Just when you thought things couldn’t get more competitive in the grocery market, Amazon launches Amazon Fresh in the UK. Yes, it’s only in London, but its 130,000 products, next day delivery, and a competitor that seems hell-bent on getting a chunk of the market at any price. So Amazon Fresh is here: what can brands expect, and what on earth should they do about it? Amazon Fresh is the next inevitable step in the evolution of the grocery market. But it may represent a tipping point for both brands and retailers – now is the time for both to stop and think and change the way they work.
Amazon Fresh will create more pressure on price
The UK grocery market has been obsessed with price for as long as I can remember, with Wal-Mart owned Asda consistently campaigning on best price, and market leader Tesco having its origins in the market trader “pile it high, sell it cheap” philosophy of its owner Jack Cohen. The resurgence of discounters has made this worse, and now we have Amazon. The prices of their current Amazon Pantry products already undercut most of the major retailers, and Amazon have committed to benchmark price across all the major retailers.
Amazon Fresh will put pressure on customer service
Amazon is flaunting a same day delivery service, which will put pressure on all supply chains. Amazon will expect their suppliers to bear the brunt of this, and as other retailers inevitably scramble to match this, the expectations of suppliers will inevitably increase. Low inventories, high accuracy and near-perfect fulfilment will become the norm.
Amazon Fresh may drive a return to large ranges
At a time when the trend in grocery retail is to shrink ranges (Tesco last year reduced ranges from 90,000 to around 60,000) and with fast growing discounters offering very tight ranges, Amazon are bucking that trend with a promise of a range of around 130,000 SKUs. That might prompt some retailers to reverse the trend and increase ranges too. This might create opportunities for brands to gain (or regain) distribution, but of course that distribution comes at a cost (and my cynical side wonders if some retailers might be tempted to do it for the listing fees alone!)
Amazon Fresh will need bespoke marketing funds
How do you get found on a site in amongst 130,000 other products? The answer to many will be simple, but expensive. To get cut-through in that sort of range will require being featured above and beyond the listing, and that will cost money. (Actually there are lots of things you can do to get cut-through in an online store – one of the topics we cover in our workshops.)
Amazon Fresh will drive the costs of business through the roof
All of this comes at a price. While Amazon are planning to charge a monthly fee of £6.99 (around US$10) the cost of meeting those stringent supply requirements and those sharp prices will be large. Getting featured in amongst that range of 130,000 products will require marketing spend. Other retailers will respond, and perhaps we’ll see the inevitable arrival of free delivery. Who knows exactly what will happen, but we are likely to see downward pressure on retail prices, and upward pressure on the costs of doing business.
Amazon Fresh is unlikely to lead to a real growth in your total sales
All of this would extra cost would be fine if Amazon Fresh were to drive incremental sales. But while it may be a success (and I for one wouldn’t bet against Amazon), and might drive sales – they will largely substitute against existing category sales. Consumers won’t use more toothpaste just because Amazon are delivering it rather than it being picked up at a supermarket, for example. So we have a significant increase in costs, but a less than significant increase in sales. Doesn’t sound too good, does it?
Who will pay for this all?
What we do know is that retailers, both old and new, will turn to their suppliers to support this in one way or another. There will be more customers to service, more distribution points, more listing fees, more demands on marketing. More discounts. More people, more complexity, more funds.
In the real world, neither teams nor funds are elastic. Things can be stretched, but at some point, they snap. It is simply inconceivable that manufacturers will be able to foot the bill indefinitely. When will manufacturers say no? When?
Amazon Fresh perhaps marks a tipping point
A few weeks ago I suggested that sales leaders should adopt a zero-based budgeting approach for how they invest at retail. The article created a large number of comments, and while nobody disagreed with the principle, there was some doubt as to whether it would ever actually happen. Well – things often happen for a reason, when the pain of current practice is too great to handle. Perhaps we’re about to get there in grocery?
Either way, it’s about time manufacturers started taking a more proactive and dynamic approach to the management of channels and retailers. New listing opportunities, new management costs, new management skills – all represent choices that manufacturers need to make. But how to make them? The key lies in focus and prioritization, and targeting shoppers lies at the heart of that. It appears more and more likely that it is going to be impossible to continue to invest in all channels, both old and new, to the extent that retailers may demand. It is also clear that there should be no need. For every shopper trying a new channel like Amazon Fresh, that’s less traffic down at least some of the aisles of some store or other. There is no need to continue to invest in all channels – a good job too as it is patently unaffordable. So which channels and retailers should we invest in?
Brands must consider a number of factors:
- Which channels are likely to deliver value and volume sales in the future?
- Which channels are likely to deliver profit in the future?
- In which channels am I likely to be able to find my target shoppers in the future?
- In which channels am I likely to be able to influence my target shoppers in the future?
Investing in big customers because they are big isn’t enough anymore. A more dynamic approach to retail investment and channel management is required. And at its heart must lies a deeper understanding of shoppers. Not shoppers in general, but our target shoppers: who they are, where they shop, and where they can be influenced. Whether you adopt a zero-based approach to budgeting or not, investment planning must reflect the new reality of a multi-channel world.
