Is Amazon after a bigger slice of the grocery market?

When the ‘Grocery Store’ section of the Amazon.co.uk website went live in July 2010, it sent a chill down the spine of UK grocery retailers. Having already eaten a sizeable chunk out of their market share of non-food sales, the online retail behemoth now seemed to be eyeing up their core food offer. They were right to be worried.

Although some experts downplayed Amazon’s move, arguing that the online giant didn’t have the distribution network to deliver chilled or frozen goods, the site has already secured a 4% share of the online grocery market in the UK, according to Kantar Media Compete - despite the fact it’s still in beta. To put that figure into perspective, Waitrose - online since 1998 (with a £10m online revamp in 2011) - has half that, at just 2%.

From a supposed ‘work in progress’, it’s quite an achievement, one that ex-Asda CEO Andy Bond no doubt had in mind when he predicted last August that Amazon would “have toppled, or at least be vying” with Walmart for the top spot in global grocery by 2020.

But online grocery is a highly competitive market that’s notoriously difficult to make a profit in. Amazon’s offer remains largely ambient and its chilled and fresh range limited and while the arrival of a certain Sir at a certain online grocer has inevitably sparked speculation that Amazon will buy it, the prospect of it offering a full grocery range and going head-to-head with the supermarket is still notional. So just how worried should Tesco and co be?

Since Amazon CEO Jeff Bezos gave the company’s UK site the green light to sell grocery in 2010, Amazon has made the sort of moves that suggest it wants to make a typically big impact. It started in October 2011, when US head of grocery Bram Duchovnay was shipped over to head up the UK operation. Since then, Amazon has dramatically increased the number of products available on its grocery website from 22,000 at launch to more than 160,000 - a staggering number, considering the largest hypermarket carries around 35,000.

“For non-food the ordering experience is slick, but people expect a similar experience from ordering grocery”

UK supermarket director

The online retailer built up its range by holding ‘Meet the Buyer’ events and adopting a smash and grab approach. One supplier told The Grocer that before he could even launch into his usual spiel to showcase his 400 products, the Amazon buyer simply asked how many items the company manufactured and said he wanted to stock every single one.

That sounds like a dream come true for suppliers, but for some, there are disadvantages to being part of such a gargantuan range. Competition is fierce. There are 433 types of olive oil on offer on Amazon, for example.

“We’re going to hold off on supplying Amazon as we don’t think it’s worth it,” says one supplier whose products are in all UK supermarkets, including Ocado. “Their orders look like they will be tiny and for a small team like ours it is hard to manage loads of little accounts. We would love to sell through Amazon but we have to be practical.”

Big is beautiful

The size of Amazon’s current range shows that there are plenty of suppliers warmly embracing the new kid in town, so the online retailer can afford to lose a few in the stampede. It offers competitive prices too - provided shoppers stock up. Amazon sells Napolina pasta at almost half the price Asda does - although the minimum order is six 500g bags. Loyd Grossman cooking sauces are 20% cheaper at Amazon than they are at Asda - so long as you buy three jars.

Amazon encourages this once-a-month bulk-buying through its ‘Subscribe & Save’ service, which offers shoppers who pre-order regular monthly deliveries of store cupboard staples such as rice, nappies, coffee and petfood, an additional saving of at least 10%. There are now more than 20,000 products available under this model, compared with 2,000 when Duchovnay arrived.

“Subscribe & Save makes it really convenient for the consumer to place a regular order and then get a discount on top of that,” says Henrietta Morrison, founder of premium petfood brand Lily’s Kitchen, which supplies Amazon with 36 lines. “Amazon has really hit on something with petfood, which is heavy and a pain to carry to the car. Amazon is a very good stream for us. It’s going incredibly well.”

There is, however, one major drawback to shopping for groceries on Amazon. At the moment, the vast majority of its range is ambient and dried food. It falls down on fresh and chilled, which shoppers can only order via third-party vendors - and that creates complications, as our comparison with Tesco above illustrates. The Grocer’s 10-item basket, containing ambient, fresh and chilled grocery, arrived in seven different parcels on five different days. It also came with an eye-watering total delivery charge of £23.51, which bumped the price up from £57.54 to £81.05. Ouch!

As the situation stands, then, it’s not practical or affordable for the average supermarket shopper to do an average grocery shop at Amazon. If it wants to offer a full basket, Amazon will need to source fresh and chilled food and establish a storage and distribution network to house and deliver it, which will cost money and involve some big logistical obstacles.

Fresh challenge

Based on a conservative estimate of what Ocado has spent to establish itself in the UK by management consultancy Kurt salmon, Amazon would need to splash out more than £350m to get equipped - that’s £200m on a chilled distribution centre and £150m on warehouses and temperature-controlled vehicles. Not cheap, but Amazon can afford it. It revealed last week that global sales were up 27% to £38.7bn. It also has more than £5bn in cash burning a hole in its pocket. Plus it’s already operating a fresh delivery service over in the US, with a limited trial in Seattle (see box right), so it wouldn’t be entering virgin territory.

