After years of expectation, Amazon finally launched its Fresh grocery service in the UK last week, parking its tanks on the lawns of the country’s biggest retailers. It promises “everything you need for your weekly shop”, from artisanal Stilton to tangy cheese Doritos, delivered to your door in a cool box.
Some analysts are predicting the US online giant could grab up to 3% of the UK grocery market by 2020. That would represent £1.4bn of sales, much of which would be stolen from the already struggling traditional supermarkets – Tesco, Asda, Sainsbury’s and Morrisons.
“I genuinely believe this is a game-changer,” says grocery market analyst Bryan Roberts at TCC Global.
Amazon has begun delivering to just 69 north and east London postcodes, but Roberts says its blueprint of same-day deliveries, access to high-quality local stores (such as Gail’s Artisan Bakery, Daylesford Organic and chocolatier Paul A Young) combined with relatively low prices and Amazon’s strong service record, could prove a “huge draw”.
While 3% might sound like a tiny share of grocery sales, Amazon will be directly cutting into what has become one of the few growth avenues for traditional players, who are seeing shoppers gradually desert big supermarkets in favour of online and local shopping trips.
The online grocery market is expected to nearly double in value to £17.2bn between 2015 and 2020, according to food and grocery research body IGD, while supermarket and hypermarket sales will fall by nearly 3% to £69.6bn. Pure online businesses Amazon and Ocado are expected to benefit the most from the change as the current market leader Tesco, which controls about 40% of the online grocery market, loses out.
Amazon’s service ambitions could also force the whole market to raise its game. That may be good news for shoppers, but is likely to put another dent in the profits of suffering supermarkets.
Amazon is offering refunds as well as substitutions for items which are not in stock and a huge list of 130,000 products – something the main operators do not currently match. Ocado offers about 48,000 items, less than 40% of the range Amazon can boast, while Tesco has about 70,000. The average Asda or Sainsbury’s superstore carries less than 40,000; Morrisons less than 22,000.
Amazon’s promise of same-day delivery is something only Ocado currently offers in certain cities, although Tesco and Asda have been trialling a same-day service for “click and collect” orders.
“It’s very unhelpful and inconvenient for the mainstream players,” says Neil Saunders of retail consultancy Conlumino. “Amazon is very good at the service side of things and deliveries. It is going to make other players pull their services up when grocery online is already not very profitable, and profits are under pressure with price cuts.”
Its potential influence on service could be comparable to the impact of discounters Aldi and Lidl on prices. They now jointly hold about 10% of the UK market – less than 4 percentage points more than three years ago – yet in that time traditional supermarkets have been forced to slash prices to try to match the discounters on key items to prevent shoppers deserting them in droves. Profits have suffered accordingly.
Saunders adds: “In a market where there is really no overall growth in volume, if anyone else comes in, even if they only take a small share, that will be coming off someone else.”
But Amazon should not look forward to an easy ride. In the US, where it has been offering its Fresh service for more than eight years, the company accounts for less than 1% of grocery spending, according to analysts Conlumino.
Geographical expansion has been slow, with the service now available only in Seattle, San Francisco, Los Angeles, New York City, San Diego and Philadelphia. Expectations had been for it to be in 50 US cities by now. “This does not look to be a massive disruptive competitor in the short term,” says Dave McCarthy, a well-regarded retail analyst at HSBC. “If Amazon is 50% the size of Ocado in five years it will have done well, but would still be well under 0.5% market share.”
One industry insider says Amazon may have an advantage from not playing by the same rules as its traditional rivals in terms of profit expectations and tax payments, but it will face six strong competitors. “Selling short-life fresh foods is very different to books. It will burn a lot of money,” the insider says.
McCarthy argues that most shoppers are more interested in low prices than home delivery. Amazon has promised “competitive” prices: a basket of key items last week came in just below the prices of the big four. In the UK, many fresh food items – more than 2,400 products including pies and pizzas as well as fruit, vegetables and meat – will be supplied by Morrisons. That relationship will help Amazon offer a relatively cheaper range of products than in the US, although it will still be more pricey than Aldi and Lidl.
Amazon will also have to be able to deliver on its service promises. Early reviews have pointed to multiple items being out of stock, and its method of using coolboxes in ordinary vehicles rather than refrigerated vans may prove problematic in a heatwave.
And while same-day delivery may appeal to some, Amazon’s deliveries will not be the cheapest. Those wishing to use Amazon Fresh must be signed up to Amazon Prime at a cost of £79 a year, and then pay £6.99 a month for unlimited deliveries of orders worth more than £40. That would take the annual cost of getting the groceries to £162.
That compares to a 12-month anytime delivery pass costing just £60 a year at Sainsbury’s and Tesco. As most online grocery shoppers choose to stick with the brand whose physical store they already visit, the prospect of a three-figure fee may be another hurdle in the way of changing habits.
McCarthy’s argument is supported by the fact that Amazon has been offering a range of groceries online for some years – from cleaning products to biscuits – without setting the market on fire. Analysts at Bernstein estimate those sales currently add up to about £300m.
The new service gives additional convenience and the ability to do a full weekly shop, as it includes fresh produce, dairy and bakery goods not previously on offer, but it will mainly appeal to those already paying for Amazon Prime. One of its main benefits to Amazon may be to keep such customers locked into the company’s growing “ecosystem” – buying films, music and now groceries through the same route.
Vanessa Henry at IGD says: “Amazon has expanded through organic growth in the US and is present in densely populated urban areas, where demand is highest. We expect Amazon to follow a similar strategy in the UK in the short term, which means that its impact on existing players will be limited. Over time Amazon could make an impact, but we don’t expect things to change overnight. For Amazon it will be more about driving loyalty and frequency of shop for its existing customers with the new service.”
If the service takes off, however, one of our smallest supermarket chains could be a beneficiary. Andy Higginson, the chairman of Morrisons, says he has no idea if Fresh will be successful but he hopes to benefit from being introduced to a new kind of shopper – particularly in London, where the Bradford-based chain has few stores.
“They have proved very determined in other parts of their business,” Higginson says. “If you are going to back any horse you would say Amazon is going to be a good one to put money on.”