FRESH AND EASY

The title of this blog refers to an attempt by Tesco to enter the North American market with its “Fresh & Easy” format about eight years ago or so. After rolling out over three hundred stores, eventually Tesco decided that it was not a viable proposition and closed down the operation. It was written off as a failure.

I was reminded of this case a couple of weeks ago when I read of the recent attempt by Amazon to spread its ever-increasing tentacles further by launching its Amazon Fresh grocery service in the UK market at the beginning of June 2016. This represents its first major attempt to directly compete with the “Big Four” food supermarkets in this market: Tesco, Asda, Sainsbury’s and Morrison’s.

What is the nature of this value proposition and how does it differentiate itself from the opposition?

In the initial phases Amazon plans to deliver to over 69 postcodes in the London and greater London geographic area. It plans to carry around 130,000 sku’s, deliver within four hours and will carry well-known brands such as Coca-Cola, Kellogg’s and Danone.

Its stated aim is to focus on “low prices, vast selection, fast delivery options and customer experience”. It plans to offer substitutions for items that are currently not in stock, plus an automatic refund. By comparison, Ocado offers around 48,000 items, Morrison’s, 22,000 and Tesco 70,000. In a move that is potentially a winner, it offers same day delivery on all orders placed before 1pm. This is likely to put its competitors under pressure if they seek to match this promise.

In terms of price, Amazon promises an ever-day-low-price approach. This avoids a direct guarantee of offering the lowest price available on any particular item but none the less highlights Amazon’s competitive approach to pricing.

Essentially the value proposition is a further development of its “Amazon Prime” offering. In the latter case, Amazon shoppers can pay an annual subscription fee of £79 to benefit from an online TV and a delivery service. “Amazon Fresh” extends this delivery concept into the highly competitive area of grocery retailing.

Currently the online grocery sector in the UK is projected to be worth around £17 billion between 2015 and 2020. By contrast sales in physical outlets is projected to decrease by around 3% to around £70 billion in the same period. It can be argued that the new business model proposed by Amazon will allow it to capitalise on the continued swing towards online shopping. It can also capitalise on its existing expertise and knowledge of the rudiments of efficient supply chain management and delivery options.

In addition to the annual subscription of £79, shoppers will also pay a fee of £6.99 per month in order to receive unlimited deliveries more than £40. This takes the annual cost to the tune of £162.88p. For shoppers who do not use the full range of “Amazon Prime” services, this might be perceived as being an expensive option. By contrast one of its competitors, Sainsbury’s charges a fee of £60 per annually.

Some people argue that in a sector which exists on very tight margins (often as low as 1-2%), Amazon might struggle to generate profits. The counter-argument is that is notoriously successful as managing profits across its existing product offerings.

Other commentators posit the view that Amazon has had little success against giants such as Wal-Mart and Safeway in the North American market with a similar proposition. In this instance, the “big guys” successfully maintained their market shares.

On a more positive note, Amazon is likely to move quickly across the UK in terms of its geographic coverage. As stated earlier, it currently operates in only one region (albeit a large one from a population point of view). Larger cities such as Manchester and Birmingham provide similar opportunities. Amazon Prime already covers a wide ranges of regions and cities in the UK such as Liverpool, Birmingham, Manchester, Leeds and Portsmouth.

Amazon also has the potential to work with local suppliers and provide a more customised approach that reflects regional tastes and preferences. Currently it deals with a number of established brands (mentioned earlier) as well as Morrison’s own label items (around 2,500 items in total).

What are the challenges?

Amazon has built up an enviable success story through its ability to deliver a vast range of items to its customers having achieved excellence in the functionality of managing the supply chain. Can it do the same in the fresh food sector? Some commentators argue that this area creates challenges to the supply chain and delivery because of the nature of fresh food (much shorter product life cycles and wastage. It is also directly “muscling in” on a market that had been dominated in the UK (and indeed in many developed economies) by a small number of powerful and dominant retailers. How will the “Big Four” respond? Also factor in increasingly serious operators such as Aldi and Lidl and you have potentially a venomous cocktail of competition.

Already it is estimated that Amazon is experiencing some problems in its delivery system by using cool boxes instead of refrigerated vans. If this is not addressed, it is likely that shoppers will complain and possibly revert back to their previous mode of shopping.

Another key question is what do shoppers actually want? Is it low price? Quick delivery? A mixture of both? Quality? Ultimately this will determine the success or otherwise of the intervention of Amazon in this highly competitive market. As mentioned earlier, the North American experience suggests that while Amazon has made a small impact, it has not seriously threatened the established players to any significant extent.

Amazon’s value proposition however cannot be dismissed easily. For instance it offers shoppers a much wider set of items (130,000) than the completion. Because of the wide and varied choice, it potentially satisfies those shoppers who wish to complete their full weekly shop in one go. It is competitive on price, when compared to the others. It can also potentially benefit from its existing scale of operations and its undoubted capabilities in the area of supply chain management and implementation.

It also begs the question as to whether we will see other third-party logistics / supply chain operators entering into the market and effectively acting as conduits in providing shoppers with an increasingly varied set of delivery options and choice. Will we see the emergence of powerful and dominant supply chain integrators over the next decade or so?

For now we can keep a “gimlet eye “on how Amazon evolves in this sector. Will it do it in a fresh and easy, fresh and cheap, fresh and slow way? Let’s see!

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