If Amazon were to bring chilled and fresh in-house, it would be able to offer a full grocery range, eliminate the postage charge and deliver everything at once. Until those additional pieces are in place, it can’t be taken seriously as a rival to the supermarkets. But that might all be about to change.

In October last year, Ajay Kavan, Amazon’s head of consumables, told the IGD convention that Amazon plans to offer a “complete product selection” of grocery that will “soon include fresh and chilled”. Despite the vague timeframe, Amazon’s intent is clear.

But industry opinion is split over how easy it will be for Amazon to make an immediate impact. One well-placed marketing source, who has worked for Walmart, says that the supermarket giant takes the potential threat of Amazon very seriously, with Asda’s parent company watching every move it makes.

However, another director at a UK supermarket is more sanguine, suggesting to The Grocer that Amazon will have its work cut out if it does decide to go the whole hog. “Online grocery retail is an incredibly complex beast,” he says. “Investing from a standing start is a tough gig and customer expectations are sky high. For non-food, the online experience is slick, but people expect a similar experience from ordering grocery. It’s a massively different problem to try and solve. It is one thing packaging up a CD and shipping it out the next day, but doing the same thing with 60 or 70 different grocery products offers up a completely different set of challenges.”

Conlumino analyst Neil Saunders agrees that even if Amazon does invest millions to get up and running, any progress would be painfully slow. “There is always room for more competition in grocery, but to grow in the present environment is very difficult,” he says. “Even the big boys are struggling. Grocery is low margin and needs high volumes to make it work. In a market where there is no volume growth, that model is under significant pressure. It’s also very difficult to enter the market, because you have a lot of existing players who are very professional, very good at what they do, and already have sizeable scale and influence.”

However, Saunders says the supermarkets would be wise to keep a close eye on what Amazon is up to. “I think they should be nervous,” he says. “Even if Amazon doesn’t move into grocery proper, any skimming off of sales is unhelpful for the grocers. They are right to be concerned and right to keep a watching brief. But whether Amazon is serious about becoming a grocer in the same way as the existing players is another matter.”

The size of the pie

What is serious is the amount of money up for grabs. Last October, IGD forecast “phenomenal” growth for online grocery in the UK, predicting it would double from £5.6bn today to £11.1bn by 2017. It added that two-thirds of the UK already shops online for groceries, with the remaining third intending to do so in the future. With that much growth up for grabs, it’s hard to imagine the most powerful online presence in the world idly standing by while others clean up on its turf.

So it seems the only obstacles that might deter Amazon from becoming a major online player are the limited nature of its current fresh and chilled offer and the fact that rivals including Ocado - the only other purely online retailer in the market - are still struggling to make money.

Not that that should put Amazon off. In fact, it could make things easier. Last month, Ocado appointed Sir Stuart Rose as chairman, prompting intense speculation that Ocado is sprucing itself up for a possible sale. Buying Ocado would be a “sensible solution” for Amazon, according to Saunders.

“There would be no real competition issues,” he says. “They have the cash to do it, although anyone buying Ocado would potentially have to pay Waitrose £40m on top. Plus, given the degree Amazon competes with John Lewis, Waitrose would likely cancel the contract to sell its food. So Amazon would really be buying a delivery and storage infrastructure.”

If Amazon does ramp up its UK grocery offer by snapping up Ocado or even taking a softly, softly approach and introducing a UK version of Seattle-based Amazon Fresh, you can expect the current anxiety being felt by the supermarkets to turn into full-blown paranoia.

And with good reason. HMV, Blockbuster, Comet and Jessops have all collapsed into administration since November. Meanwhile, Amazon’s global sales have rocketed by 22% [Q4 2012]. Over the same period, Amazon.co.uk saw a spike in visitors to the grocery section of its website, with 66% growth from Q3 to Q4, according to Kantar Media Compete. That’s half a million visitors a month, slightly more than Ocado, although it’s half as many as Sainsbury’s and seven times fewer than Tesco - the market leader with a reported 48% of the market.

What happens to its market share in the future all depends on Amazon’s appetite for grocery. If Amazon gets serious about its food offer and looks to take a bigger slice of the cake, the UK supermarkets could end up with a smaller piece for themselves - or fighting over the crumbs.

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The online shopping test: Amazon versus Tesco

• We ordered from Amazon at 10am on 28 January to see how it compares against its potential competitors
• We ordered a near identical basket from Tesco - the only differences were different cheese, sausages, unpasteurised milk and a different-sized Warburtons loaf
• All prices were prorated where necessary
• Tesco charged £4 for next day delivery
• Amazon charged a total of £23.51 for seven different deliveries on five different days

The ListOverall Amazon total: £81.05

Verdict: Amazon excels at the ambient groceries it sells directly. The beans, pasta sauce, pasta and tuna were all sold via Amazon and arrived promptly, together, free of delivery charges and over 20% cheaper than Tesco. But if you are after fresh and chilled items too, those savings are cancelled out by the high prices charged by third party vendors - and the delivery costs charged to properly pack and quickly ship them.