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Amazon’s Private-Label Brand ‘Element’ Extending to Groceries

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Amazon forays into perishable goods market

According to a recent report from the Wall Street Journal, Amazon Fresh, Amazon’s (AMZN) grocery delivery service, will begin selling privately labelled perishable goods. The products will be sold under the company’s label called Element, which already features a wide range of household products.

There’s huge potential for sales to grow in the private-label market, as customers are no longer finicky about well-known brands and tend to focus more on quality. So, if they can pay less for alternatives, they’re likely to go that way. Also, there’s less investment involved in branding and marketing, which benefits both the retailer and the manufacturer.

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Brick-and-mortar retail strategy

Amazon is basically adopting the brick-and-mortar business strategy in which customers can purchase low-cost private labels along with big name brands. Giving its customers an alternative could help Amazon improve its margins and allow its customers to avoid paying a high premium on these well-marketed big brands.

Marketing “Prime”

The Wall Street Journal report speculates that the perishable products carrying the Element label will be available exclusively to Amazon’s Prime members.

The company has taken several steps to make its Prime program popular. A few months ago, Amazon stated that Prime membership had grown by 53% year-over-year worldwide. Amazon credits the increasing popularity of its Prime program for the growth of operating profits in 1Q15.

The above chart shows that with the exception of 4Q14, the operating margins in 1Q15 were Amazon’s best results in North America for the last few quarters.

With this latest move, Amazon intends to compete directly with big consumer brands that are sold on its site. Its competitors, such as Target (TGT), Costco (COST), and Walmart (WMT), have also ventured into the private-label space with in-house store brands such as Archer Farms, Kirkland, and Nice, respectively. These private-label brands have benefited these retailers by boosting profit margins with increased store sales. The private labels also offer additional selection options to customers.

You can get exposure to Amazon by investing in the Consumer Discretionary Select Sector SPDR Fund (XLY). It has 6.1% exposure to Amazon.

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