Problem: In the physical world, “Costco leverages their high volume and strong brand to convince suppliers to manufacture products for them, and why it actually makes sense for the brands to do it” as described by Adam Keesling of Napkin Math (a newsletter I love)! What about businesses in the online world? What’s the equivalent of Kirkland Signature?
Solution: An online store that offers 3 versions of every product: explore (aka new up-and-coming brands), exploit (aka white labeled under the brand of the business), and “experience” (aka blue label businesses that are high end or luxury). The design of this business would be to mimic the shelf-space that’s present in a store like Costco, but online.
The user experience would be simple. Just like Google has a very simple search box, this website would only display a box for you to search what product you are looking for. Consumers would enter this info (boxers, t-shirt, ketchup, vodka, etc.) and the business would return three types of products: a white labeled business (exploit), an undiscovered or new brand (explore), and a high-end brand (experience). This “triple E” search would feature express purchasing features and other non-patented options (similar to Amazon’s One Click Buy, which Amazon has a patent on).
One example in the field already, which failed and was eventually re-launched, is Brandless. In it’s last round of funding, the company was valued at almost $1 billion. As the Motley Fool described they failed because:
(1) Consumables are a low margin add-on: “The point isn't to make money on a few things one may occasionally buy. The point is to make Amazon the destination where consumers will buy everything else they purchase. Brandless only operated in the one arena where rivals were most willing to suffer low margins.” Thus, a great lesson for this business to adapt to and as a result would sell not just consumables.
(2) Cost-effective, scale-building marketing is required: ”If Brandless spent big on marketing, it ran the risk of steep losses in an industry already known for thin margins. If it didn't market itself, there's no way the average consumer would find its products in a sea of competitors' advertising.” Thus, this business should focus on advertising in a traditional sense.
(3) Consumers need some degree of branding effort: “Consumers will buy private-label consumables, but they at least have to look something like the national brand goods they're being compared to… AmazonBasics is one example -- it's a brand. Perhaps the best example of a retailer-owned private label, however, is Costco's Kirkland Signature brand of foods. It [Kirkland Signature] accounts for one-fourth of the club retailer's revenue, but its packaging makes it look comparable to the mainstream brands shoppers would expect to see sold at other stores.” Thus, this business is one that could definitely benefit from a business focused on white-labeling.
(4) Brandless didn't package like consumers buy: ”Every item Brandless sold cost $3. Rather than adjust the price for more or less of a particular product, the company adjusted the portion or size of the product to provide $3 worth of retail value…. For consumers who only buy one bottle of shampoo, one ream of paper, or one tube of toothpaste at a time, that works, and the price is fair. For a family of four that can quickly work its way through a bottle of shampoo or a tube of toothpaste, making a bulk purchase from a nearby store translates into significant savings on those goods. Amazon offers all sizes and shapes of products, even if not its own brand, and Costco is the king of selling in bulk.'“ The business would learn from this to sell to already existing consumer habits.
Motley Fool ended their article by writing, “DTC business -- or retailers ramping up their private-label efforts -- are falling into these traps. Costco understands the importance of compelling packaging and inducing purchases of additional goods while in-store. Amazon already serves around 200 million customers per month.”
Using this estimate of the market leader, I would argue that there is definitely a market large enough to sustain many billion-dollar businesses.
Monetization: Selling these products and profiting off the margin or charging brands to be the “Explore” or “experience” options on the website.
Contributed by: Michael Bervell (Billion Dollar Startup Ideas)