Amazon has thrown down the gauntlet to the supermarkets after launching its Fresh grocery proposition in the UK this morning.

The US etail giant has unveiled the service in 69 postcodes across east and central London and pledged to focus on “low prices, vast selection, fast delivery options and customer experience”.

Retail Week runs the rule over Amazon Fresh by assessing its strengths, weaknesses, opportunities and threats.

Strengths

Depth and variety of range

With an initial range of 130,000 SKUs, Amazon Fresh has launched with a punchy assortment more than capable of going toe-to-toe with the big four.

The etailer has already attracted some of the biggest brands in grocery, including Coca-Cola, Kellogg’s and Danone, while it also stocks products from local producers including C. Lidgate, FishWorks and Paxton & Whitfield.

Analysts have previously suggested that online grocer Ocado could suffer most from the arrival of Amazon – and it will almost certainly be concerned by the initial range the US giant has introduced on British shores.

To put it into perspective, Ocado’s SKU-count stood at 47,000 in 2015, according to its annual report, just 36% of the range Amazon can boast, while market leader Tesco has streamlined its range of 90,000 lines to about 70,000.

Amazon Fresh 2

Amazon Fresh 2

Amazon Fresh has introduced a large range of products to the UK, competing with its big four rivals

The average Asda and Sainsbury’s superstores carry about 40,000 and 30,000 SKUs respectively, while Morrisons has rationalised its range to less than 22,000 products.

Price points

Amazon used a familiar phrase when it briefed the media on the impending launch of Fresh on Wednesday: “Everyday low prices.”

Following the rapid growth of discount duo Aldi and Lidl, the big four have been forced to invest heavily in price to narrow the gap to their German rivals – and Amazon has followed that trend.

Although it doesn’t claim to be cheaper across the board, it has maintained the low-price reputation it has established in general merchandise and entertainment by offering baked beans at 33p, packs of three peppers for 85p and iceberg lettuces for 43p.

Branded lines including Blue Dragon dipping sauces at £1.99, Lurpak butter at £1.60 and Philadelphia spread at £2.48 are all within spitting distance of the big four’s price points.

Speedy delivery

One of Amazon Fresh’s undoubted USPs is its delivery proposition.

Amazon Fresh

Amazon Fresh

Source: Atomic Taco

The prospect of same-day deliveries on all orders placed before 1pm is a potential game-changer for Amazon

Allowing consumers to select one-hour delivery slots is nothing out of the ordinary, but the prospect of same-day deliveries on all orders placed before 1pm is a potential game-changer that its new rivals may not be able to compete with, unless they increase the cost to the customer.

Website functionality

Perhaps not as pretty as the ecommerce platforms built by retailers such as Ocado and Sainsbury’s, what Amazon Fresh lacks in bells and whistles it makes up for in ease of use.

Product categories and sub-categories are displayed down the left-hand side of the page, with search functionality allowing shoppers to jump straight to lists of specific products they are looking for.

The basket of goods selected is listed down the right hand side, meaning users can easily scroll through their list to review and delete items before checking out.

Customer experience

While online rival Ocado can boast a minuscule substitution rate, Amazon is aiming to blow that metric out of the water as a unique selling point to shoppers with its own substitution policy.

If any item is replaced for a similar product – substituting pork steaks for out-of-stock pork medallions, for example – then the customer will not only receive a refund on the goods they initially ordered, but will also receive the substituted product free of charge.

In addition, Amazon Fresh will deliver goods in colour coded paper bags, which are also clearly labelled ‘fridge’, ‘freezer’ and ‘cupboard’ to make the unpacking experience easier for customers.

Weaknesses

The price of being Fresh

At £6.99 a month for unlimited deliveries more than £40, Amazon Fresh is not the cheapest online grocer when it comes to the cost of fulfilment to customers.

Add into the mix the £79 annual Amazon Prime subscription – which is required in order to access Fresh – and the annual cost to a grocery shopper is £162.88.

“Amazon Fresh is not the cheapest online grocer when it comes to the cost of fulfilment to customers”

Amazon will point to the extensive package that comes with a Prime membership, including Amazon Music, Amazon Video and unlimited same-day deliveries on its general merchandise range, but to the non-Prime shopper thinking of switching to Amazon solely to purchase groceries, the three-figure sum to cover them for a year may prove off-putting.

Compare this, for instance, with a 12-month anytime delivery pass at Sainsbury’s at just £60 a year, and some customers may struggle to see the value in jumping ship.

However, Amazon is banking on the promise of same day deliveries on orders placed before 1pm as a unique selling point to steal shoppers from the established grocers.

