The link-up between UK grocer Morrisons and internet giant Amazon has, as with all things Amazon, garnered considerable media and industry attention. But what could it mean for competitors, shoppers and the online retail sector?
In a deal that saw its shares jump by more than 5% and analysts mostly purring, Morrisons is to make hundreds of fresh and frozen products available through US giant Amazon’s distribution facilities.
The Bradford-based retailer’s chief executive David Potts outlined the potential he sees for the partnership, saying: “The combination of our fresh food expertise with Amazon’s online and logistics capabilities is compelling. This is a low risk and capital light wholesale supply arrangement that demonstrates the opportunity we have to become a broader business. We look forward to working with Amazon to develop and grow this partnership over the coming months.”
At the same time as it announced this deal, Morrisons also announced plans to take space in its other online distribution partner Ocado’s fulfillment centre in Erith. Ocado, which saw its shares tumble on the Amazon news, will also deliver a store-picking system for Morrisons. Both arrangements are designed to strengthen Morrisons online coverage in southern England, an area where it has been relatively lacking.
James Butcher, managing director at Solutions 4 Retail Brands tells PBUK: “In a changing retail landscape, ‘fresh’ produce is one of the categories which continues to bring consumers into stores. If Morrisons can marry its expertise in fresh produce with Amazon’s expertise and capabilities in online sales and home delivery, this could shake up the market to accelerate the move to online grocery shopping and re-energise Morrisons’ market position.
“Not only could this increase Morrison’s market share, it could also provide a new outlet for other produce options. We have all seen ‘wonky veg’ in the news, but that could be just the start. Morrisons is known for its fresh produce and ‘Market Street’ concept, and to support this it has made significant investment to improve its fresh produce offering, including how to keep it cooler for longer.”
Butcher continues: “The customer experience is now valued more than ever, with a bulk of this coming from activity online. One thing we all know is that Amazon is a master of internet sales and homes delivery. However, customer satisfaction will ultimately come down to product performance.
“It’s no secret that customer feedback has exploded online and through social media, with shoppers seeking more clarity and transparency about products and sourcing. Listening to this and acting on this feedback will all become part of the challenge, but, if executed correctly, Morrisons brave step could see it reaping the rewards.”
But just how far will consumers go with their desire to shop online for fresh produce? The Institute of Grocery Distribution (IGD) believes that online grocery shopping will double in value to more than £17 billion by 2020. How big a chunk of that will go to the new Amazon/Morrisons combination will depend as much on publicity as convenience.
The IGD’s ShopperVista research reveals a huge lack of awareness as to what is already available. Some 37% of Amazon grocery shoppers who have purchased some food or grocery via Amazon in the past say they could imagine buying all their food and groceries from them. But only 24% of British Amazon grocery shoppers were aware of the full range of food and grocery products available on Amazon.
The high-profile link up with Morrisons – Britain’s fourth-largest supermarket operator, could be the catalyst for a turnaround in this awareness. Mintel believes the strength of the Morrisons brand will support Amazon’s offer, thus creating an immediate degree of trust. The presence of a familiar brand on the Amazon site will be immediately attractive to UK shoppers because they know its reputation as a grocery retailer, said the researcher.
Richard Perks, director of retail research at Mintel, has long believed that the most logical tie-up would be for Amazon to acquire Ocado, which is locked into a 25-year deal with Morrisons. He also believes that this could still happen.
“This deal is significant because it takes Amazon beyond just ambient temperature, long-life groceries into fresh and chilled products and that means a major investment in distribution capability. We still think that if Amazon is serious about online grocery, and this move suggests that it is, then it should bid for Ocado. The added benefit of such a move would be to give it the distribution technology that it could use elsewhere in the world.”
Opportunities for suppliers
Daniel Lucht, analyst and global research director at Research Farm, points out the deal with Morrisons could ultimately create a lot of opportunity for growers and independents. “What is interesting is that once they get their logistics right, Amazon could link up with local supermarkets and local growers selling direct to the public, just like they have in pharmacy and other sectors. It could open doors for growers and independents to sell to a wider online market.”
The Morrisons-Amazon deal will be available to Amazon Prime customers who pay an annual fee of £79 to use the service. There is no word yet on the potential full-scale roll-out of the Amazon Fresh model. Retail analysts anticipate it will not be long in arriving, with expectations that Amazon will launch Amazon Fresh in the UK before the end of 2016.
Above all, this deal provides a way in which Amazon can build and consolidate a grocery distribution chain within the UK. The more products there are on offer, the higher the volume of customers and the greater the frequency with which they are likely to use the service. This is where the ultimate challenge to other supermarkets and retail distribution methods lie. Amazon is determined to make an impact. Christopher North, UK head of Amazon, has stated he plans to grow the Pantry concept rapidly, believing that its £2.99 deal for delivering a large box will be popular.
Research Farm’s Lucht sums up: “I think Amazon is going to be successful with this, and it will increase pressure on the hypermarkets. The space race for out-of-town retail units is an old story; people have moved towards convenience shopping more frequently rather than doing a big shop once a week. If the one-hour delivery in some areas works, it could be very popular.
“It will be a disruptive force, but how much, only time will tell.”