Would AmazonFresh really make a dent in UK online grocery?

Julie Clopper - Shutterstock.com Amazon delivery

If AmazonFresh does arrive on the UK's doorstep, in a poll conducted by IGD only 35% of online shoppers claimed they “would consider buying fresh food” from the e-tailer

PHOTO CREDIT: Julie Clopper / Shutterstock.com

There has been much hype surrounding the anticipated yet unconfirmed entry of behemoth e-tailer Amazon to the UK’s estimated £8.9bn online grocery market with its AmazonFresh concept. The suggestion of a disruptive ‘new competitor’ is also unsurprising, considering the successful introduction of the service to markets on the US East and West coasts and reports of a drive-up store concept being trialled in Silicon Valley. But regardless of whether AmazonFresh will come to the UK or not, Produce Business UK asks whether it would really take off this side of the pond

Amazon was recently voted the UK’s most meaningful retailer, ahead of Marks & Spencer, John Lewis, Aldi and Sainsbury’s in the top-five leaderboard, according to a poll carried out by media and advertising group Havas.

Those surveyed rated the retailer on making their lives easier as well as marketplace factors such as quality and price. Some 64% of the 300,000 people polled said they would care if Amazon disappeared.

So, should the rumoured arrival to the UK of its grocery arm, AmazonFresh, be cause for concern for the market’s leading online grocers? Not necessarily, according to major retail analysts.

For the most part, they doubt the reach that AmazonFresh could have in an already established online grocery market like the UK with its trusted brands. However, there are some potential competitive advantages, particularly around assortment, speed to fulfilment and convenience, that current grocery e-tailers may wish to consider.

Can AmazonFresh compete?

“I don’t see how it can get beyond being an interesting little niche, even if it gets that far,” remarks Richard Perks, director of retail research at Mintel. “Yes, there’s got to be scope to do it [fresh food] but in a small way.

“I find it very hard to see them becoming a major force in the market. Right now, most of their food business is a marketplace – a home for independent retailers. So they’re not in the business of competing for the main weekly shop. They’re clearly not a major force in food retailing at the moment.”

Perks points to the “infinitesimal” share of the overall online grocery market held by other niche e-tailers, like specialist organic suppliers Riverford and Abel & Cole, and says those companies who have truly succeeded so far in online food retailing in the UK are the major food retailers because they are the brands which have a big presence on the high street and where consumers are prepared to do a major shop.

“There’s trust in those brands because people know what to expect,” he explains. “The same is true of Ocado, of course, as it’s really the online arm of Waitrose. The UK is a competitive and very well developed food retail market that’s dominated by a very small number of retailers, each with a very clear market position and each actually doing a pretty good job. To come in and try to compete – I just don’t see it. The others are too big.”

Even if Amazon wanted to source fresh food itself and on a bigger scale – rather than be tied to a marketplace of specialist suppliers – Perks argues that while there’s potential, fresh is the most difficult aspect of retailing to get right.

“If they want to do it themselves it becomes more challenging,” he notes. “To move into grocery is an absolutely huge move and a massive investment to do it properly. It requires dedicated warehouses and dedicated deliveries. It’s a big step and you can’t do it cheaply.”

While Steve Madler, a retail analyst at Kantar, agrees AmazonFresh wouldn’t be an immediate, dominant force or leader on entering the UK, he still believes there is an opportunity for Amazon to offer an end-to-end dedicated online grocery supply chain, like Ocado, with a much larger assortment that can be held more profitably than its competitors.

“AmazonFresh is faced with strong competition from those legacy retailers who already have a firmly entrenched offer both online and in store,” he says. “Tesco has been doing it for years, Ocado too, while Sainsbury’s and Asda are being very aggressive.

“But it will be very interesting to see what would happen from an AmazonFresh range perspective – it has the potential for a much wider assortment than its competitors. Most of the UK’s multi-channel retailers have a blend of fulfilment. Some, like Tesco, have dark stores with a large assortment, but the majority of orders are still fulfilled from physical stores like a Tesco Extra or Asda Superstore. So that means they’re somewhat limited in range based on what’s inside the physical store.”

