Fresh potential: Is Amazon shaking up the UK grocery sector?
Amazon Fresh is an online grocery service that offers UK shoppers a wide variety of products from local shops and markets around London, with same day delivery.
From a pure e-commerce perspective, Amazon Fresh is “clearly doing something right,” according to Edge by Ascential senior insight analyst, Chris Elliott, who told FoodNavigator the platform is expected to grow by 40% before 2020.
Amazon Fresh offers shoppers convenience. Consumers can simply ‘add-on’ their grocery shopping – with same day delivery – when shopping online, to avoid the ‘multi-site mission’, said Mintel associate director of retail, Nick Carroll, when we caught up with him last month.
The platform also offers consumers a diverse range of products. Yet according to Carroll, neither the convenience nor product range has enabled Amazon Fresh to truly disrupt the grocery sector in the UK so far.
“I think the ability to offer products from local shops and markets around the capital is unique, but in terms of its actual disruption, it’s very small,” Carroll told FoodNavigator.
Who is using Amazon Fresh?
According to Mintel data, of the 45% of consumers who shop online for food and drink in the UK, 20% say they purchase food and drink from Amazon – with much of that coming from Amazon’s traditional e-commerce platform, not from Amazon Fresh.
In fact, if one looks to Amazon’s Prime members – and just 39% of consumers in the UK have access to Amazon Prime – only 5% say they regularly use Amazon Fresh.
“That rises to 12% of Prime members in inner or greater London, where [the service] is focused. So it is very small,” said Mintel associate director of retail, Nick Carroll.
Greater outlay, greater savings?
To gain access to the Amazon Fresh service, consumers must be signed up to Amazon Prime, a membership that costs approximately £80 (€93.16) per year.
Members can then adhere to the additional Amazon Fresh pass, which stands at £3.99 per month.
Of course, not all shoppers can afford this outlay, which may influence consumers to shop online elsewhere. “Straightaway, there is a barrier of cost that there isn’t [when] shopping online with Tesco for groceries [for example], or Asda,” said Mintel’s Carroll.
However, potential savings earned from shopping on Amazon Fresh could make up for the service’s entry-level cost.
Edge by Ascential ran a pricing comparison for Amazon Fresh earlier this month, to determine price variances between the e-commerce platform and the UK’s ‘big six’: Tesco, Sainsbury’s, Ocado, Waitrose, Morrison’s and Asda.
“At the start of March [Amazon Fresh] was 9% cheaper than the nearest supermarket,” Edge by Ascential’s Elliott told FoodNavigator.
While Elliott acknowledged the data includes health, beauty and baby categories that could be leveraged from Amazon’s dot com business, he said Amazon Fresh’s pricing strategy still makes it cheaper than its rivals’.
“They’re clearly trying to shake things up if they’re that much cheaper because that is no small margin.”
Amazon caused “shockwaves” when it announced plans to enter the grocery space in the UK – as it does whenever it announces entry into a new industry – due to the sheer size of the business and the capital it can invest, explained Carroll.
However, industry’s reaction was “perhaps greater than the potential for it to disrupt”, Carroll continued, suggesting that geographical limitations continue to play a major role in its online delivery business.
“If we look at how Amazon Fresh has grown in the US, there are a lot of parallels to be drawn in terms of strategy within the UK,” said Carroll. “In the US, it has tended to focus on cities and highly densely populated areas, where the logistics and metrics of online grocery make most sense.”
“It is a costly business, trading fresh groceries online – because of the added cost in terms of ensure the products get there fresh and on time,” he added.
Similarly in the UK, Amazon is still confined to London and surrounding areas, which may prove limiting in the long-term.
Edge by Ascential’s Elliott agreed the e-commerce giant needs to move well beyond London to make a bigger impact in the grocery sector: “They are constrained by the fact that they are only delivery currently to London and the south east. If they really want to shake things up, they need to expand their delivery to cover more regions.”
M&A for bricks and mortar
While rolling out a grocery delivery service nation-wide would, undoubtedly, cause disruption, “it still isn’t going to terrify Tesco’s,” said Carroll.
“Even if Amazon accounted for 100% of online grocery sales within the UK…it would still only be a quarter of the size of Tesco,” he explained.
The acquisition of bricks and mortar, and more specifically, of a grocery store with a strong physical presence, could be the answer to achieving greater UK grocery market share.
“If Amazon has ambitions, be it in the UK or in wider Europe, it does need to have stores, and probably the quickest way to do that would be to acquire someone,” said Carroll.
Indeed, there has been much speculation on which major grocery player in the UK that might be.
“Fundamentally, they would be silly not to be eyeing up somebody to buy,” Elliott told this publication, suggesting that Sainsbury’s or Waitrose could be potential M&A targets.
“In the US, Amazon bought Whole Foods. Waitrose could be the closest equivalent here in the UK. So if they were thinking about following a similar model, they might consider Waitrose.”