Comment: Amazon Fresh, the next disruptive force for grocers

To say the grocery market has experienced turbulence over the past few years is somewhat an understatement, but could the Amazon Fresh launch be a much greater disruptive force in the making?

What do we know so far?

In the UK Amazon is already active in the food and grocery market and Amazon Fresh is currently being trialled in London on a limited scale.

What does Amazon need to launch Fresh on scale?

Grocery is a volume business, so if Amazon is to be successful it needs to find a way to build enough market share to benefit from necessary economies of scale. And to launch on that scale Amazon requires two things: 1) food to sell; and 2) a suitable home delivery network – specifically one that can deliver ambient, chilled and frozen foods within a one-hour time slot.

It has already made significant progress on the first point through its supply arrangement with Morrisons. The second part of the puzzle, however, is more challenging.

Amazon’s expertise in ambient logistics is outstanding – from the efficiency of its warehouses to the development of a delivery network that can provide Prime customers with guaranteed next-day delivery almost flawlessly. The complexity of delivering chilled and frozen is considerably more difficult however. Temperature controlled supply chain, dealing with perishable goods and the inability to leave deliveries with a trusted neighbour or ‘next to the wheelie bin’ being some of the more obvious issues.

How might Amazon disrupt the market?

While it’s impossible to anticipate exactly how Amazon Fresh might develop in UK, we know how Amazon operates more broadly as a business and we know its disruptive influence when it does enter new markets. Therefore, it makes better sense to consider how Amazon’s business model would shape the grocery market, rather than thinking about how the grocery market would shape Amazon’s business model. So what could we expect?

1) Low cost supply chain: Amazon would seek to strip cost out of the supply chain – packaging in particular could be a differentiator. Amazon also integrates closely with some of its large suppliers’ supply chains to cut logistics costs.

2) Supplier relationships: We expect Amazon would work differently with suppliers.

While the grocery business as a whole is currently rationalising ranges, without the complexity of a national store estate to service, Amazon would be well placed to offer larger ranges.

It also seems likely that Amazon would democratise its supplier base, giving smaller and local suppliers a channel to market. Amazon Fresh lists products from neighbourhood restaurants and shops, giving these suppliers access to a broader market, while also allowing Amazon to borrow equity and the provenance stories from the these independent businesses. Amazon Fresh could lead to a new breed of innovation and entrepreneurism in food and grocery, led by small suppliers.

3) The category of me: In non-food Amazon is highly adept at helping shoppers to edit substantial ranges through tailored recommendations and suggestions based on previous purchases. This allows the retailer to stock a substantial range while still managing to be relevant to individual shoppers. With regards to grocery, this could lead to reversing the current trend to smaller ranges! Shoppers may even eventually become their own category directors.

4) Reinvention of the path to purchase: Amazon does not think about stores, it thinks about what is convenient. And existing initiatives like Amazon Dash and Amazon Echo, which allow shoppers to order products as they run out or at a moment of inspiration, have the potential to change the way we shop fundamentally. Increasingly online shopping will not be about sitting down with a laptop, but simply about shoppers building lists as they go about their day-to-day business.

Final thoughts

The market is ripe for serious disruption, but more importantly we are amidst an important demographic shift that means we need to consider the shopper mind-set differently.

In five years’ time Generation Y will account for 40% of grocery shoppers – and more importantly, as more of them start families, they will account for the majority of grocery spending. These shoppers are highly active on social media, they interact with brands differently and they are increasingly setting the grocery agenda. Convenience is their priority and they have been brought up with online shopping and of course Amazon.

What’s clear is that even initial consideration of a scaled up Amazon Fresh is highly thought provoking. If you think the past five years have been disruptive, the next could prove to be more disruptive still.