The private labels flywheel starts turning at Amazon India, seen to be 25% of sales

Sunny Sen October 26, 2017 9 min

It is every large format retailer’s wet dream to own brands, also called private labels. These in-house brands not only make a healthy contribution to the bottomline, they also help with service unmet market needs and plan inventories.

The vagaries of the market are no different for Amazon. Except that the American online retailer likes to do things in a back-to-basics way. When it was decided early in 2016 that Amazon India would launch private labels, the choice was ambitious: a fairly large set of categories including fashion, electronics, home and kitchen products, was chosen.

But, within them, the choice of products was more deliberate. “It is not about how much money you make, but it is about what are the product gaps in a popular category and how can we plug those gaps with products at an affordable cost,” said a source close to the company.

It was also decided that no one person would head private labels as a category. To get more domain expertise in each product line, category heads and market intelligence teams would work together to figure out what products need to be brought into the market.

Cut to 21 months later: Amazon is selling everything – from blankets to utensils, from clothes to linen, and from dry fruits to office stationery – as private labels and has incubated a mini-conglomerate of products inside its ecommerce business.

“All of Amazon’s private brands are created to give customer satisfaction – choice, value, and convenience. Creating products for specific categories enables us to increase the overall selection available to Amazon customers,” said Manish Tiwari, vice-president, Amazon India.

Amazon India doesn’t give the breakup of sales of private labels but industry experts estimate it at between 10% and 15% of the company’s sales by gross merchandise value or GMV. The company wants to take that up to 20-25% within the next two years, said the experts.

The company doesn’t disclose its GMV sales, which is the total value of goods sold without taking account of discounts and promotions, but FactorDaily and market estimates put it at between $6 billion and $7 billion. Which means Amazon India’s private label sales are already around the $1 billion mark. The company wants to double that to $2 billion.

Private labels is one of the big bets for Amazon India, along with logistics, Amazon pay, and fresh produce.

Zero to 4,000 SKUs

Amazon runs its business on three fundamental tenets: widest selection, affordable prices, fast delivery. Private labels help it to perform on each of these measures better. It has four in-house brands: AmazonBasics for electronics, Solimo for home and kitchen, and Symbol and Myx for fashion.

Rivals such as Flipkart, Snapdeal, Paytm and ShopClues have been unable to replicate the width and depth in Amazon’s private label portfolio yet but in-house brands in India have existed from much earlier. In fact, private labels were started in India over a decade ago by organised retail chains such as the Tatas’ Trent and Westside, Kishore Biyani’s Future Group, Aditya Birla’s More, Spencers and others.

Arun Sirdeshmukh, head of fashion, Amazon India, says the company will get into footwear, clothes for kids, and expand on women wear. Photo : Rajesh Subramanian

Ecommmerce companies latched on to the private label concept about three years ago when Myntra (now owned by Flipkart) launched a slew of private label brands. Over time, Myntra has more than 20 private labels and the profitable portfolio already accounts for nearly 25% of revenues. Reliance Industries has its own range under AJIO. Flipkart has had fits and starts with its own labels. Its early private labels Digiflip, Citron, and Flippd did not do well. It has since launched SmartBuy, a range of home products, electronics, personal grooming; furniture brand Perfect Homes; Marq, a large appliance private label; a budget brand Billion, among others.

Fashion in one category that Amazon is betting big on. One in three products Amazon sells falls in this category. It had launched Symbol just before Diwali last year. “It gives us exclusivity of selection. We are hungry to have exclusivity of brands,” said Arun Sirdeskhmukh, head of fashion at Amazon India.

“Many brands that we carry are available elsewhere… It is important to find ways to offer products that are available only with us,” he said.

Symbol and Myx allow Amazon have a tight rein over price and quality, as also ship it faster. Sirdeskhmukh said that private labels also offer better margins for partners and sellers. “These are also available in a lot more fulfilment centres, which allows us to do quicker deliveries even in smaller towns.”

 

For Amazon, the margins can be as much as 50% in fashion. “How do you monetise the footfall that Amazon gets. They have a lot of intelligence around customer data and what they want… Private labels reduces the cost of customer acquisition because of the added margin,” said Sanchit Vir Gogia, founder and chief analyst of Greyhound Research.

Costs are a very compelling reason for in-house brands, more so in India’s retail business characterised by multiple layers of distribution and middlemen. Add to this competition among multiple vendors. Branded t-shirts that sell for Rs 2,000 upwards can be procured for under Rs 400 each.

Radhika Ghai, co-founder and chief business officer of ShopClues, used the example of shoes.“We know the large manufacturers. We can offer a 100% leather shoe at Rs 500.” ShopClues recently launched its Meia brand.