Margins

Like all online grocery operators in the UK, Amazon Fresh will be operating on wafer-thin margins.

Some analysts have suggested that the big four’s online businesses are actually loss-making, but Amazon insists its aim is to ensure profitability in all of its divisions – including Fresh – through a high volume, low-price model.

“Like all online grocery operators in the UK, Amazon Fresh will be operating on wafer-thin margins”

Amazon has form when it comes to making that strategy work. But the margins in grocery are smaller than in some of its other categories, meaning it will need to sell high volumes of products to reap rewards.

Lack of pedigree

To all intents and purposes, Amazon is entering the UK grocery market from a standing start, having only sold a limited number of fresh and ambient products through Prime Now and Pantry until today.

Competing against grocers such as Tesco, Asda, Sainsbury’s and Morrisons is no easy task for any retailer, let alone a firm who is entering the market with none of the history or pedigree that the big four can boast.

Amazon has hardly set the world alight in the US with its Fresh offer – as Forrester Research ecommerce expert Sucharita Mulpuru told Retail Week last year – as competitors with greater heritage like Walmart, Whole Foods and Safeway fend off the threat and maintain market share.

Opportunities

Geography

An obvious opportunity for Amazon is to extend its reach beyond east and central London – something it is almost certain to do in time.

“Amazon has smartly started in the capital, but the opportunities to move into other busy cities populated by time-pressed shoppers are vast”

The etail giant has smartly started in the capital, where it has a high concentration of Prime members, but the opportunities to move into other busy cities populated by time-pressed shoppers are vast.

Amazon Fresh boss Ajay Kavan said it will take a “very methodical and considered” approach in how it rolls out the service to other parts of the UK, but after expanding its Prime Now service to locations including Manchester, Birmingham, Leeds and Newcastle at a pace, it is likely it will harbour similar ambitions for Fresh.

Range

As it moves into other parts of the UK, Amazon will open up the opportunity to work with more local food producers across the country.

Having started in London, it is working with a host of local businesses including butchers, artisan bakeries, fishmongers, greengrocers and chocolate makers in popular areas such as Borough Market, Notting Hill and Soho.

Expansion into other cities and counties will give Amazon the opportunity to invite more local food experts to work with it and sell their products to wider audience, while Fresh reaps the rewards of further enhancement to its SKU count.

Threats

Competitors driving fulfilment

Amazon Fresh’s same-day delivery offer will no doubt catch the eye of grocery shoppers, but its UK rivals are constantly making gains in fulfilment and could soon be operating on a similar level.

“If Sainsbury’s can transfer such fulfilment capabilities and match Amazon’s same-day delivery option, it will immediately eliminate a key point of difference”

Sainsbury’s, for instance, is in the process of acquiring Argos and boss Mike Coupe has already spoken of how it could harness the retailer’s delivery network to boost its non-food business, allowing shoppers to collect general merchandise goods from their local Sainsbury’s store four hours after ordering them online.

If Sainsbury’s can transfer such fulfilment capabilities to its core grocery business and match Amazon’s same-day delivery option, it will immediately eliminate a key point of difference.

However, while that prospect remains a threat, it is one that will take the grocers plenty of time and money to make a reality.

Argos Sainsburys

Argos Sainsburys

Sainsbury’s teams up with Argos as the supermarkets give customers more reasons to visit

Improving stores

In a world of ever-changing shopping habits, the big four are investing heavily in revamping their larger sheds to drive consumers back into stores.

While the convenience of online has seen more and more customers turn to ecommerce to purchase their groceries, the established players are fighting back with their bricks-and-mortar propositions.

All of the big four are allocating more and more space to their general merchandise and fashion offers to build a more rounded proposition in their larger sheds, while partnerships with other brands and retailers have provided more reasons to visit supermarkets.

“The big four are investing heavily in revamping their larger sheds to drive consumers back into stores”

Tesco is trialling concessions with Arcadia, Sainsbury’s is working with Argos and Jessops, Asda is piloting Decathlon shop-in-shops and Morrisons has drafted in Timpson to offer dry cleaning and shoe repairs to its customers.

Asda is ploughing cash into rejuvenating the look and layout of 95 of its larger stores, Morrisons is undergoing a ‘Fresh Look’ strategy to breathe new life into its bricks-and-mortar space and even discounter Lidl is entering that fray by rolling out its new-look ‘stores of the future.’

If those concerted efforts from the grocers can succeed in enticing customers back into stores, Amazon may need to lower its prices even further to keep shoppers online.