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Comment: How will online grocers cope with the launch of Amazon Fresh?

One of the most hotly anticipated moves in the UK grocery sector looks set to happen this year with the launch of an online grocery service from Amazon. The much vaunted move has already knocked the Ocado share price to an extent and the mainstream supermarkets could really do without the extra pressure too. Two senior supermarket executives I’ve discussed Amazon Fresh with have expressed mild concern over the launch, noting that it is really very hard to compete against an entity that has the mandate to lose money.

Online grocery is very top of mind for all of the country’s major mainstream grocers. Following the launch of Iceland’s online service, it is just M&S and the Co-op which are yet to launch online food. And at least one of the hard discounters is assessing an online grocery trial, potentially heaping further competitive pressure into the mix should they decide to proceed.

Making money in online is notoriously difficult and it has taken many of the players an age to turn their dotcom businesses into profitable activities. Tesco, Asda and Waitrose have all noted at various points that their online activities are profitable and Ocado is on the cusp of delivering a positive bottom line on a more regular basis (although it needed the Morrisons deal to push it over the line).  

Perhaps the debate over online profitability is a slightly misdirected one. Arguably the logic needs to be reframed somewhat here: online grocery (be that home delivery, click & collect, or both) is probably better seen as a hygiene factor, a basic cost of doing business that enables a retailer to meet an evolved set of basic shopper expectations. If online eventually makes money, then great; if not, well it’s simply a necessary evil that is part and parcel of twenty-first century grocery retailing.

Furthermore, the notion of online profitability is a little more opaque anyway, especially for the multichannel supermarket businesses. Several executives I’ve spoken to have suggested that, although online grocery might be inherently loss-making if looked at in isolation, when considered as part of a broader channel mix, grocery eCommerce become slightly accretive or at least neutral in terms of profitability. The ability to offer another touchpoint to shoppers, usually accompanied by a network of larger stores and convenience stores, results in a higher spend per shopper across all channels.

Going forward, it seems that mastery of two touchpoints will be essential: mobile and click & collect. The MD of Waitrose, Mark Price, once described mobile as the ‘organisational glue’ that unites all channels from a shopper’s perspective – an observation that is bang on the money as new generations of shoppers with mobiles seemingly welded to their hands become more commercially active. Click & collect – exponentially more convenient for shoppers and markedly less expensive for retailers – is set to become increasingly important. While there may have been some hiccups including the cessation of some retailers’ provision of click & collect at Transport for London sites, click & collect is undoubtedly set to stay as a vital part of any retailer’s arsenal (and we’d include Ocado and Amazon Fresh here too).

The jury appears to be out on dark stores to some extent. They can be up to 30% more efficient than instore picking, but some retailers are of the view that ploughing money into additional fixed assets (at a time when they are also busy writing down the value of their other assets – stores) is a little counterintuitive. It is better, they would argue, to sweat these existing assets, using them to fulfil online orders in addition to hosting traditional shopping trips.

Amazon’s likely entry into the online fresh sector will undoubtedly ruffle a few feathers. While a degree of trepidation from the incumbents is justified, it might be worth remembering the borderline hysteria that accompanied Walmart’s entry into the UK – sure, it increased competition to some extent, but has that much really changed as a result?