The conflict of Private label in marketplaces
Last week Amazon reported that it would slash the number of in-house brands it offers on its marketplace (Private label products) from 30 private-label clothing brands to 3.
Why did Amazon offer private label brands in the first place, why is it killing many of them now and what does retail media have to do with it?
In this post we will try to answer these questions and suggest how retail media and private label can live side by side.
Private label is good for retailers
Amazon and other hybrid retailers (that have a pure retail business and a marketplace business where they let sellers sell their products) often offer private label products and brands in certain categories that compete with the other products that are sold by brand partners or marketplace sellers.
The reason is that they yield higher margins to the retailers.
Regulators and sellers raised concerns that having private label products would hurt the competition as the retailer will give more visibility to their own brands and private label products (where there is a higher margin for the store).
The thing is that for the marketplace, each sale that its private label steals away from a seller or a brand, is a fee revenue lost.
This is a real conflict for the marketplace.
It’s not that good for marketplaces
In a recent study that was published by Radostina Shopova, a PhD Student at Vienna Graduate School of Economics, University of Vienna who explored the economic effect of private label on marketplaces, the conclusion was that in the presence of a private label, the sellers actually have higher sales and may end up having higher profits than in the wholesale model.
“Because the fee is a direct cost for the manufacturer, it restricts how much the manufacturer can decrease its price. In order to protect revenues from the manufacturer’s sales, the marketplace owner has an additional incentive to increase the price of the private label, and may charge an even higher price than what a monopolist, or an intermediary in the wholesale structure, does.”
So, in the marketplace’s conflict between selling more of its private label products that have higher margin (but no selling fee) and selling more of the marketplace seller’s products where the marketplace gets the sales fee, economically it’s better to sell more marketplace products than private label.
It’s even worse for marketplaces that offer retail media
Until this point we didn’t even talk about advertising and sponsored products!
So now add to the conflict these incredible figures that the marketplace generates from clicks on sponsored product ads. On every click on a private label product (with or without a sale) the marketplace loses ad money.
This loss should be taken into consideration just like the loss of the sales fee that the marketplace has every time a private label product is sold.
How do we solve the conflict?
How can the marketplace solve the conflict in a way that maximizes the sales of high margin private label products while minimizing the loss of revenue from sales fee and advertising fee?
One way is to make the website a fair playground for all sellers and manufacturers, including private label. Let them all compete on visibility and clicks with real-time bidding sponsored product ads.
The marketplace can give theoretical advertising budget for the private label products (which can be determined as a % of the sales just like sellers decide on their advertising budget). These products will then compete with the other marketplace products under the same fair rules based on real time bidding, relevancy etc.
It will enable the marketplace to keep a healthy competition and let the algorithm make the right decisions about its private label products when they compete with other products that are sold by the sellers or brand partners.
This is also the best practice when it comes to trade marketing deals that are coming from the trade marketing team. Let’s say they closed a one million dollars trade marketing annual deal with brand A, now you just give the brand one million dollars in ad budget to run sponsored product ad campaigns, sponsored brands ads, video etc. and compete like the other sellers and brand partners. The brand can let their agency manage the campaigns or do it in-house.
Mabaya, a Criteo company, offers a white-label self-service retail media platform for online retailers and marketplaces that enables sellers and brands to bid in order to ensure their products are listed in premium locations in the online store.
The platform is integrated in more than 50 ecommerce sites around the globe (such as Bol.com, Jumia, Manomano, Kaufland, Falabella etc.), serving more than 80,000 advertisers and sellers.