The rise of Amazon as an online grocer

There are clear limitations to the Amazon model in online grocery, forcing the company to innovate. However in the long run these limitations might actually work in Amazon’s favour. At the moment different business units are set up to compete against each other, in future they will all be unified under one umbrella and a truly winning formula will revolutionise grocery retailing.

A non exclusive list of online grocery limitations would start with warehousing. The first generations of Amazon DCs and FFCs were simply not equipped to handle the cold chain or food products. Then there is logistics, where again the cold chain is a cost driver, and either vans or packaging (totes, bags) need to be temperature controlled. Online grocery also requires tighter delivery windows for produce to stay within sell by dates (which requires a different profile of DC locations). And finally within the food category price points tend to be low and margins tight.

But there are also limitations on Amazon’s front end website. Prime Now for example had to be launched as a standalone app to make the new check out process viable, which couldn’t be done on the main website. After 20 years in business, there are now legacy issues Amazon has to deal with.

But there is another way of looking at this. Maybe the company has been forced by circumstances into making its own destiny?

One could look at Amazon’s grocery offer and feel reminded of the strategy of b&m grocers in the 1990ies. These players launched big new formats out of town, medium sized supermarkets in the neighbourhood and small convenience stores in city centres and high footfall locations. This store footprint and mix enabled them to capture all shopper missions and the greatest share of wallet possible.

Seen in this light, Amazon has found a clever way to address different shopper needs for different categories at different times by launching different online grocery business units (the .com business, subscribe & save, Prime Now, the dash buttons, Echo/Alexa, the now defunct quidsi business, meal kits and Fresh)

The .com business

Broadly speaking, the .com business (basically a 3P marketplace model) is for coffee pods and the niche on trend products such as coconut oil. ResearchFarm has tracked Amazon’s best sellers for a number of years and the annual rankings in the category have remained remarkable stable.

In the US the best selling product in grocery throughout the TTM period to April 2017 was San Francisco Bay Coffee OneCup for Keurig K-Cup Brewers, retailing at an average price point of $28.80. The average price point of all Top 100 Best sellers was $12.77.

Kind had the highest count in the annual Top 100 Best sellers with 4 products, followed by Plum Organics with 3 products and Altoids, bai5, Gatorade, Haribo, Jack Links, K2 Valley, Keurig, Orgain, Planters, Red Bull, San Francisco Bay Coffee, Simply Organic, Spicy World, Trident, viva Labs all with 2.

The best seller offered by most sellers on the 3P platform was Jolly Rancher Hard Candy, 5-Pound Package with 88 sellers, followed by Kind Nuts & Spices, Dark Chocolate Nuts & Sea Salt, 12-Count Bars with 77 sellers.

There were 20 sweets/confectionary products, 8 coffee products (mostly capsules), 5 best sellers from the baby product category, 4 coconut oil/milk products, a number of protein products, (dried) milk products, teas and drinks and a plethora of organic/gluten free/health & wellness brands.

But this captures only one aspect of the grocery shop and this is where Amazon’s other business units come in.

Pantry

Pantry was launched for three reasons: to enable Amazon to sell low priced goods economically by grouping them into a single order (I). Secondly, to encourage shoppers to build a basket (II) and to guarantee FMCG brands a one on one relationship with Amazon, as the seller is Amazon 1P (III). This gets round the problem of fakes, illicitly sourced products from the grey market, contraband and so on. Also 3P sellers can not influence the pricing algorithms, as they can when they trade on the .com site.

The best selling product in pantry throughout the TTM period to April 2017 was Procter & Gamble’s Bounty Paper Towels retailing at an average price point of $9.02. The most expensive item among the best sellers was Tide Original Scent Liquid Laundry Detergent, 50 Fl Oz at $11.39. The pricing profile then rapidly declines. The average price point of all Top 100 best sellers was $4.17 and hence considerably lower than grocery’s $12.77.

The brands with the highest count in the annual Top 100 Best sellers in the pantry category were Frito Lay with 7 products, followed by Unilever with 5 products and Kraft and General Mills with 4 products. Notable other players with 3 products in the Top100 included Barilla, Dole, Johnson & Johnson, Mondelez, P&G, Pepperidge Farm and Pop Tarts with 3 best sellers

There were some 29 snack products, 14 household care, disposable paper products and personal care products and 10 drinks best sellers.

The strategy

These two grocery offers are complemented by subscribe & save, Prime Now and Amazon Fresh. Subscribe & save is for recruiting young mothers and gaining lifetime loyalty. Baby products capture the parent customer, and new parents switch brands most.

Prime Now enables Amazon to deliver the best sellers only from its dedicated city hubs and also from 3P shops (which leaves a lot of the risk around OSA and waste in the hands of the independent grocers). Prime Now also lets Amazon target restaurant deliveries and fulfill the occasional grocery shopping items. The Now business acts very much as a test bed for the Fresh service.

The jewel in the crown, Amazon Fresh, is for the big basket and weekly shop. Fresh should be conceived of as the premium offering targeting the most affluent customers. Fresh shoppers self-select through paying the prime Fresh fees. Apart from a 1P business Fresh also uses the marketplace model for its USP, in other words it utilises strong local or regional premium players, which usually operate from a tiny store footprint without an online offering.

Outlook

For now Amazon is clearly trialling and innovating to crack the online grocery model.
At the moment different business units are set up to compete against each other to some extent, in future they will all be unified under one umbrella.

Using its big data approach and awesome data mining capabilities, we’d expect the company to eventually crack the winning formula and revolutionise grocery retailing in the same vain it has transformed non-food retailing.

Find out more here (on Amazon Fresh), and here (annual best seller data reports)