Amazon.com Inc.become more like a general retailer

• SEPTEMBER 18, 2009

Amazon Is Selling Designs of Its Own

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By GEOFFREY A. FOWLER

Amazon.com Inc. is quietly expanding its private-label business in a bid to diversify away from its online bookstore roots and become more like a general retailer.

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After starting with private-label patio furniture in 2004, Amazon has since added its own housewares, including a steamer, frying pan and chopping block.

The latest sign: The Seattle-based e-commerce giant -- known for high-tech innovations like one-click checkout and the Kindle e-reader -- last month received a U.S. design patent for a wooden chopping block.

The $24.99 Pinzon bamboo cutting board is being sold as part of a line of Amazon's own kitchen products on its Web site. It features two surfaces, one flat and the other curved. A curved blade, designed for chopping herbs, is stored inside the block.

In June Amazon launched a new collection of private-label kitchen utensils, designed by Seattle Chef Tom Douglas and sold under his name.

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Amazon won't disclose any other patent applications, but says it is always evaluating opportunities to patent the designs it develops for private-label products.

Amazon doesn't say what percentage of its $19 billion in annual sales are from its private-label business, but it already sells more than 1,000 products that are manufactured at its request. While that's a small number compared with the millions of other listings on the site, it underscores how far the company has moved beyond books, CDs and DVDs. For the first time ever, Amazon's second-quarter North American sales of "general merchandise" -- which includes everything from patio furniture to TVs -- were larger than its sales of media, such as books, movies and videogames.

The company now has its own design and sourcing team on staff, although manufacturing is outsourced.

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Chris Nielsen, Amazon's vice president of home and garden product sales, says the company has developed private-label products when it felt customers' needs weren't being met by the rest of its catalog.

Mr. Nielsen says developing private-label products has required new skills for the company, such as managing quality control and meeting product safety regulations. But online feedback from customers who leave product reviews helps the company make improvements. For instance, Amazon lengthened its first private-label product -- a chaise lounge -- after customers said it wasn't comfortable for tall people.

Kerry Morris, Amazon's private-label product development manager, says she has already gotten useful feedback about the chopping block. Some customers complained that the knife handle wasn't comfortable for extended periods of time. She is headed to China to work on improving the design.

Amazon launched its private-label efforts in 2004 with a line of outdoor furniture called Strathwood, and has slowly expanded to kitchen, bed and bath products under the name Pinzon, the explorer who discovered the Amazon River.

The company won't disclose profit margins for its private-label merchandise but it is clear that the effort wouldn't be feasible if it weren't for Amazon's economies of scale.

Ben Schachter, an analyst with Broadpoint AmTech, says Amazon's private-label business is in its early stages and doesn't add much to the company's sales now. Yet "Amazon thinks very long term," he says.

Private labels are popular with many traditional retailers because they can provide higher profit margins by cutting out the middleman in the supply chain. Some, such as Best Buy Co., have reported a big boost in private-label sales during the recession as consumers trade down. But online-only retailers have been slower to adopt private-label brands because they lack the expertise to design products, and lack a physical store presence to introduce a new brand.

Zappos.com Inc., recently acquired by Amazon, launched private-label products in 2003, and they now account for about 5% of the company's $1 billion in gross merchandise volume. The company sells 2,500 different products across 10 in-house brand names, such as Fitzwell. Mike Normart, senior director of brand development, says Zappos has had the most success with products that name brands aren't offering, like wide-calf boots. "We try to make them cost a little bit less so there is a value, but we also try to make it a better shoe," says Mr. Normart.

Drugstore.com Inc., which purchased the private label "de~luxe" brand in 2007, says it saw sales of those products increase 30% between 2007 and 2008. "We can obtain high margins by sourcing every component that goes into making the brand ourselves, from packaging to fragrances, and in turn can provide an affordable price for our customers," according to a spokeswoman.

The private-label strategy isn't without its problems. In particular, Amazon's own products may conflict with the products and merchants that the company already hosts on its site.

Amazon says that many of the private-label goods that it offers come from suppliers who also sell branded goods through the site. "They view this as a natural extension of their business models," the company says.

Adam Cornell, director of sales and marketing at wooden products maker Catskill Craftsmen in Stamford, N.Y., says Catskill sells as much as 40% of its products -- which includes chopping blocks -- online through sites such as Amazon. But so far, Catskill has seen little effect from Amazon's private-label business.

In theory, Mr. Cornell says, Amazon could "hamper competition" on its site with a stronger push into private labels. But "thankfully there are plenty of dot-com's selling competitive products that I don't think it will really have a major impact," he says.

Write to Geoffrey A. Fowler at geoffrey.fowler@wsj.com