How Amazon is disrupting grocery
The e-commerce giant isn’t killing it in the space — yet — but analysts say its efforts are poised to pay off in the long run.
Of all Amazon’s retail ambitions — an online juggernaut that began with books and has expanded to everything under the sun — its grocery effort remains somewhat undercooked, despite a decade in the space.
There’s no real mystery to why Amazon would be so assertive in grocery: Total 2015 U.S. supermarket sales were $649 billion, according to the Food Marketing Institute. And trends favor Amazon’s incursion into the space, with grocery trips increasingly fragmented as households more often split shopping duties (rather than leaving the chore to women), as e-commerce sales contribute a growing (if still uneven) share and as younger shoppers go to different retailers for various reasons, according to other research from FMI.
But it’s not just the size of the market, analysts say. As a high-frequency purchase, grocery makes a lot of sense for Amazon.“They want that consistent customer back in the fold. Most consumers look at grocery shopping as utilitarian. It’s not passion purchases, it’s ‘my standards, my staples,’ so to some degree any time you remove the pain points you win. Grocery is ripe with opportunities," Brendan Witcher, Forrester analyst, told Retail Dive. "Anyone can become a grocer, and Amazon has the benefit of having deep pockets, and most grocers don’t have that.”
Grocery is poised for disruption, in much the same way bookstores were two decades ago, and Amazon has functioned as the great retail disrupter for two decades now. Yet, the e-commerce kingpin has been picking at grocery retail for about half of that time, signaling that legacy retailers could withstand the competition, if they also make the right moves.
"Forget about department stores. Groceries is where retail is going to be won over the next five years." Cooper Smith, research director at digital insights firm L2, told Retail Dive. "Amazon is not new to the space — they launched AmazonFresh 10 years ago — [and] I think Jeff Bezos today would see AmazonFresh is a failure, but there are clear signs that Amazon is going to be persistent. And I really think that Amazon has the potential to become a huge competitor in the space."
By time of publication, Amazon did not provide anyone who could speak to Retail Dive for this story.
A decade-old grocer
So why isn’t Amazon already a major American grocer, after 10 years at it? The grocery space in general is something of a quagmire, beset by thin margins and complicated operations, and many of Amazon's efforts remain experimental.
The overall volume of goods — aided by Amazon's Marketplace, which provides half of the goods sold on its site — and the high level of convenience for buyers bode well for Amazon's grocery endeavors, but it has plenty to accomplish before it can dream of dominating the market.
“As much as we are encouraged by Amazon's drive into categories like fashion and home, we are more hesitant about the AmazonFresh business,” Neil Saunders, managing director of GlobalData Retail, noted in an email to Retail Dive regarding the company's first quarter earnings. “As much as we believe this has solid long-term potential, we think the logistical complexities and the low margin nature of grocery mean that it will be an expensive drag on profits for the foreseeable future.”
It’s not that Amazon is simply faltering when it comes to grocery sales. To the contrary, the company has had several slam dunks, particularly when it comes to certain consumer products. Its private label initiatives are experiencing runaway growth across a range of key product categories, even emerging as the online leader in some categories, according to consumer spending research from 1010data Market Insights.
“[Grocery] lends itself extremely well to replenishment purchasing, which fits nicely with Amazon’s Echo digital assistant functionality."
For example, online battery sales amounted to some $113 million this past year, and 94% percent of those sales were via Amazon sites, 1010data reports, noting that among the top 10 battery brands, the e-commerce giant’s AmazonBasics label accounts for about one-third of battery sales online and enjoyed 93% year-over-year growth.
Amazon Elements, a consumer product line including baby wipes available exclusively to the retailer's Prime members, is also “cleaning up market share,” increasing 266% year over year according to 1010data. Based on total dollars sold among the top 10 brands, Amazon now controls 16% of the baby wipes market, just behind Huggies (33%) and Pampers (26%).
Amazon also has a variety of initiatives aimed at boosting convenience. In 2007, it debuted Subscribe and Save, in 2014 it launched Prime Pantry and in 2015 it unveiled Dash button devices for one-touch order and reorder of consumer supplies, which include more than 300 items. Prime members in select cities, for an added $14.99 per month, can use grocery delivery service AmazonFresh. Late last year, Amazon also launched Wickedly Prime exclusive to Prime members, a high-end private line of snacks seen as a challenge to the likes of Trader Joe's.
Despite those efforts and the development of private label consumer products, grocery isn’t quite an Amazon forte. The company, for example, has struggled to make much headway with its consumer goods sales, with just 10% of consumers turning to its site for grocery and household items, compared to 51% who are buying consumer electronics and small appliances there, and 25% for health and beauty items, according to marketing research firm Frank N. Magid Associates.
