In Amazon’s early days, enterprising merchants carved out lucrative niches for themselves by identifying what wasn’t being sold on the site, sourcing those products at low prices and offering them as third-party sellers. This phenomenon helped the ecommerce platform serve more consumers while mitigating its risk and made Amazon the so-called Everything Store it is today. Eventually, it also inspired a change in the mega retailer’s business model.

In 2007, Amazon launched its own private-label business by taking a page from third-party sellers: Find popular products on the site and sell them at a lower price, in this case under a “brand” name created by Amazon itself. First was luxury bed-and-bath brand Pinzon, which Amazon followed with everyday-items brand AmazonBasics in 2009. The retailer’s private-label business has since grown to include 119 brands, per a recent study from research firm Gartner L2, including Amazon Essentials, which features apparel, and paper goods brand Presto.

And the list is growing. Business intelligence firm Feedvisor found Amazon is aggressively pushing into private labels. Oweise Khazi, senior principal at Gartner and lead Amazon analyst, called the market “potentially a gold mine” in part because so many consumers trust Amazon.

But third-party sellers and their private labels haven’t gone anywhere. In fact, per a Feedvisor report , 56% of all Amazon marketplace sellers earned revenue from private labels in 2018, up from 32% in 2017. They also account for 58% of sales in 2018, for a total of $160 billion—and have a compound annual growth rate of 52% since 1999. By contrast, Amazon’s compound annual growth rate for first-party sales over that 20-year period was 25%, from $1.6 billion to $117 billion.

As Amazon CEO Jeff Bezos wrote this year in his annual letter to shareholders, “Third-party sellers are kicking our first-party butt.”

And yet it’s not quite that simple. Amazon collects fees from its third-party sellers—for being on the site, storing merchandise in the retailer’s warehouses and fulfilling orders. As a result, Amazon is in competition with the very sellers that helped it gain dominance, and its relationship with these third-party vendors has turned into something like the field of candidates for the Democratic nomination in the 2020 presidential election: They’re rivals, but they also have an interest in each other’s success.

Friends and enemies

To succeed as a third-party seller, vendors make shrewd assessments about which products will sell well and where they can find them for a price low enough to resell for a profit. (There are also so-called Amazon gurus with online courses about how to succeed on the site, as well as tools like Jungle Scout, which helps sellers decide what to offer.) They also invest a lot of time in watching, and even thwarting, their competition.

In fact, one seller, who asked to be cited only as “Eric” over concerns about copycats as well as retribution from Amazon, says they operate by a “don’t ask, don’t tell” credo because sellers can be a pretty ruthless bunch. Tactics range from leaving fake one-star reviews to hijacking competitors’ listings and sending false reports about counterfeit products to get rivals delisted.

At the same time, sellers stress how grateful they are to Amazon for both the tools and infrastructure it provides, as well as for access to its gigantic audience.

“While it may seem like you have to shoulder a lot of risk and pay a lot in fees to sell on Amazon, which you do, the platform gives you access to the single largest network of online buyers in the world,” says Jonathan Weber, a private third-party seller focused on outdoor equipment and office supplies. “Like most brands, there is no way we could replace Amazon’s exposure and traffic if we sold our products exclusively on our own websites because many people simply don’t shop anywhere but Amazon.”

Mountain Falls produces an Invigorating Apricot Scrub Facial Cleanser similar to this St. Ives product.

And when CFO Brian Olsavsky said in Amazon’s Q1 2019 earnings call that the platform’s goal is to give customers the broadest selection, the best price and the most convenient fulfillment options—and it is indifferent about who sells a product as long as Amazon delivers on those three promises—sellers say they believe him. They contribute to those goals, so they believe Amazon has a vested interest in their success.

“Amazon only cares about the customer,” says Aaron Hughes, a third-party seller based in India. “So they want a lot of offerings and the cheapest price possible. They don’t really set a cap on the number of sellers because the crappy sellers will eventually lose too much money and leave.”

Gartner found that Amazon’s private-label business is focusing on categories like household goods, where consumers are more price- than brand-conscious. But some third-party sellers are looking beyond price for a competitive edge—just like a traditional brand.

“The thing I learned was to stop selling things that are common and price sensitive and build a brand people like,” says Hughes. “At the end of the day, people don’t buy plastic spatulas that are double the price because of a brand. They buy it more on price. But a handcrafted product, for example, isn’t as price sensitive.”

A rep for Amazon says private-label products are a common retail practice and notes that more than half the units sold in Amazon’s stores are from small and medium-size businesses. “The proportion of sales that come from small and medium-size businesses has continued to increase as we’ve introduced more private-label products,” she says.

But Amazon also stands to make more of a profit from its private-label sales. According to data from Amazon-focused business intelligence firm Boomerang Commerce, Amazon vendors can expect profit margins of 10% to 25%, while private labels boast margins of up to 40%. (Although the Amazon rep stressed its own private labels only account for about 1% of its total sales.)

Imitation is the sincerest form of flattery?

In addition to Amazon, third-party sellers compete against big brands. But with access to sales data and trends and the ability to promote its in-house brands in search and on other product listings, Amazon has a big advantage over both of them, and sellers, at least, say it isn’t shy about using it. Amazon can start selling the same product as a third-party seller, says Hughes, and “totally demolish you.”

“Many private-label product sellers are worried that if their product does well, Amazon will take notice and roll out a private-label competitor of their own,” says Weber. “While it’s unlikely Amazon intends to fully replace third-party private-label brands—there are simply too many niches—it’s likely people will see more and more Amazon private-label brands over the coming years.”

