Walmart Vs. Amazon: The Private Label War
17 Jul 2018
With Amazon’s explosive growth, it’s easy to lose sight of the fact that Walmart is still, by a long shot, the world’s largest retailer. In 2017, Walmart WMT -0.9% recorded sales worth $485 billion and earned a profit of $13 billion. Amazon recorded revenues at $178 billion with profits of $3 billion.
While Amazon’s growth trajectory is aimed at overtaking Walmart sooner versus later, they are still the new kid on the block, and in many ways chasing a low margin, slim profit model that was all but invented by Walmart. And that includes adopting strategies that help them to increase profits without increasing prices. Enter, private-label brands.
Walmart has known for a long time that private labels can help to enhance margins on the items it sells, and has been stocking its shelves with them since before Amazon was born. Probably the oldest brand at Walmart, Ol’ Roy, a dog food named after the founder’s bird dog, is a great example of a store brand which has become a household name. Created in 1983, Ol’ Roy has grown to be one of the top selling brands of dog food in the U.S..
And Walmart has embraced this model wholeheartedly. Thirty-five years later, 84 percent of customers shopping at Walmart purchase private brands from the retailer according to this story.
Amazon, by comparison, quietly made its foray into private-label brands in 2009 with AmazonBasics, but didn’t fully embrace the private-label strategy for several years. But also, like most things Amazon, timing, as well as product choices for its new private labels might be just perfect.
Right on cue, a recent study by Gartner L2 logs Amazon at owning more than 80 private labels, predominantly in the clothing, shoes and footwear categories. According to research done by Quartz, their private labels have expanded from selling 252 products in June 2013 to 1,506 products at the end of last year.
The number seems astronomical in such a short amount of time. But Amazon’s uncanny ability to tap consumer data enables the company to bring products to market quickly and with accurate pricing. Further, private labels enable Amazon to collect and own its design, manufacturing and distribution data, to better understand customers first-hand – further powering the private-label engine.
While the retailer has long been viewed as a no-nonsense place for buying the basic commodity items, such as pants, t-shirts and socks, Walmart has also been tweaking its private-label approach to align with Millennials with more fashionable, on-trend items… something that has not been their bailiwick.
But according to David Cheesewright, president and CEO of Walmart International, Walmart is increasingly looking to offer better quality that will improve profit margins and drive loyalty.
Walmart recently launched four new private-label fashion brands including women’s brand Time and Tru, plus size brand Terra & Sky, children’s brand Wonder Nation and men’s brand George. To promote the new brands, Walmart is also bringing new signs and photography into the stores. And to address Millennial’s need for “experiences”, they are also upgrading some locations with remodeled stores, lower sight lines and upgraded fitting rooms.
It’s worth noting that Walmart’s earlier attempt to be fashionable failed when it launched Metro 7, a more fashion-savvy clothing collection, in 2005, which included advertising campaigns in Vogue. The label never caught on with Walmart customers and was eventually discontinued.
Still, the timing could be right for Walmart to chisel some market share out of the cost-conscious, brand immune millennial group, and it seems that their plan for upping their private-label game is going to continue.
Chief Financial Officer Brett Biggs recently stated during the Raymond James Institutional Investor Conference that Walmart’s private brand agenda has undergone significant changes the past couple of years focusing on “really good products, good feedback from customers, better packaging and sharper pricing.” He also noted that “Private label in the future is going to play a really important part of what we’re doing…”
While Amazon appears to be at a disadvantage in marketing its private labels through an in-store experience, it may have a card to play here thanks to their acquisition of Whole Foods. In buying the company, Amazon inherited Whole Foods’ smaller-format stores, which had been dedicated to Whole Foods’ private label 365. It’s possible that these locations could also become a testing ground for other Amazon-branded merchandise in the future.
Further, Amazon is also investing significant paid media dollars behind its brands on Amazon.comAMZN +0.8%. For example, according to this report, Goodthreads, Buttoned Down, and Amazon Essentials own 16% of Sponsored Products on search terms related to wovens (e.g. dress shirts). For polo-related keywords, they own 13% of Sponsored Products.
Coincidentally, one recent private-label product launched by Amazon is its “Wag Dry Dog Food by Amazon,” marketed as a grain-free, higher-end product which is priced at around $45 for a 30-pound bag. Walmart’s ‘Ol Roy by comparison prices at around $20 for a 50-pound bag and was sold out on the Walmart.com site when I checked. But interestingly, it also sells on Amazon.com for around $50 for a 50-pound bag (of course with the less expensive, smaller bag of Wag products suggested).
In the private-label battle, which is centered on bringing the differentiated product to market at the right price, it will be interesting to see how these products continue to sell and evolve over time. Will Millennials searching for higher-quality, lower priced products still buy the tried-and-true ‘Ol Roy? Will Walmart eventually launch a new, grain-free version to accommodate these differentiated expectations?
Time, and consumers, will tell. One thing is for sure, private brands are a key component to success as it is the differentiated product that can only be found at that specific retailer that keeps consumers coming back. The questions are: Is the product differentiated enough? Do consumers want it? At what REAL price do they want it?
Both of these companies need to invest even more money to understand these questions well before they bet the business on it. Or, maybe they can rely on their egos.