Amazon has also grappled with positioning its Prime Pantry program, changing up its pricing structure more than once, and Subscribe and Save customers have found that Amazon’s prices aren’t always consistent or even the best deal.
Many of Amazon’s efforts still seem experimental. For example, an AmazonFresh Pickup service unveiled in March in Seattle, which enables consumers to order thousands of grocery items (including meats, fresh produce, bread, dairy and household essentials) pickup within 15 minutes, is in beta, and only open to its own employees — as is the company’s Amazon Go convenient store. Meanwhile, that experiment, unveiled last year, has seen some setbacks as the “check-out free” automated systems become disrupted when the store is crowded with more than 20 people or if shoppers move too quickly, glitches that have delayed that store’s public opening.
Moreover, of the categories that consumers say they turn to Amazon for the most, grocery ranks dead last, with just 10% of customers relying on Amazon for grocery and household goods on a regular basis, according to other Magid research released this year.
“Grocery stands at the bottom — it’s the hardest category to reach through e-commerce in its current state, and that must be frustrating to Amazon. It’s a problem that Amazon realizes it cannot address in its pure online format, and that’s a big thing for them to admit,” Matt Sargent, Magid's senior vice president of retail, told Retail Dive. “But Amazon’s goal is to be that complete ecosystem.”
As Amazon learns the ropes of grocery retailing, that leaves a window open for traditional retailers to move assertively to maintain shopper loyalty. But the window is narrow — and shuttering quickly. “If you wait for Amazon to establish a foothold," Sargent warns. "It’s too late.”
Leveraging data to get ahead
Amazon's position as a tech company with troves of purchase data smooths its grocery and consumer goods sales, and that's likely to continue with its brick-and-mortar efforts.
The company vacuums up data that allows it to know which goods and services fare best with its customers, and it's continually bolstering its customer-first stance. That ability has only improved thanks to Alexa, the company's voice assistant, found in its Echo line of speakers and its mobile app.
Doug Stephens, retail futurist and author of “Reengineering Retail: The Future of Selling in a Post-Digital World,” calls grocery “the holy grail” for Amazon. “[Grocery] lends itself extremely well to replenishment purchasing, which fits nicely with Amazon’s Echo digital assistant functionality,” he told Retail Dive in an email. “Grocery also offers Amazon the ability to collect massive amounts of household and individual shopper data, which can help it better triangulate demand and trends within markets.”
Though click and collect services remain a niche play in grocery, they’re poised to take off the way they have in Europe, John Roswech, EVP of Criteo Brand Solutions, told Retail Dive. At this point, Stephens argues that click and collect offerings are table stakes for every grocer. That’s not just because of the convenience of having groceries ready and paid for as consumers drive home from work, but also because shoppers are increasingly using their mobile carts to build their shopping lists, Roswech said.
"Amazon has to learn how to be a good physical retailer and they’re just working towards that... Amazon is still in an early stage."
“Generally what we see is that people leave the cart open all week,” Roswech said. “As you consume things in your household — Tide detergent or Kraft macaroni and cheese — 40% of the people ordering groceries are ordering on their mobile device. We really think that Amazon is driving some innovation, but as long as traditional retailers leverage that asset of the physical stores, we still believe that the ‘bricks and clicks’ have a strong advantage over Amazon. The traditional retailers are using their asset, and the asset is the physical store.”
And while Amazon has closed its own ecosystem through Alexa and its Echo devices, Roswech said grocery retailers should get in the game, too, via Google Home, for example. "We believe that it’s going to come down to convenience — how the consumer wants to shop. If I’m a big box retailer, the most important thing I have to pay attention to is my shopper. Do they want click and collect? What type of experience do they want, and give them a seamless experience across their devices."
As Amazon develops its grocery operations further, it is collecting data along the way, which in turn can shape how its stores and services will look. "It makes sense that Amazon saw the opportunity in the products that have low close rates online," Brett Wickard, founder of "lean retail" solutions firm Fieldstack, told Retail Dive. "[L]everaging customer data to test a new retail paradigm makes sense. The upside is huge, the downside minimal. Even if this concept doesn’t perform as well as they’d hope, the data gathered will allow them to revise and enhance future concepts."
Amazon isn't the only retailer with data, Wickard and others noted to Retail Dive. But supermarket retailers have to get better at using the mounds of data they do have.
"Imagine not only knowing what a customer is buying from you, but also knowing the things that they may want to buy but haven’t," Wickard said. "Unified commerce merchants know this – because they have traffic from their e-commerce presence that can impact their brick and mortar."