The Amazon rep maintains the platform does not use seller data to determine which private labels to create.

“Amazon uses information about individual sellers only to support them or enhance or protect our customers’ experience,” she says. “We prohibit the use of individual sellers’ information to compete with them through our first-party offerings, including through our private-label products.”

The term “individual sellers,” though, is key.

Amazon launched luxury bed-and-bath brand Pinzon, followed by everyday-items brand AmazonBasics in 2009.

“I believe that when they say that, they mean they don’t single out individual sellers and troll through their product ideas and sales data to make private-label decisions,” Weber says. “However, it’s silly to assume they don’t use internal sales data. … Sales data is the single most important decision-making point for third-party sellers in evaluating potential niches, and while we have to get by with third-party sales estimates, Amazon has the real sales numbers, which gives them a huge advantage over third-party sellers.”

“Eric” says that while Amazon may not use individual seller data, it could use aggregated data. And John Frigo, a third-party seller peddling home goods, agrees. “From a business standpoint, it would be stupid not to use this data,” he says.

“And their justification for destroying the rest of the world is they’re getting it to the consumer at a cheaper price and the same value,” says David Wright, CEO of ecommerce services platform Pattern, “but at the expense of brands.”

A rose by any other name

Notably, many private-label products are sourced from the same companies that manufacture traditional brands, says Tod Harrick, senior director of customer success at Boomerang.

“It’s ironical,” says Guru Hariharan, Boomerang CEO (and five-year Amazon veteran). “If you’re a top seller on Amazon and have products with high ratings and reviews, Amazon is expected to contact you to buy your products in bulk and launch a private label. If you decline, Amazon goes to the next best sellers in the category.”

And so brands and sellers have to decide which is the lesser evil: teaming up with Amazon to produce products to compete with their own or facing off against Amazon and a competitor. (Or doing both.) This dilemma, Hariharan says, results from Amazon being a data company, not a manufacturer.

“It uses the sales patterns on Amazon.com to watch what’s selling well and ends up buying in bulk to sell them as a private rebranded version,” he adds. “And because of this, Amazon’s private labels end up being top-shelf, good-quality products.”

Kimberly-Clark, for example, sells its own brands, like Huggies, directly on the site. But it’s also widely reported to manufacture private labels like Mama Bear. “Kimberly-Clark provides paper products for Amazon’s private-label brands,” Hariharan says. “This is what we loosely call 2P—they have first-party products but also a relationship with Amazon.”

(Kimberly-Clark did not respond to a request for comment. “I don’t have additional details to share on suppliers,” says the Amazon rep.)

Why partner with Amazon? Because CPG companies like Kimberly-Clark want to own the first page of search results on the site’s digital shelves.

“Big companies like the P&Gs are getting papercutted to death—their businesses are going down,” Wright says. He adds that about two years ago, Amazon had an internal three- to five-year vision to double down on private labels. The margins are incredible, he says, and Amazon can cut out the middleman by going to a factory in China and slapping on an AmazonBasics label. (P&G strongly denied it produces private-label products for anyone.)

Meanwhile, Gartner notes, “Amazon is making a concerted effort to borrow brand equity from traditional brands by actively copying their packaging, flavors and properties.”

Take Mountain Falls, a private label with oral-care and soap products made by Vi-Jon Laboratories, a manufacturer of personal-care products that also produces Germ-X. Products like Mountain Falls’ Invigorating Apricot Scrub Facial Cleanser and Daily Moisturizing Lotion are “typically remarkably similar to their traditional counterparts” from St. Ives and Aveeno, Gartner says.

“A brand might find themselves having Amazon create another one of the thousands of brands on their platform—and Amazon may decide to give themselves preferential treatment for their own brands, but this is no different than Walmart putting their own private-label products on an endcap,” Wright says. “At the end of the day, retail will find a source to produce their own private-label brands whether or not a brand partners with them, and it comes down to ideology at the brand level.”

Straight to the source

And now, insiders say, Amazon is making moves to bolster its manufacturing muscle by cutting out brands and connecting directly with manufacturers in China.

“If you’re producing goods for P&G, you can reach out to Amazon and say, ‘Hey—we have a factory and produce these goods. We can start a line and produce it for you guys,’ and they can have a direct relationship with Amazon,” Hariharan says. “Why pay a 20% premium when you can give customers the same quality product at a cheaper price?”

The Amazon rep says they are likely referring to the Amazon Accelerator program, which includes selling partners with exclusive brands around the world, but it wasn’t immediately clear if that’s the case.

The U.S. imported nearly $558 billion worth of goods from China in 2018, making it the largest supplier of products to Americans, per the Office of the U.S. Trade Representative. Wright says Amazon has also sent 60 to 80 employees to China to help teach factories there how to sell directly on Amazon. Insiders say the program is code-named Dragon Boat. Amazon, however, says this is not a current project, denies Wright’s assertion about sending employees to China and notes it has global selling teams around the world.

“Eric” says he has seen Amazon “side-stepping” third-party sellers by going to Chinese factories—and he sometimes even gets emails from Amazon in Mandarin.

In the meantime, brands can protect themselves by bringing production in-house, like direct-to-consumer companies such as razor brand Harry’s and furniture brand Burrow, which have their own factories.

While Amazon and third-party sellers continue their battle for profit and primacy, the ultimate winner might actually be the consumer.

“As Amazon drives this entire concept of profitability, it is squeezing profitability out,” Hariharan says, “and passing along savings to shoppers.”