The £178 billion UK groceries market is characterised by price competition, as led by cost cutters Lidl and Aldi, and rapidly evolving shopping habits, much of that facilitated by technology. Indeed, the British Retail Consortium has forecast the loss of 900,000 retails jobs by 2025 as the industry moves further online. According to research by IGD, the UK’s online grocery market is expected to double to £17.2 billion by 2020.
In such dynamic conditions, Amazon’s deal with Morrisons, whereby Morrisons is essentially becoming a wholesaler to Amazon the retailer in certain grocery segments, represents more market upheaval for the incumbents, and hence a potentially destabilising element to existing business strategies and models.
Logistical difficulties with perishables
In the UK, Amazon has struggled to implement a popular full-service grocery delivery business. Although its infrastructure is entirely capable of delivering bulkier, long-lasting goods such as cleaning agents and dry staples, to ensure that fresh meat, fish and dairy products like milk and eggs show up at the consumer’s door in good order is far trickier. Indeed, the fresh food component of the shopping trolley must be refrigerated en route, and it is more difficult to return within Amazon’s delivery model. As such, by allowing Amazon’s grocery shoppers access to Morrisons’s fresh, frozen and shelf-stable products, Amazon clears its apparent logistical hurdles while providing a full-service grocery range.
In granting such a market, in effect, to a rival, Amazon is capitalising on how, at least for the moment, Morrisons appears to compete less directly with Amazon than, say, Tesco, does. Morrisons has its best markets in the north; Amazon often targets more affluent markets in the south-east. The tie-up adds another dimension to an already complex industry, with Sainsbury’s involvement in the joint venture of budget grocery retailer Netto as just one prime example.
The fact that Morrisons already has an outsourced logistics agreement for its own produce with delivery specialists Ocado explains why, upon announcement of the deal, shares of Ocado fell almost 10 per cent. Not only Ocado but Tesco and the other members of the big four, Sainsbury’s and Asda (Walmart) may feel the threat from such a serious step into UK groceries by Amazon and its $300 billion-plus market capitalisation.