price. Amazon used a metric called “glance views ,” which gave the data on products that customers were view ing on its website and could be leveraged to sell to targeted customers in the product category. It used search seeding, a proprietary tool that shortlisted products to show up in the initial search results on Amazon India , so that its brands featured on the first two to three pages during the search (see Footnote 9). AMAZON ’S RELATIONSHIP WITH ITS SELLERS Historically, Amazon ’s sellers had a strained relationship with the firm. Many brands expressed dissatisfaction with Amazon ’s inaction toward dealing with counterfeit products and the control exerted by the firm for pricing the products. Amazon allowed customers to make inform ed buying decisions through its “Buy Box ,” which educated it about sellers competing fiercely to grab a share of the coveted box. The criteria to make it to the box involved many variable parameters that Amazon continually adjusted to ascertain the winner, giving it the control to price products. Sellers were also frustrated by the competition they had to face to grab a share of visibility on the platform. Nike was one of the big brands that discontinued “selling its clothes and sneakers directly to Amazon. com in 2019.” 15 Its departure was a big blow to Amazon ’s reputation as it signaled that the firm was not addressing the concerns of its sellers satisfactorily, leading to poor B2B relationships. However, the others followed a different approach. In 2019, Amazon introduced a wool -blend sneaker that closely resembled the signature woolen shoe manufactured by Allbirds, Inc., an apparel manufacturing firm renowned for designing eco -friendly shoes from Merino wool. The shoe was sold at a lower price as Amazon used cheaper material, but the design was so similar that it was hard to tell the difference. Allbirds, Inc. did not sue Amazon. They believed that subtle differences in designs and copycat cases could be time -consuming. The founders of Allbirds, Inc. posted an online letter to Bezos, noting that the sneaker introduced by Amazon was “strikingly like Wool Runner ” and that they were flattered at the similarities. They offered to help Amazon use more sustainable materials in its product (see Footnote 9). Amazon ’s investment in the private label space compounded the apprehensio ns of sellers who feared that the firm would imitate their products and give its own brands greater visibility to boost its sales. 15 Bloomberg. (2019, November 13). Nike to stop selling products on Amazon . Businessline . Retrieved March 31, 2022, from https://www.thehindubusinessline.com/companies/nike -to-stop -selling -products -on-amazon/article29960797.ece 6 Jungle Scout, an e-commerce analytics firm, surveyed 1,000 marketplace sellers, and over 50% of the respondents believed Amaz on ’s private label products competed directly with those of its sellers. In India, the firm was accused of being biased toward a handful of sellers, granting them rebated commissions and leveraging them to evade the country ’s foreign direct investment norm s. In early 2019, one -third of the total value of goods sold on Amazon.in could be attributed to only 33 sellers. 16 In a survey, 73% of sellers expressed concern with Amazon ’s private label products competing with their own, and 57% of those indicated that they we re very concerned (see Footnote 8). However, most of the sellers found it difficult to switch to alternative marketplaces. As of June 2022, Amazon occupied a 37.8% share of the US e-commerce market ,17 which incentivi zed businesses to sell on this platform. In addition , not every seller had the marketing muscle and brand recognition that Nike enjoyed, so most of them stuck along. The sour B2B relationship Amazon share d with its sellers provided a ripe opportunity for its competitors to rob it of its sales and market share. According to a report by “Kunal Chopra, CEO of Etailz (a firm that assisted vendors in selling across platforms), one of their clients wished to sell exclusively on Walmart .” (See Footnote 2.) The said client expressed apprehensions at the proposal of selling on Amazon because it feared imitation by the firm ’s private label brands. THE WAY FORWARD It was about time that Amazon ’s top management ad dressed the elephant in the room and doubled its efforts in the realm of corporate governance. Third -party sellers needed to be reassured of the safety of their data to restore their trust in the brand. To mitigate the repercussions of a sustained attack on the firm ’s business practices, Amazon needed to publish the proceeds of the internal investigation being carried out in response to the charge levied by WSJ. However, many questions loomed large for this e-commerce giant. How should Amazon react if the result of the investigation goes against it? What should it do to mend its relationship with its sellers? Should Amazon slacken its pace of private label expansi on and focus on consolidating its empire , which comprises a multitude of customers, sellers , and employees and the concerns of these parties? If yes, how would the move hurt the chances of competing with Walmart, which already had more private label produc ts than Amazon? (See Footnote 7.) 