How will Amazon affect the future of the UK grocery industry?
In an increasingly competitive European grocery industry, there is only one certainty: Amazon is here to stay.
Success in one of Europe’s largest retail sectors is critical to long term growth for Amazon and while Amazon is yet to gain any significant share within this sector, recent initiatives such as the launch of AmazonFresh, today’s launch of the Dash button in the UK, as well as Prime Now delivery across Europe, all have major implications for not only grocery retailers but all of Amazon’s competitors.
Growth in the UK grocery market is relatively low, and competition—both offline and online—is intense. The key question is how much share Amazon can expect to gain from established competitors.
Conversely, selling grocery products is strategically important to Amazon’s non-food businesses. The household penetration and purchase frequency of FMCG and grocery products increase the value of Prime membership, which in turn leads to major increases in a household’s loyalty to Amazon.
Establishing itself as a destination for grocery shopping will be a significant challenge for the online retailer. This is especially so in the UK where the major supermarkets, including the pure-player Ocado, have strong expertise in driving shopper loyalty.
However, this loyalty continues to erode, with retailers now having to focus on Amazon as well as the rapid growth of Aldi and Lidl.
These discounters have a combined UK grocery share of 10.7% (Kantar Worldpanel August 2016), gaining an impressive 2.3% in just two years. Much of this growth is down to significant store expansion with both retailers planning to open in excess of 50 stores in 2016.
Amazon has started on a relatively small scale across Europe, limiting the Prime Now, Pantry and Fresh initiatives to select cities and postcode locations. Despite this, analysts are still predicting a 3% UK grocery share by 2020.
In the near term, it appears that the larger supermarkets have the most to lose from Amazon’s advance. All of the top four UK supermarkets continue to experience grocery share decline, with Sainsbury’s being the only one to experience any short-term share growth in the last year.
Collectively, the “Big Four” are well aware of the Amazon threat and are taking steps to respond.
Morrison’s appears to have made the strongest response with a direct distribution agreement with Amazon.
This may have some long term benefits, however Amazon is likely to gain more from this by providing a simple and credible partner to enter the online grocery sector.
More significantly for Morrison’s, its recently announced renegotiated agreement with Ocado will provide a store pick solution in all areas of the UK Morrison’s also completed its sale of its 10% stake in FreshDirect, the US online grocer, more than two years after announcing plans to divest.
Asda, Sainsbury’s and Tesco have responded in force to Amazon’s clearest point of difference: the one-hour delivery slot for Prime members.
Most recently, Tesco has launched a same day click and collect service in nearly 300 stores, with shoppers able to pick their groceries up after 4pm for orders placed by 1pm.
Asda offers a similar same day click and collect scheme from 240 stores although plans remain uncertain on the roll-out of its stand alone click and collect pods first launched in 2015.
Sainsbury’s has recently announced it will roll out same day home delivery and click and collect options to 30 stores by Christmas, assuming successful results from an initial three trial stores.
Success of these initiatives will depend on the retailers maintaining strong availability of their products to avoid significant shopper frustration.
So what are the key challenges for brick and mortar retailers, and what can they do to minimise the threat from Amazon?
With convenience clearly being a key driver of online grocery shopping, Amazon has focused on its ability to provide delivery options that fit with shoppers’ busy lifestyles.
Headline-grabbing initiatives such as delivery by drone prove that Amazon remains at the forefront of logistics and technology advances.
The rollout of 1-hour delivery slots through Amazon Prime Now in 10 cities and countries in the UK (London, Birmingham, Newcastle, Manchester, Leeds, Edinburgh, Glasgow, Surrey, Hampshire, Berkshire) and major cities throughout Europe has driven retailers to trial their own version.
Click and Collect (especially Click & Drive in France ) is already an established mechanic in mainland European countries but even here, retailers will have to react to the 1-hour slots.
The key challenge for retailers will be offering more convenient service without eroding margins still further – leading to potentially higher delivery charges for customers wanting the premium 1-hour service.
Amazon places the customer experience at the heart of all its initiatives to ensure the shopping experience is as simple and enjoyable as possible.
Its sophisticated automation and personalisation technologies ensure that only results that are relevant to an individual shopper are displayed. Amazon is also at the forefront of using enhanced product content (called A+ content) to ensure shoppers understand the products and can select with confidence.
Finally, Amazon’s Vine programme drives of the volume of product reviews and ratings, used by 77% of consumers before making an online purchase (Jupiter Research).
Currently, the Big Four grocery retailers are lagging behind Amazon in terms of providing an optimised online shopping experience.
Many retailers do not support features such as enhanced content or product reviews. These and other factors can help to maintain shopper loyalty, and retailers must therefore use Amazon as a key benchmark when developing their own digital assets and capabilities.
This is no easy task as further enhancements, such as Amazon Choice–which makes educated product recommendations for certain –means Amazon is even starting to make decisions for those shoppers willing to grant Amazon the privilege.
As the operator of a large and growing marketplace for “third party” merchants and sellers, Amazon is able to offer an “endless aisle” of shelf-stable goods while assuming limited risk. (After all, Amazon takes its fees on every transaction, but merchants carry the inventory risk.)
As Amazon converts more households to grocery shoppers, it will be able to offer them convenient delivery of a range of non-food items that is orders of magnitude larger than most traditional retailers can dream of offering.
Amazon has also launched private label baby wipes, nappies, baby food and coffee in the US. Between its “1P” (retail) and “3P” (marketplace) businesses, Amazon has visibility not only of category-level demand, but precise product-level demand as reflected in searches and product reviews.
With these unique sources of intelligence and insight, Amazon may continue to develop its own brands and product range, potentially positioning it not only as a seller of innovative products but a maker itself.
If retailers are able to match Amazon on the areas above, what future developments should they be expecting, or even fearing?
Once Amazon has established successful business models in each of its European markets, retailers should expect a swift national roll out of services such as Fresh and Prime Now. This will provide further challenges within the competitive grocery market.
Today’s launch of the Amazon Dash device is a headline grabbing initiative but one which proves Amazon’s desire to become fully integrated into shopper’s lives – a one-stop-shop for absolutely all your purchasing needs.
Further initiatives such as Amazon Choice, drone deliveries and even the opening of actual brick and mortar Amazon collection stores in the US highlight Amazon’s commitment to enhancing the loyal shopper’s experience.
The ultimate aim is to use the frequency of grocery shops to up-sell shoppers to higher ticket items such as electronics and clothing – all delivered in one simple and quick delivery.
If Amazon achieves this, established retailers have every reason to be fearful.
Our Grocery Retail Digital Sector Report contains an analysis of the grocery retail sector, with a focus on its digital evolution and related trends which are impacting the major UK players in this space.