Grocery is hugely attractive to Amazon. Not only is it the largest retail category, grocery shopping is a high frequency and repeat purchase. In addition, unless you’re a retail analyst, grocery shopping is fairly dull, which makes it a good opportunity for using technology and smarts to reduce the consumer friction and pain-points.
Amazon is a retail juggernaut and will leverage its scale, deep pockets, long-term appetite and ability to fund bold R&D to add competitive pressure to the grocery sector. The key enablers for successful entry and growth in grocery retail is money, time and data, all of which Amazon has in spades. In 2017, Amazon spent $22.6 billion just on R&D, more than any other company in the USA, including Google, Apple and Microsoft. Amazon launched a checkout-free contactless store (Amazon Go) last year and is adept at using technology to improve the consumer experience. It is Amazon’s unrelenting customer obsession that is the single biggest threat to the incumbent grocery retailers.
Amazon’s non-food market share in Australia is forecast to be almost 5% by 2026, and 1.1% for food. Given the challenges around home delivery, sourcing and cool-chain maintenance with fresh foods, grocery food will be impacted first, however, perhaps the more relevant impact is the way that the imminent threat of Amazon is already changing the behaviours of the majors. The majors are getting ‘Amazon ready’ and learning from the impact experienced in other countries.
The majors will need to integrate physical and online shopping, along with digital and traditional shopping methods. This will require leveraging their existing assets, including bricks and mortar stores, loyalty programmes and customer data, and at the same time improving their offer in the areas that Amazon dominates, namely private label, click and collect models that are economically viable and the sweet spot of 1-hour delivery windows. Coles and Woolworths will increasingly need to understand their customers better to enable them to engage directly with shoppers and offer them unique services and experiences, and ultimately protect them from Amazon - Amazon is great at collecting all sorts of data and using it to offer things that people didn’t even think they needed.
This will all have to be done whilst increasing productivity to reinvest into lower retail prices and avoid the risk of operating deleveraging due to declining volumes; as a minimum it will require being competitive on the 20% of products that matter most to consumers (like the hard discounters). The end result will be further investment at a time when margins are already declining and ultimately ‘doing more for less’.
Amazon’s vocal supermarket killer…
Amazon has been a lead driver in the development of virtual assistants. These are voice-activated devices that let users ask questions or give commands to complete all manner of everyday tasks in more intuitive ways, including searching for information, organizing schedules and, of course, shopping – and do it 24/7, even when the majority of shops are closed!
Amazon’s voice-activated virtual assistant, the Echo speaker
Voice-activated virtual assistants, like Amazon’s Echo speaker, are now available for purchase in Australia (from $79) and will reach full functionality when used with Amazon Prime, which launched in Australia in June 2018 for an extremely competitive annual subscription fee of $59; (Amazon Prime is a bundled subscription offering, which includes movie and music downloads, photo storage, access to special deals and two-day delivery on purchases). This will truly help make grocery shopping a frictionless process: no more driving to a store, dealing with crowds or even sitting at a computer selecting products online, just simply talk to a virtual assistant and tell it what you want and when you want it delivered! Simple and convenient – and needless to say, voice-activated search algorithms will favour Amazon’s own products.
Essentially, grocery shopping today is more a physical selection of a range of regularly purchased items rather than ‘browsing’ in the traditional sense, so it’s well suited to voice-activated shopping. Virtual assistants are likely to reduce, or even eliminate, the need to regularly visit physical stores and the challenge for the major supermarkets is how they compete in this emerging digital marketplace; 25% of U.S. households already have a home assistant. By 2021, it’s estimated that 18% of total spending will be via virtual assistants (currently 3%). It’s no surprise that Walmart has partnered with Google as their technology partner to allow customers to link their store accounts to Google's Express shopping service and use voice-activated Google Home speakers to buy hundreds of thousands of items for home delivery.
Ultimately, the majors will increasingly need to defend customer traffic in physical stores, whilst also developing digital strategies that will compete with the convenience of voice-activated virtual assistants. However, the difficulty for the incumbent bricks-and-mortar retailers is that the digital disrupters have a different set of financial incentives; Amazon doesn’t actually need to make a profit from its grocery business. In the USA, 50% of consumers are Amazon Prime members representing 70% of consumer spend, so the key growth metric for Amazon is to increase spend per person within Amazon’s vast suite of products and services – in other words, getting consumers dependent upon the Amazon ecosystem, which in turn will make Amazon an even more attractive advertising platform for suppliers. It does suggest world domination with Amazon owning the customer as well as the suppliers and taking a slice of all revenue streams and doing so with no real desire for making a profit in the near-term. Scary.
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