Tristan Kitchener, of Kitchener Partners, discusses the anticipated entry of Amazon into Australia, and what their grocery and fresh foods offering could mean for the supermarket industry, and the question marks for producers.
Jeff Bezos, founder and CEO of Amazon, says that the reason Amazon is successful is that for the last 20 years they’ve had three big ideas that they’ve stuck with: ‘put the customer first, invent and be patient’. However, if you’re a retailer, or in fact have any business that could be touched by Amazon, another of his sayings might make sitting comfortably a thing of the past: ‘your margin is our opportunity’.
Amazon is valued at over $350 billion and is undoubtedly hurtling toward world domination by disrupting businesses across a wide range of sectors. Its appetite to improve the customer experience through upstream and downstream supply chain integration is unprecedented – as illustrated by their recent US$1.5billion airport acquisition and leasing 40 planes to guarantee on-time deliveries. This demonstrates Amazon’s determination to be a business that strives to charge customers less, and provide greater value through superior customer service.
Being customer-focused allows you to be more pioneering and Amazon’s strength as a brand is that it’s associated with being innovative and on-trend, with high levels of appeal and a fun place to shop. Amazon’s now fabled Amazon Go concept store in Seattle is looking to revolutionise grocery shopping for the benefit of the consumer by providing a simpler time-saving shopping experience; consumers just walk in, select the products they want and walk out with the payment fully automated. The ‘staff-less’ supermarket is the equivalent of the driverless car. This stands Amazon in good stead as it looks to provide a full online grocery offer, in a market where its rivals are struggling to differentiate their brands. The unique challenge for Amazon will be how they will adapt their business model in Australia to consider the high-cost of labour and land, large freight distances and being an unknown to consumers in grocery retailing.
What is Amazon?
Amazon was founded in 1994 as an online bookstore that diversified into selling electronics, video and music downloading, cloud computing infrastructure and in 2018 Jeff Bezos is planning to launch suborbital human flight into space. Whilst Amazon’s online marketplace is undoubtedly the engine room of business, it’s a hugely diversified business, with a range of B2B and B2C offerings.
The marketplace model allows open-access for all consumers and businesses, with simple sleek websites and superior customer service. Prices are kept low to generate economies of scale, and these savings are reinvested into lower prices and a wider range, to further increase convenience and ultimately customer satisfaction. This in turn increases Amazon’s market share and brand strength, and enables Amazon to ‘own the customer’ and have pulling-power with suppliers.
Like the UK, Australia is moving to a market that favours the hard-discounters, ALDI and Costco, that carry the top 20% of lines that generate 80% of sales in a traditional supermarket. Amazon will use their best-in-class online capabilities to provide consumers with hard-discounter prices, high quality private label brands, and with ranges that are larger than the full-service retailers, Coles and Woolworths. And of course, the convenience of online shopping.
How attractive is Australia to Amazon?
Like Aldi, Amazon has a long-term growth agenda with no desire for profits in the short-term. It was the large profit pool that attracted Aldi to Australia, with the complacent duopoly of Coles and Woolworths making some of the highest margins in the world, and the fact that Lidl, Marks & Spencers and David Jones are all rumoured to be developing grocery offerings in Australia, suggests the profit pool is still large. (And you can now also add Kaufland, the sister company of Lidl that may be opportunistically looking to take over the recently vacated Masters sites).
Amazon is already successful in markets that are much more competitive, so if Amazon believes the market in Australia is big enough to be worthwhile, there is no reason why they wouldn’t enter.
Who will be impacted most by the entry of Amazon?
In other countries, the retailers that have suffered the most are those that share the most similar demographic to Amazon consumers. Given Amazon’s broad appeal (over 90% of consumers in the UK have shopped with Amazon), it suggests that the mainstream retailers, Coles, Woolworths and ALDI, will bear the brunt of the onslaught. However, given Amazon’s appetite for vertical integration and expansion into adjacent sectors, the broader supply chain and related businesses could also be directly impacted, and that means everyone makes less money.
So, will Amazon Fresh succeed in Australia?
