Amazon has created plenty of noise about its food offer in the UK, but to date, it has failed to win shoppers in any significant number. Should the major grocers be concerned or does Amazon’s foray into food amount to little more than a damp squib? 

  • Amazon’s market share sits at just 3%, four years after it launched its food offer
  • Analysts believe Morrisons tie-up could be the turning point in Amazon’s growth
  • Shore Capital’s Clive Black believes Amazon will be one of the key components in UK grocery over the next five years
  • Experts predict that Amazon will need stores to take on the big four with Asda and Morrisons touted as potential targets

Amazon is ramping up its UK grocery offer. This week it revealed it would sell the entire Morrisons food range on its main website for the first time, while millions of Prime members will get their groceries delivered for free after it scrapped charges last month.

The etailer has plans to roll out that service, currently available in London and parts of the Southeast, to other major cities including Manchester, Birmingham and Edinburgh.  

The big four are clearly worried. In response, Tesco boss Dave Lewis said it could eventually give members of Clubcard Plus – its own subscription service – free home grocery delivery, too. Observers say the move is designed to defend its share against the onslaught from Amazon.

Amazon Fresh van

But are Tesco and its mainstream peers right to be worried about Amazon’s grocery business? 

Despite all the noise about Amazon Fresh, the online titan’s grocery arm has gained relatively little traction since its UK launch more than four years ago.

Amazon currently holds just 3% of Britain’s online grocery market, according to Mintel, compared with Ocado’s 14% and Tesco’s 30%.

“The reality is they’ve been in the market for a while now, and we don’t see the level of exponential growth that many were expecting and Amazon was probably targeting” 

Mintel analyst Nick Carroll says the “vast majority” of that 3% comes from sales on Amazon’s core site, including speciality food and alcohol, rather than through Fresh.

A source at one major grocer says: “There will be people in our online business who will be taking Amazon very seriously and treating them like any other competitor.

“But the reality is they’ve been in the market for a while now, in particular in London, and we don’t see the level of exponential growth that many were expecting and Amazon was probably targeting. 

“I would be surprised if their market share was significant, even just in London. Certainly across the UK, it is negligible.”

Based on coverage alone, Amazon is a grocery minnow on these shores. Fresh still only delivers to selected postcodes in London and the home counties, while the Morrisons offer on the main Amazon website has only launched in Leeds.

By comparison, Tesco.com boasts 99.7% coverage of the UK, not to mention almost 4,000 UK stores that can be used to service online demand.

“Is [Amazon] where we would have expected it to be when it launched? No,” Carroll admits, “but Amazon is slowly building this service and it’s ramping up its influence in the grocery market.”

Tiptoeing not leaping

Clive Black, head of research at Morrisons’ house broker Shore Capital, acknowledges that so far Amazon has been “tiptoeing forward” in the UK, rather than moving in leaps and bounds, but insists: “Those tiptoes are moving.”

Black points out that Amazon is still “on a learning curve” when it comes to the grocery market and is taking time to get the model right.

“The acquisition of Whole Foods showed a real commitment to the sector, but also the evolution of Amazon’s thinking because there are several ways to skin an online grocery cat”

Clive Black, Shore Capital

“It launched Amazon Fresh in the States and that model has ebbed and flowed with some considerable adjustments to it since launch,” he explains.

“The acquisition of Whole Foods showed a real commitment to the sector, but also the evolution of Amazon’s thinking because there are several ways to skin an online grocery cat. Ocado has got the pureplay central fulfilment model, the superstores have the store-pick model and Amazon has had something in between.”

Despite its slow progress, Black says recent moves underscore the fact that Amazon means business in food retail.

“Amazon is committed to groceries in the UK and it is a very patient organisation with considerable financial resource. Putting the Morrisons proposition on its main website is a notable move,” he says.

The turning point?

Edge by Ascential analyst Jack O’Leary says that move is not just notable, but a make-or-break moment for Amazon’s grocery offer.

The timing of the launch, when online grocery orders are at an all-time-high amid the coronavirus pandemic, could not be better.

amazon-morrisons

“Now is the time for Amazon Fresh to become a force in UK grocery if it is going to happen,” O’Leary says.

He believes that the new Morrisons tie-up, combined with the free delivery, could be as pivotal for Amazon in the UK as its acquisition of Whole Foods was in its native US. 

“This will be the turning point for Fresh in the UK if there is to be one. With the elimination of its extra fee, Amazon has broken down this last barrier”

Jack O’Leary, Edge by Ascential

“Fresh grocery delivery has been a challenge for Amazon for a very long time. In the US, Fresh initially launched in 2007 and spent years struggling along, available to only a few exclusive metro areas and within a siloed shopping experience,” he says.

