Amazon is set to generate revenue of more than £431.5bn globally by 2024, according to forecasts from Edge by Ascential, and grocery will be central to its strategy
The recent opening of its first new-format Amazon Go Grocery store in Seattle signals the significance of the category in Amazon’s huge plans for growth.
When there’s an express train hurtling down the track towards you, is it better to try to derail the behemoth or to try to hop on board as a passenger?
Amazon is expected to generate revenue of more than £431.5bn globally by 2024 according to forecasts from Edge by Ascential.
The recent opening of its first Amazon Go Grocery store in Seattle highlights the significance of the category in Amazon’s huge plans for growth.
The online giant has also made its ‘Just Walk Out’ cashier-less technology available to other retailers and is reported to have secured a site in Notting Hill, London, for the first international Amazon Go store.
As Amazon Prime growth slows in the US, the company is looking to overseas markets to increase Prime membership and drive future retail sales growth. Grocery will be one of its main levers.
The category is attractive for Amazon because of its size and share of total consumer spending, the high repeat order rate, and low online penetration, which all give plenty of potential for growth
Amazon is experimenting with its grocery formats. The opening of the Amazon Go Grocery store was one development; the retailer is also investigating a new retail format designed more like a traditional supermarket. This is to be tested in California and is likely to sell products not stocked by Whole Foods Market with the aim of reaching a more mainstream customer base.
In 2019, Amazon grew its UK sales by 23% to £13.4bn. The UK is the retailer’s international test market for grocery, and it has been speculated for some time that Amazon may seek to acquire an existing grocer. Morrisons is a likely target, given its current partnership to supply Amazon Fresh and Prime Now, but Sainsburys’ more premium offering and southern base also make it a strong contender.
Retailers and brands in the UK need to prepare for Amazon to experiment with more pop-up formats after last year’s trial of Clicks and Mortar shops in more than 10 locations, as the business bids to provide a more omnichannel experience. It is also planning 3,000 cashier-less Amazon Go stores globally by 2021 including openings in the UK.
As grocery takes on an increasingly central role within Amazon’s strategy for growth, retailers and brands need to decide whether their own growth – if not survival – depends on collaboration with the online titan or whether they will opt to compete. To make that decision means understanding as much as possible about its future plans.
Here are five important considerations for retailers and brands working with Amazon:
Amazon is rationalising its distribution and fulfilment systems
The company’s current set-up for serving grocery, including Amazon Fresh, Prime Now and Amazon Pantry, is a complicated mix of fulfilment models, varied subscriptions and inconsistent geographic coverage. This is confusing for customers and makes the business model complicated for Amazon, so it is highly likely that it will seek to rationalise its grocery formats and offerings.
In the US, Amazon’s Whole Foods acquisition has huge potential to help with expansion and distribution and the deal represents a strategy that it could potentially take overseas through future acquisitions – leveraging an existing store network provides a logistics infrastructure for the delivery of perishable items via Prime. Stores provide a central hub for Amazon’s growing grocery activities, enabling shoppers to use click-and-collect services and Prime Now grocery delivery.
A further opportunity for Amazon’s rapid grocery distribution is potential integration with Deliveroo. However, Amazon’s efforts to invest remain under investigation by the Competition and Markets Authority, so it is unclear whether the move will pay off.
Formats and programmes are changing at speed
Programmes such as Dash Replenishment for automatic reordering of everyday items and Amazon Fresh Pickup for click and collect are being piloted in the US and these could be transformational to its future grocery strategy.
Fresh Pickup is available in several US cities and allows Prime members to shop and pick up groceries from Amazon Fresh in as little as one hour for free, or in 15 minutes for $4.99. Customers drive up and pull into a parking space and a team member loads the ordered bagged groceries into the car, or customers can walk in and grab their order inside the lobby.
This programme could potentially expand internationally. From a brand perspective, manufacturers need to monitor and test how best to optimise their marketing and processes for these Amazon programmes to pave the way for strong performance as they are rolled out cross-border.
Amazon is strengthening its ecosystem by forging closer partnerships with key suppliers
In terms of the product mix offered by Amazon, it is concentrating on the first-party seller side of its business, where items are sold directly by Amazon, and working closely with larger suppliers to strengthen its strategy in key categories.
It wants to limit the chance of big players, such as Nike, exiting its ecosystem by giving more help to first-party sellers. Among the services for brand partners are tools to tackle the challenges introduced by third-party marketplace sellers potentially devaluing brand image.
As this focus increases, smaller brands may find themselves forced to the third-party seller marketplace where they lose elements of control over pricing and promotional strategy as well as brand equity. Brands selling as third parties need to prepare for a stiffening of Amazon fulfilment inventory efficiency standards. Third-party sellers still count for more than half of Amazon’s sales.
Sustainable and ecommerce-optimised packaging is a top priority
In order to reduce costs, streamline logistics and increase its sustainability credentials, Amazon has prioritised changes to its packaging standards to develop ecommerce-optimised packaging and this is a focus area that partners need to adhere to. The company will request packaging that protects the product, ships in its own container and minimises dimensional weight ratios to lower costs of fulfilment.
This packaging innovation is an area where brands should devote resources in anticipation of Amazon requirements. It is also a field where other retailers can learn from Amazon.
To raise the average selling price of items on Amazon the use of bundles, bulk packs and unique solution packs can all be leveraged. Amazon wants packaging that is frustration-free for the customer, ships in the same container it arrives at the fulfilment centre in and reduces preparation time for Amazon.
Amazon is offering help with new product launches
Amazon is keen to help vendors launch new products on its platform at speed. Brands have traditionally found it a challenge to launch such products on Amazon due to their inability to get Amazon to order enough inventory.
The recent introduction of the ‘Born to Run’ programme gives selected vendors the opportunity to launch faster. However, marketing support equal to 10% of the ‘launch buy quantity’ is required and therefore interested brands need to demonstrate commitment.
Being a technology company at its core, Amazon can be expected to keep pushing the boundaries of innovation. It is exploring biometrics to help provide a faster retail and payment experience in its stores, including looking at deep-vein technology to scan a user’s palm. It is also investing in electric vehicle start-up Rivian, no doubt with an eye on its own delivery fleet.
Finally, there are plans to monetise Alexa by offering premium content – this may give brands a further opportunity to market themselves to customers through the smart assistant.
- Chris Elliott is insight manager at Edge by Ascential
No comments yet