Amazon's 34 private label brands could add a billion dollar boost to its business

Amazon's nascent effort to sell products that carry its own brands could give its business a huge windfall.

The e-commerce giant offers everything from burgers to beauty products under its collection of 34 private-label brands. Combined, sales of those products could add $1 billion to its gross profit by 2019, Morgan Stanley analyst Brian Nowak said in a research note issued Tuesday.

Gross profit is the difference between the retail price a company charges customers for its products and its wholesale costs of purchasing, producing or providing them.

Amazon's private label effort is still "early" in its development, Nowak noted, but added that means the company has a big opportunity, especially if it pans out for Amazon as it has for its competitors.

This is "why private label is exciting, as it's large and profitable for other leading retailers," he said.

Nowak got to the $1 billion gross profit number by calculating what would happen if Amazon grew its private label business to 5% of its total retail sales over the next two years. Thus far this year, Amazon has only generated $250 million in revenue from private label goods, or about 0.15% of its gross merchandise sales, he estimated.

Amazon's private label brands extend across nine product categories, according to Nowak's analysis. They include apparel brands such as Lark & Ro; Amazon Basics, which the company uses for a range of ever day products including luggage and batteries; and home furnishings brand Strathwood.

For now, however, Amazon still has a long way to go. For example, the company has about 2,400 individual apparel items that carry its private label brands, Nowak estimated. But rival apparel brands such as Calvin Klein and Michael Kors typically offer five to eight times self-branded apparel items, according to Nowak's research.

And while consumers can only find three arts and crafts items that carry one of Amazon's own brands, Elmer's and Scotch offer hundreds of such items that carry their brands. Meaning the company has room to expand its offerings in those and other product categories.

Another opportunity for the company: Convincing more shoppers to buy more Amazon-branded products. Among customers who have bought apparel on Amazon, just 8% say they've purchased clothing carrying its Amazon Essentials brand, compared to 35% who say they've bought a Nike clothing product on the site, according to Nowak's report. Other Amazon apparel brands are even less popular.

"The tea leaves show that Amazon cares about private label," Nowak wrote. "But it's still early."

Indeed, despite the slow adoption, Amazon doesn't seem to be letting up. It's been quietly growing its private label brands for months now, particularly in its apparel business. In a July 2016 job posting for a software engineer, Amazon wrote that it wants to become "the number one online shopping destination for fashion customers."

The company had already launched seven apparel brands by early 2016. But that number is now up to 19, according to Morgan Stanley's analysis.

There's a simple reason why Amazon is putting so much emphasis on its apparel business, and likely why Morgan Stanley is so bullish on Amazon's private label prospects, in general. Clothing has the highest online penetration rate among all retail categories in the US.

According to a July 2016 Morgan Stanley note, US shoppers buy more clothing online than any other type of product. At that point, 52% of US shoppers had bought clothing online in the previous 12 months.