“It wasn’t until the acquisition of Whole Foods and the launch of Prime Now that Fresh gained traction.

“This will be the turning point of growth for Fresh in the UK if there is to be one. With the elimination of its albeit small extra fee for Fresh in the UK a few weeks ago, Amazon has broken down this last barrier.

“While Amazon does not have the same asset base of stores to deliver from in the UK as it does in the US with Whole Foods Market, partnering up with Morrisons and building out Prime Now across more areas will work to overcome that.”

Selling Morrisons products through the main Amazon site will also help boost awareness that the online giant actually sells groceries.

Carroll says the fact that Amazon Fresh is only available in certain postcodes means the etailer’s brand awareness in food is minimal.

“Amazon isn’t particularly associated with groceries, but having the Morrisons logo front and centre on your homepage will make that association,” he says.

“Partnering with Morrisons gives them instant credibility in that market rather than having to build brand awareness that Amazon does food and in an Amazon Fresh brand.”

Putting that proposition upfront in such a way could help its potential grocery audience rocket. “It’s going from a small potential customer base to a huge one. Nine out of 10 online shoppers use Amazon – that’s a big step up in terms of capacity,” says Carroll.

Big four beware?

Despite its advances, Carroll insists Amazon will not be taking on the big four any time soon.

“I don’t think Amazon will ever challenge Tesco or the big four,” he says. “Last year, 7% of grocery sales were online. That might go up to 10% or 15% this year, but the reality is the vast majority of food and drink sales come at a store level. If Amazon wants to compete with Tesco, it needs stores.”

Is Amazon v Ocado the real battle to watch?

Analysts may be sceptical about Amazon’s ability to topple Tesco, but it may be able to take on online pioneer Ocado.

Ocado van

“Ocado has built a very loyal customer, but it doesn’t have the top-of-mind and frequency of visits that a website like Amazon does. Amazon’s brand awareness and usage is universal,” Carroll points out.

The price positioning of the pair is very different, and Amazon’s partnership with Morrisons – another retailer keen on price – could give it broader appeal than Ocado.

“Amazon could quickly, through the Morrisons partnership, build up quite a strong competitor against Ocado, particularly as Ocado is viewed as more price-premium,” Carroll suggests.

Ocado’s soon-to-launch joint venture with M&S, which is viewed as an expensive place to buy ‘treats’ for many food shoppers, may see its price perception rise higher.

This could position Amazon, which also sells higher-end Whole Foods and Booths products, as the online shop to go to for shoppers of all budgets.

Black believes that is something Amazon is already considering, but says it would be easier to establish that bricks-and-mortar presence by buying a UK grocer, rather than building a store estate from scratch – just as it did in the US when it snapped up Whole Foods. 

“For Amazon to set up a major bespoke grocery offer for the UK market would be very large in capital terms, very risky in cultural terms and very time-consuming. Whereas to buy into an existing brand that has an affiliation with the British public makes a lot more sense,” Black says.

“Amazon went down that route in the US with Whole Foods because it recognised that the optimum model for online grocery is a combination of stores and centralised distribution. 

“Ultimately, Amazon either has to build out a centralised or regional network, or it has to acquire a store estate for it to flicker as a notable entity on the radar of industry market share.”

Amazon Go Grocery_4

As Black points out, there are some potential acquisitions in the market right now: “Asda is for sale, although Walmart and Amazon are not exactly best buddies.

“It’s got an agreement with Morrisons and it would appear that Amazon likes Morrisons’ vertical integration. We know they have looked at Waitrose and been rebuffed.

“Now that the Competition and Markets Authority has effectively blocked any consolidation of the big four after blocking the Sainsbury’s and Asda deal, I don’t see anyone else, other than Amazon, coming in and looking to buy one of those players.”  

“Over the next five years, I believe Amazon will be one of the key components in the development of UK grocery” 

Clive Black, Shore Capital

Black even suggests that Amazon could pull off the most audacious of acquisitions by buying the market leader.

“It’s not beyond the realms that they could acquire Tesco now that Tesco has gotten rid of the Direct general merchandise business and has a low market share in non-food.”

That may be a long shot, but anything is possible with Amazon. For now, the grocers are right to be wary and pay more attention to the etailer, not because of its market share, but because of its ominous potential to grow it. 

“I don’t think I would be complacent about Amazon if I were a leading British grocery executive, because they are committed to this market,” Black concludes.

“Over the next five years, I believe Amazon will be one of the key components in the development of UK grocery.” 

It may be tiptoeing along at the moment, but it might not be long before Amazon seriously puts its foot on the gas in UK grocery.