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E-tailers take risks to build brand

Online retailers can earn higher margins and build their brands with private labels. But that means carrying costly inventories.

Internet retailers are turning to in-store brands to boost revenues. But by doing so, they take on the added risks of carrying inventory and alienating suppliers.

In-store brands such as Safeway Select or Sears Kenmore have long been a staple of brick-and-mortar retailing. Safeway devotes entire sections of its stores to Select brand items, which yields higher margins and promotes the Safeway brand.

That lesson has not been lost on e-tailers, which have attracted Wall Street's attention with a no-inventory model that is quickly losing ground to a business that looks increasingly like traditional mail order. If a Web site is a more-efficient version of a catalog, an e-tailer still needs a customer service department and a warehouse full of product.'s new emphasis on investment in its warehouse and shipping infrastructure is probably the best-known example of how e-commerce sites are changing. Amazon has also considered entering the publishing business, an endeavor that would have the backing of valuable market research garnered from the site's 6.2 million customers.

Private label products offer retailers "a chance to market around the information that they collect," said Evie Black Dykema, an analyst with Forrester Research. For example, if discovers that Vitamin C sells particularly well, it might make sense for the company to market its own brand of the vitamin--manufactured by someone else, of course.

In fact, already has plans to do that. It has registered the domain names,, and will eventually sell a line of vitamins and supplements under the Vitafresh brand name, said company spokeswoman Debby Fry Wilson.

Virtual Vineyards, which has been selling wine and specialty foods online since 1995, began offering wines under the Virtual Vineyards label in October. According to company cofounder Peter Granoff, the move made sense for several reasons, including the products' higher margins. Other reasons included the variation in state restrictions on the sale of alcohol, corporate customer demand for large quantities of wine with customized labels, and finally, charity. In an industry deluged with requests for donations to charity, "We were donating other people's wine and getting no benefit from it" in terms of promoting the brand, said Granoff.

Virtual Vineyards does assume some risk in keeping its own inventory on hand, Granoff said, but those are the kinds of risks Net retailers are increasingly going to have to take. "It's a big lie that you just set up a shell and you're in business," he said. "This is a direct marketing business, just like catalogs."

The benefits may outweigh the risks, but not all e-tailers are rushing to build their own product lines., which sells everything from bulbs to outdoor furniture, sees in-store brands as a threat to its suppliers, some of whom have given exclusive rights to sell their products online. "It would go against the grain of all the things we've been doing," said spokeswoman Eileen Isola.

But there is little concern that private label products would cause outside manufacturers to stop supplying their product to a particular Web site, said Dykema, particularly since that hasn't happened in brick-and-mortar retailing. "Drug makers will be eager to be stocked through" no matter what kind of in-store brand it offers.

Nor are e-tailers bound by the same rules as their offline competitors, Dykema added. "Online, the rules are developing," she said. "People are focusing on the growth potential of the medium and are less distracted by some of the traditional retail concerns."