That’s the multi-billion-dollar question. Few details are known about the full grocery service model Amazon might use in Australia to deliver a fresh food offering (Amazon Fresh). Amazon is essentially an online marketplace with a sophisticated logistics network, but is largely geared to moving boxes of ambient products, and not fresh foods. Success in fresh foods, and particularly fresh produce, will be dependent upon navigating the changing seasonal growing locations across a large geography, and generating enough sales to provide the necessary economies of scale. Just like the Australian retailers, Amazon will have to domestically source most of their fresh foods due to strict quarantine restrictions. They could also focus upon just the major cities as Australia has the most metropolitan population in the world – this is the hub-and-spoke expansion strategy that ALDI uses, with a single distribution centre surrounded by 60 to 80 stores.
The most comparable market to Australia in grocery retailing is the UK, and Amazon Fresh launched there in June last year, with a range of 130,000 products. It’s still early days but indications are that it will be tough for Amazon to make a dent in a mature retail market.
Amazon could partner with a mature retailer as they have in the UK, where Morrison’s is supplying Amazon Fresh with a range of ambient and fresh food. It would be surprising if conversations hadn’t already happened between Amazon and/or Coles and Woolworths; combining the existing sourcing and buying infrastructure of a major retailer with the online capabilities of Amazon would make an attractive proposition, and provide a swift low-cost entry solution. Of course, Coles and Woolworths would have to manage the corporate conflict, as helping Amazon grow would hurt Big W, Target and Kmart, but a partnership would allow Amazon to build scale much quicker. And for Coles and Woolworths it could be a case of ‘keep your friends close but your enemies closer’.
The partnership model will be important for suppliers. If Amazon go it alone, then the increased competition could benefit suppliers as their will be greater demand for their products, but a partnership with either Coles or Woolworths could mean the opposite, with even greater buying power for the majors.
Whatever the business model, Amazon Fresh will need to make money to be a viable long-term business. In the UK, to access Amazon Fresh, consumers must firstly purchase an Amazon Prime membership for £79/year (or £7.99 month) and then also purchase the Amazon Fresh ‘add-on’ for an additional £6.99/month. Whilst Amazon Prime memberships provide a bundle of other benefits, including unlimited movie access, photo storage, music downloads, one-day delivery, it will be interesting to see if this is too expensive for consumers.
Why does Amazon Fresh charge a membership fee?
Amazon’s mantra is to charge consumers as little as possible and is happy to take a long-term view regarding profitability, so one must assume Amazon Fresh has high operational costs and the fee is required to offset the costs. Australia is a price-conscious market and ideally Amazon Fresh will need to reduce or eliminate the need for any type of membership fee to succeed. The only alternative, and a more likely solution, will be to bundle more value into the membership fee – as founder Jeff Bezos put it “we want Prime to be such good value, you’d be irresponsible to not be a member.” This would also provide plenty of opportunity to leverage the services provided by other Amazon businesses.
Either way, before Amazon can launch a fresh offering they will need a significant online presence in grocery food. The alternative will be to build their brand presence through bricks and mortar stores, and this may well be the driving force behind the highly innovate Amazon Go store – it’s novelty and excitement would certainly attract the attention of consumers and encourage trial, and strategically located Amazon Go stores would accelerate the growth of Amazon Fresh. Amazon could easily acquire struggling IGA stores located in metropolitan areas where a high-convenience grab-and-go model would be well received by consumers.
So, is it just a question of when?
The rational argument says Amazon should focus on brand building in emerging markets, such as India, where the opportunity is much larger. Amazon already has over 10% (about $2 billion/year) of the Australian online spend so why bother with a market as small and challenging as Australia? The reason is that Amazon is about world domination and understands the benefits of first-mover advantage – they want to get in before a potential competitor such as Alibaba from China does!
At its heart, Amazon’s operating model revolves around building scale and loyalty quickly. So, in Australia, Amazon will lead with Amazon Marketplace and go after the low hanging fruit first, and target electronics and general merchandise – watch out JB Hi-Fi and Harvey Norman! Then they will tackle the niches, and their suite of other businesses will follow, with Amazon Fresh most likely being a later arrival.
Nevertheless, the strength of the Amazon brand makes it a disruptive force in any sector and market it enters, and the online grocery market in Australia is likely to be no different. Amazon’s track record and deep pockets suggest that it unquestionably has the capabilities to succeed. It’s probably just a question of when.
Am I certain? Certainly not.
Tristan Kitchener is an expert on the grocery retail sector, and provides support to businesses along the whole value chain from retailers through to manufacturers, producers and growers. He has