Why am I so certain of this? Why do I say that the Amazon.com's (NASDAQ:AMZN) new diaper business is going to flop? There is a reason.
As we've seen, Amazon.com has gotten into the private-label diaper business, as part of its new Amazon Elements line, available exclusively to Amazon Prime members. That is, it is launching its own brand of diapers, baby wipes and, presumably, more private label products in the future. Usually, when retailers launch their own private brands, they do so by pricing more aggressively than established brands from Procter & Gamble (NYSE:PG) or Kimberly-Clark (NYSE:KMB). This is easy to see if you buy diapers from Target's (NYSE:TGT) Up&Up brand. They're much cheaper than those from name-brand companies. Same goes for other retailers like Wal-Mart (NYSE:WMT) or Costco (NASDAQ:COST).
Retailers must discount these products because consumers already attach an image of quality to the existing and established brands. Your discounting needs to be large enough to combat this image advantage. It doesn't matter much if your private label diapers are as good as name brands. They could be exactly the same. But at the same price or close, consumers wouldn't even try them.
And that's where Amazon, as with the Fire Phone, failed and guaranteed an initial flop (at least until it starts discounting hard). With the Fire Phone, Amazon.com initially had the unfortunate idea of pricing the device at about the same level as the Apple (NASDAQ:AAPL) iPhone 5s or the Samsung (OTC:SSNLF) S5.
Never mind that Amazon.com's Fire Phone actually had worse specs than those two phones. Even if it had the same specs, it still would have failed miserably because it would have been competing against established brands at the same price level. Here, with diapers, Amazon.com is making the exact same mistake. Amazon.com's diapers are priced (WSJ subscription required at the link) not just above P&G's lower-end diapers, but actually near (at just a 10% discount) P&G's most expensive premium diapers! This ensures a flop.
Amazon.com positions Amazon Elements as being sold on "ethical grounds," where the supplier is transparent regarding how the products are made, by whom, with what ingredients, etc. The purpose here is to have a reason to extract a higher price/margin.
Naturally, to try and price its products at or near the premium price of established brands, Amazon.com needs to have an excuse. For the Fire Phone, the excuse was dynamic perspective and Firefly. For the diapers, it's the "ethical grounds."
This, however, stands no chance of saving them from flopping. Amazon.com itself does not have the right image (remember the fight with Greenpeace). And, even if it did, there's no reason to believe this ethical market for diapers is anything but a very niche segment.
Indeed, on Amazon.com the 20 top sellers in "Diapering" are all name-brand diapers and wipes, and the first "ethical" product only showing up in 24th place - Seventh Generation wipes. There is basically no large market for these ethical diapers and wipes, as per Amazon.com's own sales counts.
A Favorable Angle
There is just one favorable angle we can come up here. That while Amazon.com is pricing its wares wrong versus established name-brand players, it's pricing them competitively versus other "ethical" diapers and wipes.
Pampers Swaddles (the best selling diapers on Amazon.com) cost $0.32 per unit, whereas Seventh Generation's Free and Clear, unbleached baby diapers come in at $0.34. So ethical products try for premium pricing (and sell poorly as a result, as can be seen from the top sellers' list). Amazon.com is targeting its diapers at around $0.267 per unit, so while it prices at only a slight discount to the Pampers, it is targeting a more significant discount over other ethical products.
What might happen here is that if Amazon.com's brand is strong enough - which is in doubt on environmental grounds, as I've explained - it might still pose a problem for existing ethical suppliers. Yet, these ethical suppliers sell poorly, so even if Amazon.com displaces them (hardly a certainty), Amazon.com is likely to sell poorly as well.
As with the Fire Phone, we'll be able to gauge how these diapers and wipes will truly do just by looking at Amazon.com's own best sellers' list (for Baby Diapering). This enabled us to call the Fire Phone a confirmed flop well ahead of the pack, and should also enable us to see whether these do well or not in due time.
Discounting Will Pose A Problem
The problems for Amazon.com will not end with the recognition that it made yet another obvious pricing mistake. Amazon.com will in time discount those diapers. But then another problem rears its head - selling private label, discounted diapers online carries the same fulfillment, payment and shipping costs as selling higher-margin, name brand diapers.
This means that Amazon.com's margin on those private label diapers will fall much more rapidly than the discounts imply - because a large fraction of the cost of selling those diapers will be fixed.
This, indeed, might be an intrinsic disadvantage for online sellers. Retailers are used to offering private label products for many of their products, but the delivery cost of those products to consumers is minimal, as consumers go to the store themselves and pick them up. Not so for online retailers, where handling, paying and shipping the diapers can easily eat up 15%-20% of the sales price.
To sum things up:
- Against established name brand products, the new Amazon.com private label products have no chance. They're priced too close to the premium products and even at a premium to value brands - this ensures a flop against established players.
- Against ethical producers, Amazon.com private label products have a chance as they're priced cheaper, while trying to offer the same "advantages." There is a chance Amazon.com might displace ethical sales from others that price more expensively. However, the sales Amazon.com could displace are small so they don't ensure success. And Amazon.com's environmental image is not aligned with the segment it's trying to address, so that makes success there dubious as well.
To sum things up, a flop is highly likely.
Amazon.com has made the same exact error with its new private label diapers and wipes as it did with the Fire Phone. It priced them as premium products when it has no premium image to go with them.
This ensures a flop. Anyone who knows how moms choose these things knows that they give a lot of value to the brands they're used to - they're not going to switch to more expensive diapers (coming from P&G's value brands) just because these are Amazon.com's. And they're not going to switch to only slightly-less-expensive diapers either (when coming from the premium P&G diapers).
Furthermore, Amazon.com's continued attempts to launch high-priced, no-name products does not bode well with regards to its retail expertise or the desperation it must be in to try and increase margins. These are not the moves of a company in control of its profitability.
Disclosure: The author is short AMZN.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.