Madler says when AmazonFresh launched in the US it did have a full end-to-end refrigerated supply chain and distribution in place, and he anticipates the same format would be implemented for any developments in the UK and Europe.

Will it appeal to UK shoppers?

IGD’s ShopperVista Channel Focus report The Amazon Grocery Opportunity in 2015 found that only 35% of online shoppers claimed they “would consider buying fresh food” from Amazon if the service was available.

Nonetheless, sceptical Perks still asks what has AmazonFresh got that will be truly special and persuade customers to decide to shop there. He notes that the UK online grocery market tends to split into two shopper categories – those that are happy for others to choose their fresh food for them and those that aren’t. So, with UK retailers already specialised in online groceries, he asks why would a shopper switch to AmazonFresh?

“I don’t see the appeal,” he states. “What can Amazon do to make it different and more appealing? Also, do the economics add up to have a small fresh food delivery? It’s pretty clear there’s trend away from people doing a main weekly shop – although it’s not a big trend and it’s not a big decline. If Amazon is going to sell fresh food it’s going to set itself up against that reality. But there’s no way the economics are going to add up to do daily deliveries.”

For Madler, he sees Amazon’s reputation for convenience and its speed of delivery as a unique selling point. In the US, he claims AmazonFresh has done quite well in urban markets where, while it’s not the first to market, it has a huge amount of brand presence and share of consumers’ mind. Indeed, he says it’s important for UK retailers to realise that Amazon is not just about price.

“AmazonFresh is less aggressive on price matching – it wants to maintain a certain level of consistency with its fresh platform,” he explains. “Amazon looks at overall shopper value and a big portion of value is around speed and immediacy. Amazon will try to be as convenient as possible, which means one hour or even half-hour delivery windows across a very large assortment of products. From that perspective, it’ll be tough to beat Amazon on speed to fulfilment or on price.”

To differentiate itself further from its rivals, reports also suggest that those Amazon Prime subscribers signed up to use AmazonFresh would receive a wireless device called Amazon Dash that is already in use in the US. It allows customers to scan grocery items to be auto-replenished in their next order, and thereby makes the shopping experience even faster and simpler.

Regardless of the attraction or the gimmicks, Lisa Byfield-Green, who leads IGD’s online and digital research, believes loyalty and awareness would be the key to success. Indeed, she points out that AmazonFresh customers would first need to sign up to become Amazon Prime members.

“Selling its subscription model will be a key objective for the service to be successful, which may be a challenge in a market where customers regularly have access to free click-and-collect, and delivery slots from the major grocers priced as low as £1,” she explains.

Furthermore, while IGD’s report found that one in three online grocery shoppers claim to have bought a grocery product from amazon.co.uk (younger, working families based in London being the most likely to do so), only 24% felt that they were fully aware of the full range of FMCG products available on Amazon. “Strong marketing campaigns from Amazon will be needed to sell the service to shoppers,” notes Byfield-Green.

What’s the customer profile?

From a customer base perspective, Madler suggests AmazonFresh may win over those “on the fence” shoppers who are considering going into online grocery shopping, as well as the loyal Amazon Prime customers who tend to get into the “Amazon ecosystem” and spend more, plus, interestingly, Ocado customers who, he claims, have a similar profile to Amazon shoppers.

“I think Ocado is relatively exposed at the moment because the profile of its shopper base overlaps with that of Amazon,” Madler says. “But Ocado has been operating quite well for a number of years and it does have a loyal customer base and good product sourcing through private label and Waitrose.”

Indeed, shares in Ocado fell sharply ahead of a big new signing for the e-tailer and amid suggestions AmazonFresh would launch in the UK. Nonetheless, Madler is quick to point out that it remains to be seen which shoppers would, in fact, move to AmazonFresh.

Even so, he says Amazon is already quite a force to be reckoned with in terms of its overall share of mind among customers, meaning it could pick up more of those undecided shoppers who are thinking about going into online groceries.

