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What threat does Amazon Pantry pose to the UK grocery sector?

Many column inches have been written to either laud or lament the launch of Amazon Pantry in the UK and what it means for our traditional grocery giants. Whilst the Pantry offer itself may be more smoke than fire in terms of a serious grocery offer, as the recent Morrison’s agreement demonstrates, retailers need to keep their eyes fixed on the whole of Amazon’s consumer offering, and the challenges that will pose for their future success.

How does Amazon Pantry stack up?

Let’s consider the long awaited Pantry offering and how it stacks up against Tesco, Sainsbury’s, Asda, and Ocado. The standard online grocery offering in the UK is world leading. Order up until near midnight for next day delivery within a 1 hour timeslot. This is being developed with Tesco offering some same day opportunities and added options around click and collect. Pricing is anywhere from free to £7 depending on the size of your basket and which day you choose. An annual delivery pass is generally around £60 for unlimited deliveries over £40.

Amazon Pantry is very different. There is much less of a delivery promise – with deliveries generally “next working day” (although what time this ends is unclear) and no sign of delivery timeslots. Pricing is by the box with charges of £2.99 for the first and an additional £0.99 for each extra box needed. The box system seems intriguing at first but quickly becomes tedious whilst shopping. These charges are on top of Prime membership - offered for £79 - you cannot shop Pantry without being a Prime member. Amazon Pantry seems an expensive option when this is factored in, especially considering the level of convenience being offered relative to the market.

Pricing on the website is sharp. Comparisons to major grocers on leading brands show near parity in many cases. However the Achilles heel in pricing is the lack of an own label range. Most shoppers operate with a mixed basket of branded and own brand goods. Typically 25-30 per cent cheaper, they offer the customer a great saving opportunity, one not open to Amazon shoppers.

Another big difference is range. There is no chilled, frozen, bakery or fresh product which means you need to shop additionally and the Pantry range itself is also limited. Canned goods for example - Amazon is offering 134 lines in total while Sainsbury’s offer over 150 lines in canned soup alone. Soup may not be in a game-changer position but mirrored across categories it becomes a significant issue if the lines you normally purchase aren’t there. There are other issues with no attempt at a unified Amazon basket at this point. Previously when online grocery shopping I’ve purchased light bulbs, batteries, screen wash and de-icer plus a few home and kitchen items. I expect this kind of convenience. None of these were available together with some bizarre misses such as paracetamol.

Amazon’s move for Morrison’s products has the potential to remove these weaknesses. There are also advantages in not partnering with a premium retailer such as M&S, as it still leaves room for Amazon to bring in local suppliers, farm shops and boutique ranges to sit alongside this range. It does however risk alienating CPG brands who were happy to operate in an environment away from lower priced own label products.

The real surprise using Amazon Pantry is the website itself. Grocery e-commerce is different to nearly all other sectors. You’re not adding one or two products, you’re placing regular 40 item+ orders and to do that quickly the UX needs to be tailored to help you. The most obvious miss of Amazon Pantry is only being able to add products from a product details page. We all know what a can of beans looks like, and that’s why grocery sites are near unique in letting you add directly from a shelf or search page. This may sound like a minor gripe but across a large shop it adds a lot of time and frustration into the process.

No cause for concern?

Amazon is not currently competing in the grocery space. The range is limited, the site experience lacking and the delivery proposition is simply not competitive in the UK. For an existing Prime customer, there are few compelling reasons to use the service. Even if Amazon triggered major investment in price there remains the problem of needing to shop separately to buy your fresh produce, bakery, chilled and frozen food. This is a problem that all the other major UK supermarkets have a solution for.

Amazon is already a master of bundling products and services together for their customers with 45 per cent of its US customer base Prime members. If they can add a solid grocery offer to the existing Prime portfolio then the draw for the UK consumer becomes much stronger. Amazon’s challenge is that they need to do this in the most competitive online grocery market in the world.

The real challenge for retailers is what could come next. Amazon Fresh in the US already represents a more serious proposition, and it’s only a matter of time before an improved offering comes to the UK. The recent Morrison’s move is a huge statement to the market. It will take time for Amazon to integrate Morrison’s products into their range, and longer still to solve the challenge of a fresh supply chain. When they do their appeal will dramatically increase.

A move for Ocado is not diminished by the Morrison’s deal. In one step Amazon has increased Morrison’s share price, discouraging a rumored Tesco move, and dropped Ocado’s share price by over 10 per cent making them a more compelling takeover target. Even before the Morrison’s announcement, if Amazon had moved for Ocado, Waitrose would have likely trigged an exit clause with their products. That gap is now ready to be filled by Morrison’s fresh product, plus thousands of independent local suppliers, and Ocado is now a much cheaper target. Creating a nationwide fresh & frozen food customer delivery service in the UK remains a huge challenge for Amazon and is not the same as delivering books and DVDs. Tesco, Sainsbury’s and Asda have spent 20 years developing their capability, which remains leagues ahead of Amazon Fresh in the US, the acquisition of Ocado would let them bridge that gap.

UK grocers need to plan strategically on how they can contend with this threat, and not forget about the discounters. Anyone with the word ‘ecommerce’ or ‘online’ in their job title has probably received a phone call in the last year from headhunters recruiting for Lidl or Aldi, and their online grocery launch could be as little as 12 months away.

Every innovation, presenting a broader multi-channel proposition to their customers, makes the task for new market entrants more difficult, particularly Amazon with its lack of store estate. Sainsbury’s move for Argos may speak to a direct response, broadening their proposition, upping their fulfilment capability and giving them many more customer touchpoints in one step. If the businesses can be successfully integrated, this strategy focuses on their digital strengths and reinforces them further – areas which Amazon will struggle to match whatever their track record.

The UK grocers who continue to innovate in ways such as this should continue to keep ahead of the market, whatever is thrown at them in the future.

Tim Reay, Head of Grocery, Salmon