Amazon has unique and unrivaled visibility into the performance of hundreds of thousands of products and brands. The amount of data Amazon has is enough to understand consumer trends, upcoming brands, etc.
Just like Netflix is investing into TV shows based on data they collect, Amazon is starting to build brands based on data. But Amazon could also avoid doing most of the work, and instead invest into the brands already performing well. The data they have allows that - it's not just for developing and analyzing products, but also for valuing brands and sellers.
Amazon has made acquisitions like Zappos and Quidsi/Diapers.com. Both challenged Amazon, but ended up getting acquired by Amazon in the gross margin race to the bottom; "If you can't beat them, join them". Yet their challenge was on the audience-reach level, so it made sense for Amazon to make sure customers are not debating where to buy. Especially when trying to sell Amazon Prime.
We think there are three major groups of third-party sellers:
- Selling other companies’ brands (retail arbitrage). Largest group as it represents the traditional retail model.
- Manufacturing and selling proprietary products. The most exciting group growing in market share.
- Private-labeling products sourced from large manufacturers. Where a lot of talk happens, and is often a starting point for many new sellers, but overall a small part.
Many of the top sellers are now experimenting with a mix of these models, but the largest sellers remain those selling others' brands. Those are in direct competition with Amazon Retail, meaning there isn't anything unique enough Amazon couldn't replicate itself. So while they are all very successful businesses on their own right, there isn't much to be gained for Amazon.
For Amazon the key question is do those businesses scale, given the resources it will take to integrate them. Retail arbitrage sellers do not meet this criteria.
Those owning their own brands though could be that. Though it is important to make a distinction between private label and manufacturers - we think private label brands often have limited growth prospects and lack of differentiation. Sellers owning brands do have the ability to challenge Amazon, as they can use external factors to grow sales, leaving Amazon and everyone else unable to do much about it. Thus they can be competitive by being proprietary.
Amazon has launched a few dozen brands themselves, some of them pretty successful. In the race of owning every vertical, Amazon could decide that they could get there faster through acquisitions. For example acquiring Anker, which sells hundreds of millions of $ smartphone accessories a year, instead of trying to build up Amazon Basics.
We talked to a few brokers and they've confirmed that there is plenty of $1-10 million, often private label, sellers changing hands. But very few are at $100 million and above size, and even then they are not big enough to challenge Amazon.
The realization is that no seller has grown value fast enough and/or big enough to alert Amazon. Which suggests that the marketplace has inherit limits on how much a seller can grow. We are yet to see a seller on the path to $1 billion in sales.