Why Amazon's omni-channel retail ambitions in the grocery sector aren't looking so Fresh

We continue to believe grocery is a significant opportunity, and we're focused on serving customers through multiple channels, whether that's online delivery, pickup or in-store shopping.

That’s the party line from Amazon's investor relations team around an area of its business that frankly, to date,  hasn’t delivered the way that the company might have hoped it would. 

As noted over the past couple of years on diginomica, the online grocery shopping and delivery space has become increasingly competitive and lucrative, fuelled inevitably in no small part by the lockdown conditions around COVID that saw consumers less willing to make their way down to the local store.

While some of that online activity has fallen away in the Vaccine Economy, the genie is nonetheless well and truly out of the bottle and online grocery shopping is here to stay, as real world retailers such as Kroger can testify. Future Market Insights (FMI) predicts a 23% compound annual growth rate for the global online grocery market, with the US expected to see levels of $ 2778.4 billion by 2032, up from $ 350.55. 

Amazon has long had ambitions to expand its footprint in the grocery space, seen most expensively in its $13.7 billion acquisition of Whole Foods back in 2017. The firm has also signed deals with other supermarket chains to act as an online marketplace, such as Morrisons in the UK.  

Fresh price rises

But it’s the behemoth’s plans for its Amazon Fresh initiative that have been most closely tracked. This offers both physical stores and online ordering/delivery in most US major cities, as well as other locations around the world, such as London, Rome and Tokyo. 

Of late, those plans have been subject to some revision. Last month it was announced that Amazon Prime members will no longer get free delivery on some grocery orders starting in a few weeks time. Amazon Fresh orders under $150 will no longer qualify for free delivery, a significant levelling-up from the current situation where the purchase requirement is $35 (or $50 if you’re in New York). 

From the end of this month, customers will be looking at a variable delivery cost of between $3.95 to $9.95, depending on the size of the order placed. That’s the norm for other delivery services - if you make a purchase via Ocado for Marks & Spencer groceries, for example, certain delivery slots cost more than others.

But Amazon’s changed position is a gift for rivals. Walmart, for one, took great delight in highlighting the new Ts & Cs with a tweet that sneered, 'That Fresh $150 free delivery minimum is looking pretty stale right about now’. (Walmart’s minimum order price for free delivery is $35.)

On top of that, Amazon has now put the rollout of its own Amazon Fresh physical stores on hold as it tries to find a way to make them competitive against both mainstream supermarket chains and the rise of the low cost discounters, such as Aldi and Lidl.  

To date, much of the marketed appeal of the Fresh stores has been pitched around the introduction of advanced tech, such as cashless checkout. But in the face of a cost of living crisis, consumers are less interested in being able to self-scan their way around the weekly shop and more about how they can actually afford to pay for the goods they’re buying. So, Amazon’s main competitive differentiator isn’t that big a deal anymore, other than being costly for the retailer itself. (Amazon’s not alone here - Sainsbury’s in the UK ran into similar issues with its own techno-enthusiasm!)

Basket mix

So what’s next? It’s absolutely not the case that Amazon will be pulling out of the omni-channel grocery business - there’s too much money sitting there on the table for that to be in any way a realistic proposition. But it’s time to pause to think. Amazon CEO  Andrew Jassy confirms: 

Grocery is a really important and strategic area for us. It's a very large market segment, and there's a lot of frequency in how consumers shop for grocery. We also believe that, over time, grocery is going to be omni-channel. There are going to be a lot of people that order their grocery items online and have it delivered to them, and there are going to be a lot of people who continue to buy in physical stores.

But you're going to also see a hybrid of those, where people pick out what they want online and pick it up in stores, or people are in stores and there's something that's not in inventory in the stores, so they go to their app or to a kiosk and order it to be delivered from online. And so I think having omni-channel is going to really matter.

And Amazon should be well-placed to benefit from that buying shift, he argues, although there are challenges to be faced in terms of what the firm can offer: 

We have a pretty significant-sized grocery business. I think people sometimes don't realize that and that we've been building for a long time. It's continuing to accelerate, and I kind of see it broken into a few pieces. If you think about the online grocery offering, we have a very large business there. It looks different from the typical mega physical grocery store. But if you think about the aisles in a grocery store, from packaged food to paper products to canned goods to pet supplies to health and personal care items to consumables, we have a very large business there that continues to grow at a rapid clip, and that we think will continue to grow.

But it doesn't have a big market segment share in perishables. And if you really want to have significant market segment share in perishables, you typically need physical stores. And we have kind of two different offerings there. For what I think is the very best organic physical store experience and selection, we have Whole Foods, which is a very significant-sized business that's continuing to grow. I really like the progress that that business has made on profitability in the last year. And I like what I see in front of it - I think that's a premium product, but it's a significant business. It's a good business for us in the grocery space.

But, he admits, if you want to have a mass physical store offering, you need a different kind of offering:

That's what we've been working on with Amazon Fresh, and we have a few dozen stores so far. We're doing a fair bit of experimentation today in those stores to try to find a format that we think resonates with customers, is differentiated in some meaningful fashion, and where we like the economics. 

We've decided over the last year or so that we're not going to expand the physical Fresh doors until we have that equation with differentiation and economic value that we like, but we're optimistic that we're going to find that in 2023. We're working hard at it. We see some encouraging signs. When we do find that equation, we will expand it more expansively. But I think that we have a very significant opportunity in the grocery segment. I think we're building a pretty broad grocery network across online and physical, and you're going to see us continue to work on it.

My take

A temporary sigh of relief might be in order from others in the grocery game, but what Jassy’s saying illustrates very clearly how difficult striking the correct Vaccine Economy omni-channel balance is across this sector - and indeed the entire retail landscape. Some companies are building on the boost from the pandemic to create a sustainable model - Kroger, being a case in point, with its post-COVID playbook, or Marks & Spencer which is in the throes of adjusting its online and offline mix to meet the new realities of the market. Others, such as Walmart, still can’t turn an e-commerce profit despite all their resources, while the likes of Aldi have business models that are based on such low costs, that their online shopping capabilities are deliberately limited in nature. This is very much a sectoral omni-channel transformation that remains in flux for now.