Antitrust and private labels at Amazon: wrong solution to the wrong problem

Amazon recently got a ton of bad press about its private label brands at the recent House Subcommittee hearing. It was blasted for using sellers’ data to cherry-pick products that it could then directly source (sometimes from the same manufacturers), using its size to brush smaller competitors aside. There were further complaints that it tilts the playing field to force sellers to use Amazon fulfillment, or to tweak the Buy Box in Amazon’s favor.

This is a mishmash of complaints, and the private label arguments are basically ridiculous.

Private labels have been used for decades by retailers. Walmart’s grocery aisle is filled with them – 30%+ of Walmart groceries are private label. And the process is pretty standard: retailers watch the data to see what sells, and then figure out whether they can build a competing brand that’s cheaper. Sometimes they can, and they use a private label to do just that.

Critics say Amazon is different because it has access to more data and especially precise data from individual sellers. But that’s really nonsense. It’s actually much more important for Amazon see how well a category is doing than it is a single item. Take a lawn chair: there may be one that’s selling pretty well. Amazon need to know how well all of the similar lawn chairs are doing. That underpins a conclusion that a private label lawnchair has a good shot – maybe sales are hot, maybe Amazon can see a margin it can undercut. Individual Amazon workers may take a shortcut and jump to set up a private label when they see good sales at Lawnchairs-R-Us. But they shouldn’t – not only because Amazon has rules against it – but because those rules serve Amazon, not just the seller. More data is better data, so aggregating data from multiple sellers improved Amazon’s perspective.

More broadly, Amazon is doing nothing different than most retailers. What’s different? Those hurt by Amazon may be more visible and still very small  (like Popsockets, which has been a highly visible critic). One-product companies are immensely vulnerable – Amazon can crush without breaking a sweat. Bigger companies see things differently. Heinz may not like Walmart’s own-brand ketchup, but it’s not a mortal threat. Popsockets could be out of business quickly if Amazon sells an identical product more cheaply and uses its platform to push sales.

Strategically, this focus on private labels is especially misplaced. Unlike Walmart, private labels are totally irrelevant to Amazon’s business and to future business models. They are one dimension among several desperate efforts by Amazon to grow profit margins retail, which is now losing a lot of money (more than $30 billion annually). But aside from batteries, where Amazon took 30% of the market, and a few other low-margin cheap segments, Amazon’s private labels have failed. They have some traction in softlines- soft consumer goods like clothing. That’s it. Amazon itself says private labels account for less than 1% of sales.

Private labels are also the wrong target for public policy reasons. Antitrust is the wrong solution to the wrong problem. It offers a one-off solution to long term issues.  And antitrust attacks on Amazon are doomed because they will be immensely unpopular: as though consumers are standing in line to demand that the Federal government save us (from what? Lower prices?) by breaking up Amazon! This is so obviously doomed that a Machiavelli might suggest that Amazon is using private labels to bait regulators and deflect them from more important issues, while knowing that in the end and serious action will be blocked by Walmart and Target.

This is not at all to say that Amazon should not be regulated. On the contrary. But not primarily  via antitrust: in the next post, I’ll explain why radical transparency is the right solution – and show that it can even prepare the ground for subsequent antitrust enforcement, if that’s needed. But for private labels, the reality is that Amazon doesn’t need them, doesn’t care about them, and won’t even blink if it cannot use them. So we should regulate the Amazon we have, not the fantasy Amazon that exists after a breakup that will never happen.