Morrisons has revealed it will be teaming up with Amazon to bolster the e-tailer's grocery supply chain. By providing it with a wholesale supply chain service, Amazon will be able to expand its Prime Now and Pantry services with a wide range of Morrisons ambient, fresh and frozen products.

A small step for Morrisons' plan to shake up its grocery business – CEO David Potts, called the agreement a "low risk and capital light" arrangement to broaden the business, but perhaps a giant leap for Amazon after months of skirting around the edge of the UK grocery market. Has this deal finally given the e-tailer the means to enter into battle as an equal competitor?

What's in it for Morrisons?

Danielle Pinnington, founder of shopper research company, Shoppercentric, said the move is not a great surprise, considering how late Morrisons was with its own online proposition. "There are parallels with the Sainsbury’s link up with Netto – if you can’t beat them, join them," she said.

She also pointed to how Amazon is now a considerable threat to the existing online grocery industry. "A collaboration like this could take the sting out of the tail for Morrisons, whilst bolstering its efforts to catch up their more established online competitors," she added.

Currently, Morrisons.com has been restricted from delivering to the entire country. The retailer has a 25-year agreement with Ocado to run online delivery service, and it also announced today it is in discussions with Ocado to expand the reach of its online operation. The Ocado agreement is not final, but the grocer has said it might take space in Ocado's new customer fulfilment centre in Erith. 

George Scott, senior analyst at Verdict Retail, said both the talks with Ocado and the Amazon deal are signs that Potts is "sowing the seeds for a convincing recovery". Potts, who became CEO almost a year ago, recently sold off the retailer's M-Local convenience estate, while shifting the focus back to traditional mid-sized supermarket – a different move to its grocery competitors. 

But could any of the big four have entered into this Amazon deal? Catherine Shuttleworth, CEO of shopper marketing agency, Savvy, doesn't think so; she told Essential eCommerce Morrisons is the only supermarket which could risk building a relationship with Amazon, allowing them to pitch into the UK grocery market and gain a foothold.

Amazon's game plan

Steve Mader, VP of digital insights at Kantar Retail, said the deal makes even more sense for Amazon.

"One of my big concerns with Amazon trying to get more and more into grocery and eventually fresh and frozen, is that if it competes head-to-head with the major UK grocers, it needs to compete on basket-level pricing and the only way to really do that is to delve deeper into its own label."

The deal with Morrisons could open doors for Amazon to create its own fresh food label, a move it is trying to do across its business, demonstrated by hiring a former M&S exec, Frances Russell, to launch an online clothing business earlier this month.

"Having its own label could create a wider relationship," continued Mader. "Even as deeply intertwined as Ocado first was when it launched with its Waitrose supply chain."

What about Amazon Fresh?

The UK grocery market has been waiting nervously for Amazon Fresh to launch in the UK, following endless rumours stemming from the e-tailer taking out a lease on a warehouse previously used by Tesco. But Mader doesn't think the 'Fresh' brand is important.

"I've seen in the US Amazon has been focussing less on Amazon Fresh because it is expensive to put the supply chain in place. The focus has been on Prime Now and this is how they're launching predominantly in the UK."

Amazon's one-hour delivery service is rapidly rolling out to major urban areas around the country, now available in London, Birmingham, Newcastle, Manchester, Liverpool, Warrington, Birkenhead, and Wigan. And as Mader points out, in a country which is still restricted due to Sunday Trading Laws, Prime Now offers a way for shoppers to get their products at a convenient time for them.

"What Amazon is trying to do is target the Prime shopper in a Prime household and offer them as many different fulfilment options as possible," added Mader. "And what we've seen with Prime Now, is that it is going after fresh and frozen, with milk and frozen pizza available, but the assortment isn't robust enough for typical household to do their full grocery shop."

A very different business model

But Amazon is a small player in the grocery world, and does not have the buying skills of the big four supermarkets. What the Morrisons tie-up allows is for Amazon to finally compete head-to-head with the UK grocers whether shoppers want their goods via Prime Now, Amazon Pantry, or even – if it launches – Amazon Fresh.

And the clincher is Amazon can offer the products at a competitive price. Research from Profitero found goods bought from Amazon Pantry to be considerably cheaper than other UK grocers, with supermarkets being at least 16% more expensive, while Tesco was on average 24% more expensive than Amazon.

Mader said the Amazon business model is very different from traditional grocers, which makes life increasingly difficult for the incumbent supermarkets.

"Amazon doesn’t make money on item-level profitability like other grocers, but it is the context of how that Prime shopper spends money across digital services," he explained.

Customers who spend £79 per year on Prime to receive one-hour and next-day delivery – as well as unlimited streaming of movies and TV episodes, unlimited cloud photo storage, and access to 800,000 books in the Kindle library – are believed to spend over twice as much money as regular Amazon shoppers.

Research from ParcelHero states Prime members spend on average £1,000 per year, opposed to £450 spent by non-members. "For consumers who have so far resisted the allure of Prime membership, this huge potential expansion of its food delivery service may prove to be just the hook Amazon needs. And Amazon is also offering exclusive deals for Prime Members on its Pantry service; so it really is a joined up approach," explained ParcelHero’s head of consumer research, David Jinks.

Mader agreed, he said: "Prime is a very sticky platform, it keeps shoppers in the ecosystem, it will be very difficult for UK grocers to compete once – and if – Amazon gets scale," explained Mader.

But the supermarkets may be closing in on Amazon when it comes to online. IMRG noted supermarkets were among the highest risers in its latest ComScore Top 100 Retailer Ranking – which measures unique visitors to UK online retail sites.

While the top four brands – Amazon, Argos, Tesco and Apple – remained the same compared to last year, the most notable increases were in the supermarket category – with Asda (up 4 places), Sainsbury’s (+10) and Waitrose (+6) all recording a rise. If the supermarkets can continue to improve their online offering and find a robust way to sustain a profit, they could fight off the e-tail giant.

But while the new hybrid Amazon beast is ready to take prime position at the top of the grocery food chain, Mader believes the traditional grocers won't be extinct just yet. "There will always be a place to pop down to the local shop," he said. 

For more information, click below:

IMRG

Kantar Retail

ParcelHero

Profitero

Savvy

Shoppercentric

Verdict Retail