Amazon’s daring plan to reach its target for 260 stores by 2025

An estate of more than 260 Fresh stores by 2025 is central to Amazon’s plan to truly compete in convenience grocery in the UK, it was revealed in an internal document last week.

With only eight of its ‘Just Walk Out’ physical grocery stores having so far opened in the UK – the eighth, in Holborn, this week – it’s some ambition.

Bold plans are “the way it operates” says Miya Knights, co-author of a book about Amazon. But how will it achieve its triple-digit store expansion target? Where is it most likely to set up shop? And what challenges will it face?

It is a good time to be looking for space. According to latest Local Data Company figures, retail vacancy rates, which have steadily climbed since the start of the pandemic, continue to do so. They stood at 14.5% at the end of Q2 this year, up 2.1% on the previous year.

City centres have been hardest hit, thanks to increased working from home, while high streets have proven most resilient, a result of changed consumer behaviour.

That will demand a reassessment of what makes a prime location, says Richard Petyt, partner at Knight Frank. “All the footfall patterns that everyone understood just changed,” he says. “The pandemic will have made it more difficult because there will be a lot of once potential locations where footfall has been impacted.”

But it could also work to Amazon’s advantage.

“The pandemic has caused a massive shift in the health and trajectory of different types of locations, with smaller or more local high streets proving far more resilient than the once-dominant town and city centres,” says LDC commercial director Lucy Stainton.

“This opens up a wealth of opportunity for retailers, especially in the grocery and convenience space, who have a multitude of more buoyant local centres to target for new stores, as well as softer rental deals in those larger centres,” she adds.

However, vacancy rate increases are slowing. They rose by 0.4% from Q1 to Q2 this year, compared with 0.8% between the same periods in 2020.

Amazon also has competition. C-stores were the second fastest-growing category of new store in H1 this year, with 332 units opening, says LDC.

Co-op has aggressive store expansion plans underway, opening 33 new stores in the first half of 2021, according to its latest interim results.

“Amazon has made a number of miscalculations that reflect its immaturity”

Meanwhile, Tesco and Sainsbury’s are “continually looking at refreshing their [convenience] portfolio, so if a new opportunity arises it might suit for a relocation”, says Petyt.

Aldi and Lidl, meanwhile, are both shrinking their favoured store format to squeeze into smaller units in London.

Lidl this week set a new national target of 1,100 stores by the end of 2025, having opened 55 in the year to 28 February. Aldi needs to open 50 a year to reach its target of 1,200 by the end of 2025.

Both are particularly keen to grow in London – where they are under-represented compared with the rest of the UK – and have store targets for 2025. Lidl wants 130, having opened its 100th last year, while Aldi wants 100, up from about 50 by March this year.

So while “there might be availability of units, just because Amazon might want them doesn’t mean they will be the only bidders”, says Petyt.

“Will there be that many locations and will they be able to bid enough to win the best sites that they want given the level of competition?” Petyt asks.

Indeed, property owners might feel more comfortable with one of Amazon’s rivals.

“People that own property here just don’t like the way [Amazon] lease,” says Richard Curry, partner at Rapleys. US companies often take a “why don’t you do it our way?” attitude, he adds, and with Amazon “you have to sign all sorts of NDAs just to know it’s them, which seems a bit excessive”.

Furthermore, “there will be an air of scepticism about their performance until they’ve opened a few more” Curry says.

Property team

Amazon has formed a crack team to take on the challenge. Experience was needed, says Knights. “The Amazon grocery team have made a number of miscalculations that only reflect their relative immaturity when it comes to establishing and running a food store-based business,” she explains.

In July, Amazon hired Tesco veteran Tony Hoggett to head up its international stores arm and lead the estate expansion. He starts work in January. The company in 2019 hired former Sainsbury’s director of commercial operations Matt Birch to scope out potential sites.

The property team now boasts former Lidl GB head of property Oliver Barrett; store acquisition experts from Aldi and Tesco; and skilful property hands from TfL, McDonald’s, Costa Coffee and Co-op.

“They have been acquiring quite a lot of experienced acquisition guys in food stores and development,” says Curry, arming it with “detailed knowledge of the food store industry”.

Amazon’s eight Fresh stores to date, with another soon to open in Chingford, indicate the company has some ‘must haves’ for sites.

All are within half a kilometre of a transport hub, close to high-density residential or office locations or a major venue, and less than 200 yards from a major supermarket convenience store.

“High density of Prime members in an urban, high footfall area is a prerequisite,” says Knights.

“It’s also likely disposable income comes into the equation, as do factors such as smartphone penetration,” she adds. “Commuters and office workers are pretty key too.”

But as Knights puts it: “That really translates to anywhere where convenience is king.”

The ‘Just Walk Out’ tech that Amazon hopes will attract customers cannot be easily installed in any unit. “Having a decent, always-on internet connection to run some of the JWO systems and process the data is pretty key – so, I’m sure fibre access would be a priority, with good 5G coverage for backup systems,” Knights says.

As Petyt explains, there are other “specific requirements”. “For example, they need quite high ceilings to get their IT equipment in there,” he says.

For that reason, Amazon leans towards “absolute boxes” Curry says, devoid of the quirks often found in older buildings, which “limits what they can take”.

“Walk down high street Richmond and show me where there’s a box,” he says.

Former Amazon executive Brittain Ladd says the company must do everything it can to accelerate store openings. Fresh’s swift expansion, he says, will be the sector’s “Pearl Harbour moment”.

The Just Walk Out technology can reduce the friction of shopping for consumers, but crucially “saves Amazon millions in labour costs annually in every store. This provides Amazon with a significant competitive advantage” Ladd says.

But experts have doubts about whether Amazon’s estate expansion can be achieved in the time it hopes.

“I’m not sure how they will achieve their numbers,” says Curry. Knights believes Fresh stores “will be an urban and transit hub play for the foreseeable future”.

Petyt says: “It seems very ambitious to try and achieve that many store openings organically, without buying a business.” Which isn’t out of the question. The Times this week cited Amazon sources saying the company was reluctant to pursue deals in the UK due to concerns the competition watchdog was taking an interventionist approach – evidence Amazon is at least thinking seriously about the prospect.

As Ladd puts it: “Unfortunately for the grocery industry, Amazon is just getting started.”