Can Amazon Disrupt the Grocery Market With a Private Label Brand?

By Markets Fool.com

If you're going to buy it,Amazon.com wants to sell it to you.

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Following the recent expansion of the company's same-day shipping service for Prime members, The Wall Street Journalreports that the company plans to introduce its own private label brand of food. This would bring the company more in line with how traditional grocery chains operate.

Most supermarkets or big-box stores that sell groceries -- including major players like Whole Foods Market and Wal-Mart -- have private-label house brands. Unlike the white-label store brands of the past, which were thought of as low-end lines, these products convey a mix of value and quality.

Customers pay a little less for items that are equal in quality to the name brands, with the savings coming from cutting the middleman out of the loop. Entering the private-brand world is a bold move by Amazon that could increase its business -- but it's not without risk.

What Amazon is doing
Amazon appears to be launching a slew of products under its Elements brand. That would give the online retailer a house-brand alternative to the big-name products that it currently sells. This initiative would make the Internet company's virtual shelves look a lot like those at traditional brick-and-mortar stores, where private labels compete for consumers against the heavily marketed big-name brands.

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Elements baby wipes. Source: Amazon

"Amazon sought trademark protection for more than two dozen categories under its Elements brand, including coffee, soup, pasta, water, vitamins, dog food and household items like razors and cleaning products,"The Journalreported. This would not be Amazon's first foray into private labels, as it successfully sells cables, phone chargers, and other technology-related items under its Basics brand.

Amazon also attempted to market diapers and baby wipes under the Elements brand. That effort was a bit of a disaster as the diapers were pulled over quality concerns, though the wipes are still sold.

How it could go wrong
Amazon faces the same risk any retailer does when it decides to directly compete with its vendors. It's possible that some brands could either not sell to the online retailer -- which is unlikely due to its size -- or could offer it less favorable deals.

This is a risk, but traditional supermarket chains have walked this line for decades, so these concerns are unlikely to derail Amazon's efforts. The vendors won't like it; however, they don't like it now in the brick-and-mortar world either, but there is little they can do about it.

A bigger risk for Amazon after the diaper debacleis that it fails to deliver quality products. Private label products are made by a third party. In the case of the diaper line, that led to design flaws and customer complaints.

At the time of the launch for the line, Amazon promised high quality. In a press release, Sunny Jain, Amazon.comconsumables vice president said:

Our obsession with customers and drive to continuously innovate on their behalf has led us to create Amazon Elements.The two things customers told us they want are premium products that meet their high standards, and access to information so they can make informed decisions, Amazon Elements offers both.

That turned out to be a massive case of overpromising and underdelivering, which showcases exactly what can go wrong when you attempt to create a private label brand. Amazon has likely learned something from the diaper experience, but in some ways the Elements line already has a strike against it.

Will it work?
If Amazon can deliver good products for less money than the bigger brands charge, there is no reason to believe this model will not work. There are risks, but lesser retailers have managed to create successful private label brands and the online giant should be able to do the same.

This is good news for customers and shareholders alike. Amazon should be able to leverage its customer base to create sales for the Elements house brand. That should lead to consumers paying a bit less while the company makes a higher margin because it's not paying the big brand premium.

Amazon is simply taking something that works for traditional retailers and adopting it for its purposes. It's hard to see how that will fail even if there are some hurdles to jump over.

The article Can Amazon Disrupt the Grocery Market With a Private Label Brand? originally appeared on Fool.com.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Daniel Kline owns shares of Apple. He buys from Amazon Basics and can't see why he wouldn't buy from this new line. The Motley Fool recommends Amazon.com, Apple, and Whole Foods Market. The Motley Fool owns shares of Amazon.com, Apple, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.