By tracking how often a customer hits a certain product page on a merchant's site, unified commerce merchants can leverage that data to know what goods that customer is more likely to buy in-store or online, he added. "Algorithmic forecasting is fantastic at optimizing the goods that you already have — but it is sorely lacking in expanding the product mix," he said. "Leveraging your search traffic with a unified commerce platform allows the merchant to fill in that gap."
Experimenting with the customer experience
The utilitarian aspect of grocery shopping described by Forrester's Witcher has helped solidify the supermarket shopping experience for the past several decades: fresh produce, meats and dairy at the periphery, with packaged consumer goods (food and non-food) in the middle. But Amazon is shaking that model up.
There have been rumors about a “multi-format” Amazon grocery store — involving robots and some hybrid of delivery or pickup and self-picking of produce and other fresh foods — but it’s not clear that Amazon has actually settled on any one design.
What is clear, though, is that Amazon is experimenting. “Is it hard? Absolutely. Do they have the same depth of expertise in grocery that Kroger or Wal-Mart do? No,” Keith Anderson, Profitero VP of strategy and insights, told Retail Dive. “But they’ve hired a lot of experienced merchants and business executives, so they’ve bought a lot of expertise and talent in that area. The question about what will it look like and how will it expand is an important one, and there’s a little bit to be learned from the relatively deliberate expansion of AmazonFresh."
“The grocery store has to be re-imagined, not in terms of product categories, but in terms of experiential categories.”
When it comes to a local, perishable-food business model, whether operating a store or a delivery or pickup service, there's a complex set of considerations involving population size, population density and demographics, Anderson said. "You can look over essentially all retail formats in history that have a fresh food component, and it’s difficult to expand more than a few hundred stores a year," he said. "It takes identifying optimal locations — leasing or owning — then store buildout and training. It is a very big commitment. And so, as with many of Amazon’s greatest successes, I think some of what they’re doing now is best viewed through a five- or 10- year lens. Amazon is not going to open its thousand or 2,000 stores in 2017 or 2018.”
Witcher is also critical of Amazon's place in the grocery space. "I think we need to be cautious about the idea that Amazon is going to be a top grocer by the end of 2018," he said. "Amazon has to learn how to be a good physical retailer and they’re just working towards that. Everyone has to remember that Amazon is still in an early stage. This grocery format is something they’re looking into."
That could be accelerated at least somewhat if Amazon buys a fleet of established stores. The e-commerce giant was rumored to be interested in taking over Whole Foods, and, more recently, was said to be mulling an acquisition of B.J.'s Wholesale. Whether or not Amazon is considering buying and overhauling an existing chain, Profitero's Anderson said it pays to look at the broader question of why Amazon seems to be investing in physical retail in general. And that may have more to do with Amazon's own assessment of the limits of e-commerce.
Creating demand, not just capturing it
Amid the turmoil in the grocery industry, e-commerce does loom large, as it has in other retail segments. But Amazon's moves to brick and mortar suggest that online grocery sales still have their limits. That's something for rivals to keep in mind, even if they do have a shorter leash, considering their lean margins and lesser ability to plow revenues into their operations.
Retail is about demand capture as well as demand creation, Anderson stressed.
"To adequately compete with Amazon, you can’t attempt to be like Amazon. They’ll eat you alive. To win, you have to be the best at everything they are not.”
"People think now about demand capture, and that all you need is the dumb pipe of stores to hold the inventory. And people have assumed that if physical retail went away entirely — it would all move online," Anderson said. "But there are shoppers and occasions that don’t work for e-commerce. Amazon is continually investing to remove those barriers. But I have a hunch that they’re seeing excess capacity — and they see an over-correction potentially on the horizon. As big chains lose their ability as a going concern and begin unleashing their assets for pennies on the dollar, [Amazon may be asking,] what would be the right price and the right operating model to actually create demand and capture sales that as a purely online retailer we couldn’t?"
That sounds daunting. Yet, traditional grocers have the home advantage in protecting their turf. For one, they already run physical stores and are already in their communities and in touch with their customers. "Physical retailers who learn to leverage their whole data sets will have a leg up on e-commerce players who move into physical," Wickard said. "Physical retailers who marry their physical merchandising and customer service expertise with the data expertise of ecommerce merchants will be rewarded with a superior, more efficient organization across channels."
But it's no time to stand still.
“The grocery store has to be re-imagined, not in terms of product categories, but in terms of experiential categories. It’s not about four-wall sales anymore. The physical store is, increasingly, a catalyst for sales across channels. Grocers need to consider how they can turn their stores into places where something is always happening," Stephens said.
"It may be cooking demonstrations, fitness and nutrition counseling, yoga classes, classes with celebrity chefs, farmers markets or any other of a myriad of events. To adequately compete with Amazon, you can’t attempt to be like Amazon. They’ll eat you alive. To win, you have to be the best at everything they are not.”
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