During the summer, we here at Tematica spoke at length on the growing number of private label products and brands at Amazon (AMZN). Having seen the strategy work at a number of other retailers, like Costco Wholesale (COST), Kohl’s (KSS), Wal-Mart (WMT) and even JC Penny (JCP), we see it as “expected” that Amazon would seek to grab a greater slice of profits to be had by offering its own products.
In recent Amazon news, an analyst from financial firm Morgan Stanley has predicted the eCommerce platform’s private label retail sales could provide an added boost to its bottom lines.
According to a Barrons.com article published Tuesday (Oct. 10), analyst Brian Nowak has speculated that Amazon’s private label merchandise sales could add $1 billion to Amazon’s bottom line, making up 5 percent of retail sales by 2019.“… for Amazon, it’s all about gross profit dollars: advertising, subscriptions, services … and now private label …” Brian Nowak said.
“We believe it is increasingly important to focus on Amazon’s gross profit dollar drivers. A deepening gross profit pool gives Amazon more dollars to invest and [eventually] allows [funds] to flow down to P&L for shareholders.
”Amazon’s private label goods first launched in 2009 and include thousands of products in a wide range of categories, such as clothing, electronics, industrial supplies and more, the Barrons.com article reported.
“Private label is likely to be the next driver … as our sensitivity shows that even if private label could grow to 5 percent of Amazon’s retail sales by 2019, it would add almost $1 billion of gross profit,” the Morgan Stanley analyst said.
Amazon currently boasts 34 private label brands in nine categories. Private label products are responsible for 0.15 percent of its global merchandise sales. Other major retailers see an average of 18 percent of gross merchandise sales coming from private label profits, Barrons.com reported. For example, Costco gets 20 percent of its revenue from private labels, JCPenney sees 44 percent, Kohl’s gets 46 percent and Walmart sees 15 percent, the article noted.
A new report from Moody’s reinforces the negativity surrounding department stores like Macy’s (M), JC Penny (JCP) and Nordstrom (JWN). Unlike most that focus on the shift to digital commerce that is part of our Connected Society theme, Moody’s adds a perspective that meshes extremely well with our Cash-Strapped Consumer and Rise & Fall of the Middle Class investing themes — consumers embracing off-price retailers such as TJ Maxx, Marshalls, and HomeGoods all of which are part of TJX Companies (TJX) as well as Ross Stores (ROST).
One interesting observation is the expanding footprint of these off-price retailers beyond apparel and into home products, which offers additional challenges to Macy’s and other department stores that have home products and furnishings. This move also means additional challenges for Pottery Barn (owned by William-Sonoma (WSM)), privately held Crate and Barrell and Bed Bath & Beyond (BBBY).
Off-price retailers will remain among the top performers in the U.S. retail industry during the next 12 to 18 months.
That’s according to a new report from Moody’s Investors Service. The outlook is not as positive for department stores, which will continue to struggle as they seek to level the playing field with both off-price and online vendors.
Moody’s expects operating income in the off-price sector to grow 6.9% in 2017 and 5.4% in 2018. Department stores will see operating income decline 9.3% this year and 2.7% in 2018.
“Off-price retailers continue to outperform other sectors of the U.S. retail industry largely because they offer the kind of lower-cost, higher-value products and shopping experience many consumers are looking for,” said Moody’s analyst, Christina Boni. “Off-price stores are far outstripping department stores, which in contrast are still struggling with outmoded formats and supply chains that can’t keep pace with customer demand.”
Despite their lack of e-commerce penetration, off-price retailers have succeeded where department stores have foundered due to their focus on delivering major label brands at significant discounts to value-hungry consumers, Moody’s said. Off-price vendors also outperform the broader universe of U.S. apparel-focused retailers.
While apparel sales make up the bulk of their sales, off-price retailers have been increasing their product mix in the higher-growth and less competitive home products category. Moody’s estimates that home product sales at off-price stores grew 9.9% in 2016, compared with 7.8% for the off-price sectors overall growth.
Over the last few quarters, we’ve been rather vocal here at Tematica about the “transformation” at malls across the U.S. as part of the headwind that many brick & mortar retailers are facing “thanks” to our Connected Society theme. The move by Wegmans is a new one, but it also underscores the types of changes that we’ll be seeing as mall operators, such as Simon Property Group (SPG) reposition their assets from shopping focused to a different kind of destination focus be it dining, entertainment or in this case grocery shopping. That said, we are well aware of efforts by Amazon (AMZN) and Instacart to leverage Connected Society developments to flip the grocery model by bringing them to the shopper. We’ll see how much time the move by Wegmans buys companies like Simon Property Group as they look to fill what is likely to be a growing number of retail stores.
In a first for the 101-year-old grocer, Wegmans said it will open a two-level store, at Natick Mall, Natick, Mass., with direct access to the shopping center. The 134,000-sq.-ft. store will be located in a building that formerly housed one of the mall’s anchors, J.C. Penney. The new Wegmans, scheduled to open in spring 2018, will devote 12,500 sq. ft. on the second floor to two restaurant concepts. The grocer is seeking a complementary tenant for the 45,000-sq.-ft. third floor of the building.