Groceries and Food: The Next Frontier for Amazon

I’ve gotta say, I’m a massive fan of Amazon. I would hold their shares, but it appears that many more people than me hold that view. Along with firms like eBay, they are one of the few real stars of the dotcom era in which your investment would have been returned hundreds of times over. It’s difficult to see that kind of performance being replicated in the current climate, not least because companies such as Amazon and Google have become so far removed from their original iterations, their brands allowing them to expand effortlessly into what would seem totally unrelated fields.

Amazon is a great case of this. It started primarily as a books and CD retailer, heavily involved in logistics. Today, I’d view it more as a logistics company heavily involved with books, CD and basically anything that can be delivered. Prior to 2004, it was virtually impossible to get a guaranteed delivery for the next day. The only exceptions to this were Royal Mail’s Special Delivery and the specialist couriers, and even then you had to wait in all day because the man could come at any time.

By and large, Amazon with their Prime product have changed all that. For a fixed fee per year, customers receive next day delivery to their selected address. The establishment of Collect+ centres has further enhanced the product offering: no longer is it needed to take a day of work to receive a delivery; unless its something physically very big. Returns are seamless as well (for Prime items at least); you just print out a label and drop it off. A refund is put into your account when the parcel is dropped off and not when the item is received.

Amazon have really turned the model on its head and have surpassed eBay in my own opinion, whose major weakness is that it doesn’t sell anything itself, and therefore the quality control is variable. I’m a massive fan, and even though I don’t order things some months, I’d still regard the Prime fee as good value – probably like most people.

What Amazon requires to keep the shareholders happy is a continuation of these trends – expand into other new products whilst keeping this winning proposition for the customer. In the last 10 years, we’ve seen them offer music, e-book services and video; the next 10 years I feel will be dominated by food. Already, there have been tentative moves into the food sector with its Pantry offering.

Why is food an attractive proposition for Amazon? I can think of several reasons.

  • Amazon enjoy a logistical advantage over virtually all firms
  • Synergy with existing products; ability to offer a much greater non-food range
  • Greater customer loyalty to the brand (as opposed to supermarkets)
  • Home delivery product from supermarkets is standard
  • Physical store format is changing, with discounters gaining ground

If Amazon could enter this market with a proposition that heavily builds on current market expectations – a guaranteed 1-hour delivery slot, greater accuracy of delivery times – this may be very difficult for others to replicate. Even their new concept store – where there are no cashiers at all, offers a vast improvement on the shopping experience where the queue to checkout could be the longest part of the shop.

This has to be set against the costs, which have to be competitive. Unlike the non-food sector, I feel the premium for convenience is not too large. Part of that may be cultural – we’ve always had to go out and get food, for example. If Amazon’s shopping basket price is £10 more for a weekly shop, people may be happy to have a wider delivery slot, or just go out every week and do their shop.

Having said that, there are many smaller targets that Amazon could look at. A new breed of companies now target the time-poor but cash-rich: Graze, Hello Fresh and so on. These companies typically deliver time-sensitive packages of food in small quantities for consumption then and there. None of these companies have any particular competitive advantage, despite their claims and this is something that Amazon could easily offer, should they want to.

One of the main challenges that Amazon could face is how to manage this strain. It’s likely that any large-scale food operation would be managed separately, so for the mean-time an all in one delivery won’t occur. And setting up this type of operation would be a seriously expensive business. Purchasing a ready-made solution in the form of Ocado would mean buying a company seriously over-priced by any metric. But if anyone can afford it, Amazon can.

For this reason I’m rather bearish on many of the supermarket shares. For most of them, they have not really made a good fist of diversification. Tesco have made the best of it in my opinion, but many of their ventures have not really become market leaders. I don’t feel that costs can drop too much further, but there is certainly scope with new technology that we may radically change how we shop, and I have a feeling that most of the traditional supermarkets will not be the beneficiaries of this.

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