Apples and Pears: Why Amazon's grocery business will succeed

Amazon

One of the more surprising outcomes of last week's news that the World's largest online retailer, Amazon, had launched a grocery delivery service was the distinct lack of culinary wordplay that accompanied it.


"Free delivery is all well and good, but will this service really deliver?" didn't come the cry.

Most commentators opted instead to spend their time exploring the obscenely long list of 22,000 products, with the bellwether award going to a whole lamb, priced at £119.95. Cheap as chips.

The move has clearly left a bad taste in the mouths of the mainstream media. This is unsurprising for two reasons. First, a lack of information. The online grocery sector is still in its infancy, worth £3.2bn today, rising to £7bn by 2014. Given there is not much of a track record to judge against, and the supermarkets hold sway, new entrants are bound to be treated with scepticism.

Second, we've been comparing apples with pears. Focusing squarely on the consumer end of the business – and assuming that grabbing market share or providing a best-in-class proposition is the only way to win – is a mistake. For Amazon, there is ample evidence to suggest the move could bear fruit.

Indeed, Amazon has it's own way of doing things. It is no stranger to selling groceries online, having launched its US service in 2007. It also has a specialist brand, Amazon Fresh, which operates in its Seattle heartland. That should head off any criticism that the company is going into this latest venture blind.

The menu – What's on offer?



Still, for argument's sake, it is worth looking at what Amazon has to offer. The online grocery war is waged on multiple fronts: Price, choice, quality and service (which breaks down into convenience, speed and user experience). What we find in this case are some unique features, coupled with some serious shortcomings.

Price & Choice: The scope of the products is enormous, and will continue to rise as more suppliers come online. While it boasts some products you can't find on its rivals, such as Tab Cola, there are some very odd omissions, as one incandescent ice cream fan observed.

The pricing, too, is out of whack, with some items ten times more expensive than you'd find at a rival big four supermarket. But that is easily fixed. To make the proposition more compelling from a value point of view, bolting on some of the features found across the Atlantic – such as its loyalty subscription scheme (15% discount) – could be an option.

Quality: Check. Amazon has partnered with scores of smaller suppliers to augment its basic offering. This is somewhat undermined by some decidedly unappetising images, noted The Telegraph.

Service: Despite calling it shipping, Amazon has an advantage over existing major players by offering unlimited next-day delivery for an annual membership fee of £49. On the flip side, it does not offer time slots like rivals such as Ocado, which could make things complicated at best, BT-style infuriating at worst.

Free 'super saver' delivery is also available on all purchases, which is good – until you realise what you buy is likely to come from more than one supplier, which means you'll be getting your goods at different times. If you are willing to pay, you'll be charged a separate fee from each supplier.

In addition, while the iconic Amazon shopping list calculates totals on the fly, it does not factor in deductions for delivery until you reach the virtual checkout. Provided you actually get there, that is.

User experience: As you'd expect from these guys, there is some great functionality. The find your tea drop-down menus, for example, are a nice touch. The much-maligned search experience, like a fine wine (which they also stock) will get better with age. The look and feel of the pages is best-in-class.

However, while some of the famous tools, such as Bestsellers is neat, others have been rendered completely useless. How, after all, do you review a banana? What use will it be to be told "customers who bought beef also bought chicken"? A big fan of Walker's cheese and onion, I panicked when I saw there were only four packets (of 12) left.

Recipe for success?



None of which, really, is the point. Even if Amazon can offer a best-of-breed experience – including, say, a potato-peeling service – it's not likely to make much difference, because online grocery shopping requires less bells and whistles than other retail segments.

And even if most of UK plc shares the view that Amazon can't eclipse the likes of Tesco, that doesn't mean it won't work for them.

Why? The service itself is only half of the equation. Take, for example, the sponsored links on each of Amazon's search result pages. It's quite possible these links, which command serious ad spends, could bring in as much revenue as the delivery business itself.

It is highly unlikely that Amazon intends to turn lambs and nappies into a significant profit driver for the business. While they have sufficient scale to discount, and one of the most respected brands in the world, it will be nigh-on impossible to build market share given the high degree of brand loyalty in this space.

It would require colossal marketing spend to build credibility, and that's not the Amazon way. Online experts have noted that Amazon will find it difficult to convince customers it could be as reliable with groceries as it is with books and CDs. It hasn't helped itself so far.

"The long term potential of Amazon's food & grocery offer is likely to be in developing a reputation for bulk and niche purchases and offering a platform for smaller food & grocery suppliers rather than cultivating a significant share of the UK food & grocery market," Verdict analyst Joe Robinson told the BBC.

Long term is the key point. Amazon already has the infrastructure in place but lacks the distribution networks of its traditional rivals. It plans to stock 2,000 products at five warehouses across the UK, the largest being in Swansea. The remaining products (which includes fresh and chilled goods) will be distributed by third party suppliers, which will doubtless cause headaches along the supply chain.

Checking out



Unless Amazon are hiring the Chip n' Dales as delivery boys, the grocery business is likely a loss-leader play. The upside is the ability to cross-sell more expensive products at market-leading prices while building its credit card business and harvesting more information on the spending habits of consumers.

The last point is worth more than all the lambs in the world.

To put it another way, it's the evolution of the one-stop-shop, all-things-to-all-men model that Tesco has been so ominously developing for years.

At this rate the company will soon be building homes, villages, and hopefully rebuilding the rainforest. Heaven knows they'll need some lumber to make more of that lovely packaging.

There is a danger, of course, that Amazon may be a victim of its own success.

"At some point Amazon is going to put itself up for sale on its site, and the cycle will be complete," one wistful observer noted.

Until that day, when it comes to fresh produce, I will be sticking to my local farmers' market, where I can put my hands on the things I buy – and many of the things I don't.

After all, there's nothing quite like bringing home the bacon.

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