16 Sub ramaniam, N. (2021, October 14). Amazon copied bestselling Indian brands to boost private label play : Report . Inc42 Media. Retrieved March 31, 2022, from https://inc42.com/buzz/amazon -copied -bestselling -indian -brands -to-boost -private -labels – report/ 17 Chevalier, S. (2022 , August 26). Market share of leading retail e-commerce companies in the United States as of June 2022 . Statista. Retrieved March 31, 2022, from https://www.statista.com/st atistics/274255/market -share -of-the -leading -retailers -in- us-e-commerce/ 7 Exhibit 1 Amazon ’s 14 Leadership Principles Customer obsession Leaders start with the customer and work backwards. They work vigorously to earn and keep customer trust. Although leaders pay attention to competitors, they obsess over customers. Ownership Leaders are owners. They think long term and don’t sacrifice long -term value for short – term results. They act on behalf of the entire company, beyond just their own team. They never say, “that’s not my job. Invent and simplify Leaders expect and require innovation and invention from their teams and always find ways to simplify. They are externally aware, look for new ideas from everywhere, and are not limited by “not invented here .” As we do new things, we accept that we may be misunderstood for long periods of time. Are right , a lot Leaders are right a lot. They have strong judgment and good instincts. They seek diverse perspectives and work to disconfirm their beliefs. Learn and be curious Leaders are never done learning and always seek to improve themselves. They are curious about new possibilities and act to explore them. Hire and develop the best Leaders raise the performance bar with every hire and promotion. They recognize exceptional talent, and willingly move them throughout the organization. Leaders develop leaders and take seriously their role in coaching others. We work on behalf of our people to invent mechanisms for development like Career Choice. Insist on the highest standards Leaders have relentlessly high standards — many people may think these standards are unreasonably high. Leaders are continually raising the bar and drive their teams to deliver high quality products, services, and processes. Leaders ensure that defects do not get sent down the line and that problems are fixed so they stay fixed. Think big Thinking small is a self -fulfilling prophecy. Leaders create and communicate a bold direction that inspires results. They think differentl y and look around corners for ways to serve customers. Bias for action Speed matters in business. Many decisions and actions are reversible and do not need extensive study. We value calculated risk taking. Frugality Accomplish more with less. Constraints breed resourcefulness, self -sufficiency, and invention. There are no extra points for growing headcount, budget size, or fixed expense. Earn trust Leaders listen attentively, speak candidly, and treat others respectfully. They are vocally self -critical, even when doing so is awkward or embarrassing. Leaders do not believe their or their team’s body odor smells of perfume. They benchmark themselves and their teams against the best. Dive deep Leaders operate at all levels, stay connected to the details, audit frequently, and are skeptical when metrics and anecdote differ. No task is beneath them. 8 Have backbone ; disagree and commit Leaders are obligated to respectfully challenge decisions when they disagree, even when doing so is uncomfortable or exhausting. Leaders have conviction and are tenacious. They do not compromise for the sake of social cohesion. Once a decision is determined, they commit wholly. Deliver results Leaders focus on the key inputs for their business and deliver them with the right quality and in a timely fashion. Despite setbacks, they rise to the occasion and never settle. Source: Amazon. (n.d. ). Leadership principles . Retrieved March 31, 2022, from https://www.amazon.jobs/en/principles Exhibit 2 “Jeff Bezos ’s Virtuous Cycle ,” Which Forms the Foundation of Amazon ’s Business Model Source: Amazon . (n.d. ). About Amazon . Retrieved March 31, 2022, from https://www.amazon.jobs/en/landing_pages/about -amazon 9 Exhibit 3 10 Highest -Performing Private Label Brands of Amazon.in Brand Category Market share by brand (%) Amazon Basics Consumer electronics and household goods 57.8 Amazon Essentials Men’s and women’s clothing 4.7 Amazon Collection Jewelry 7.8 Pinzon Bedding and towels 2.1 Solimo Household goods 1.8 Amazon Elements Vitamins and supplements 1.6 Simple Joys by Carter’s Children’s clothing 1.5 Other brands Goodthreads Men’s clothing 19 Daily Ritual Women’s clothing Lark & Ro Women’s clothing Source: Created by the authors using data available from Marketplace Pulse. (n.d. ). Amazon private label brands . Retrieved March 31, 2022, from https://www.marketplacepulse.com/amazon -private -label -brands