Design is another vector in play. Amazon uses analytics and data to decide what kind of clothes needs to be put out there. For example, it realised that there was demand for boxers but the ones sold at affordable prices in India lagged in the design department. So, under Symbol, boxers with colourful patterns and prints were launched.

To give a sense, Amazon works on colour choices customers are searching for, what products people are spending more time on in which geographies, what are the optimal price points, where should what kind of inventory be placed on its pages, and other specifics of design. With these in mind, Amazon has already expanded its private label fashion SKUs to 4,000 units.

Everything but the kitchen sink

“Worldwide, one out of six products bought online are fashion products. In India, that number is one out of 50. The question is who will take a greater share when it gets 10-12% penetration,” said Sirdeskhmukh.

Launching the Amazon Fashion Studio in Gurugram was a step towards a long-term realisation of its goals. It is Amazon’s third after opening in New York and London. The studio is spread across 44,000 sq.ft, and had 16 bays for modelling and to shoot product videos. This is not exclusively for Amazon’s brands and is open for other companies as well. But the studio does give an additional leverage to showcase Amazon’s own products in a better way.

This is just the beginning for Amazon. It is working on expanding its ethnic wear Myx category into a wider selection; so, too, with Symbol. Sirdeskhmukh said that Amazon will open up footwear, kids wear and accessories soon. “We are also more focussed on top wear. We will get into more complex categories like dresses and expand on women wear, which has been a limited play,” he said.

The home and kitchen category is another focus area. The idea is to have products that find daily use under the Solimo and AmazonBasics brands. “…we want our customers to be able to find anything and everything that they are looking for,” said Tiwari.

Solimo already has thousands of products — from utensils to cooking ware and from toilet papers to bed linen. “Private brands like Solimo play a role of providing great value to the customer by reducing costs from the supply chain (optimised design for e-commerce) and providing this as value to the customers,” said a spokesperson.

For example, a Solimo non-stick set of three cost Rs 1,399 (after discount), but a similar set from Nirlep, Pigeon, Prestige or Bajaj would cost more than Rs 2,000. Even an entry-level brand such as Neelkamal sells it for Rs 1,499.

Through Solimo, Amazon also sells dry fruits, candles, comforters, and other products at heavy discounts of up to 50%. Similarly, in AmazonBasics, it offers Apple’s charging cable for Rs 899 – the one from Apple sells at Rs 1,700.

“Essentially, private labels is a strategy to gain profitability,” said Jayanth Kolla, cofounder of digital transformation advisory firm Convergence Catalyst. “Among ecommerce companies, the pressure of profitability is much higher… For companies like Amazon, which has grown certain categories of products to get scale, private labels are the way to go.”

In food, an executive with a competing ecommerce platform said, the margins are very thin — lower than 10%. “Private labels help in increasing the margins to up to 20% or sometimes even a little more than that.”

Add to that, Amazon is working on bringing out its private label products in food. The company refuses to disclose any details, but sources tell FactorDaily that Amazon is looking at owning and managing the entire supply chain for private labels. “That will allow them to have a deeper margin play… something that only BigBasket has been able to do in the online space,” said a source close to Amazon.

“As a company policy, we do not comment on what we may or may not do in the future. We have received the government approval for food retail based… We are excited by the government’s continued efforts to encourage FDI in India for a stronger food supply chain,” Tiwari said.

In food, an executive with a competing ecommerce platform said, the margins are very thin — lower than 10%. “Private labels help in increasing the margins to up to 20% or sometimes even a little more than that,” he said.

The big benefit outcome of Amazon’s private label is brand loyalty and affinity. Raghu B. Viswanath, founder and chairman of Vertebrand, a brand strategy company, said Amazon is far more focussed on segments, categorisation and customers when it comes to private labels. “They have gone about in a very scientific way with private labels,” he said. “But you need deep pockets to do so.”

With over $5 billion committed to India by its US parent, funding is the least of worries for Amazon India’s private label warriors. They just need to execute to the plan.

 

Update 10.05 am, October 30, 2017: We carried an error in a graphic that said Flipkart does not have a private label in furniture. The company has told us it has an in-house furniture brand, Perfect Homes. We regret the error.
The story was updated with details of the contribution of Myntra’s private labels to its business and Flipkart’s past and future plans with its in-house brands.
The headline of the story was changed to make clear that the 25% target for private labels sales is an external estimate, not Amazon's. The earlier headline was "The private labels flywheel starts turning at Amazon India, to be 25% of sales".

Disclosure: FactorDaily is owned by SourceCode Media, which counts Accel Partners, Blume Ventures and Vijay Shekhar Sharma among its investors. Accel Partners is an early investor in Flipkart. Vijay Shekhar Sharma is the founder of Paytm. None of FactorDaily’s investors have any influence on its reporting about India’s technology and startup ecosystem.