For the casual Amazon shopper, meanwhile, he admits that perhaps there won’t be much of a point of difference since they’re already being well served by Tesco, Ocado, Asda, and others. “It’s the really loyal Prime shopper, who spends on average four to five times as much as a non-Prime shopper on Amazon, that will see the benefit,” he says.

As such, he anticipates loyal Prime members would flock to AmazonFresh for their fresh food, as they have done in the US. With that in mind, if any retailer has data that indicates its shopper base heavily overlaps with that of Amazon Prime, Madler suggests it could be an exposure point.

How could UK e-tailers respond?

With Amazon’s heavy investment in fulfilment, Madler believes it would be difficult for other e-tailers to win on that front. To continue attracting shoppers, therefore, he advises companies to work on differentiating their overall proposition.

On average, that means going more premium or offering exclusive ranges in store, which, he says, would help create more of an emotional connection with shoppers and elevate the narrative beyond price or convenience.

“In this respect, Waitrose is very well positioned already,” he notes. “On the US East Coast there are [other online grocery retailers] Peapod and Fresh Direct, who have both been operating for years and years and also show no signs of going away anytime soon. But Peapod has responded by experimenting with meal solutions and meal bundles.

“Peapod has started to work with some of its suppliers and manufacturers to help build meal solutions for customers. Meal subscription boxes is one of the biggest trends that we’ve seen in the US and it’s also picking up in the UK, with the likes of HelloFresh.”

Madler recommends UK grocery e-tailers continue to innovate their offer with exclusive ranges and promotions, while at the same time focus on building solutions with anything that makes life easier for consumers.

How might AmazonFresh work?

Operationally, if AmazonFresh does come to the UK, analysts expect it would follow the same approach as in the US in terms of being a direct sourcing relationship with suppliers and manufacturers, including local independents. There are no third party retailers on the fresh platform itself and AmazonFresh manages its own separate refrigerated warehouses.

“If there’s a local deli, butcher, fishmonger, etc. in London, for example, Amazon would work with those local, small retailers or chains to enable shoppers to buy from those companies as well,” explains Madler, adding that this would appeal to shoppers from a convenience perspective too. “For those companies, it’s a fantastic way for a niche retailer like a gluten-free bakery or an independent store to expand their customer base.”

IGD’s Byfield-Green agrees, saying: “For suppliers, AmazonFresh provides a new potential growth opportunity within the online channel, making [their] investment into understanding the channel more important than ever.”

On launching in the US, AmazonFresh offered around 17,000 SKUs within its fresh range, although an initial, smaller offer would be expected for the UK. Market-wise, the retailer is anticipated to begin in London and operate from its warehouse in East London, where services are also based for the Amazon Prime Now one-hour delivery.

According to Byfield-Green, as in the US, the company would be likely to expand the business on a region-by-region basis; targeting densely populated urban centres. Indeed, Leeds is already cited as a likely second hub for the service from April 2016.

In terms of deliveries, AmazonFresh manages its own separate refrigerated warehouses but unlike the UK standard of retailers using their own chilled vans, Byfield-Green suggests Amazon Logistics and third party distribution services are most likely to be used to deliver any AmazonFresh orders in the UK.

“This indicates that the company is looking to apply learnings from its US business to keep costs in check,” she points out. “Amazon has experimented with this model in San Francisco, using the US Postal Service to deliver smaller orders. Packaging will be designed to keep items cool.”

Currently in the US, AmazonFresh offers same-day and early morning slots with two options – Doorstep Delivery (a three-hour time window when items are left in temperature-controlled tote bags on the doorstep) or Attended Delivery (a one-hour appointment when the customer is home to receive the delivery). Non-food items can also be delivered alongside grocery.

Of course, AmazonFresh may not even arrive in the UK. But while Amazon is notoriously secretive, analysts claim the launch of its Prime-member one-hour delivery service in London (which is usually closely associated with its fresh offer), coupled with a recent and successful Prime membership recruitment drive, is a good sign that AmazonFresh is getting closer and closer to landing in the UK.

Apparently, Germany may also follow suit. All we can do for now is watch this space.

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