Amazon has made another stride in taking on US food retailers with the roll out of its fresh grocery business into the second most populous city in the US, Los Angeles. The move is sure to make other players in the market sit up and take notice but will it be enough to really shake up the US online grocery channel and give it the much needed boost it requires? Michelle Russell takes a look.
The might of Amazon is making further inroads into the online grocery channel in the US. The AmazonFresh service it has operated since 2007 in Seattle, this week extended to parts of Los Angeles.
The e-commerce firm is offering customers same-day and early-morning delivery on orders over US$35 across over 500,000 products, from dairy and fruit to meat produce and seafood.
Reports suggest San Francisco could be its next target with plans to potentially launch in 20 other urban areas – inside and outside the US – in 2014. Amazon, however, has declined to return any request for comment on its plans.
Regardless, Amazon sees an opportunity to broaden its offering and dip its toe further into the waters of US online grocery retailing. But where, in western Europe, online is now rooted as a way of shopping for food, in the US it is much less established.
Neil Stern, senior partner at global retail consulting firm McMillanDoolittle, says the US online grocery retailing space is quite small. He estimates online shopping accounts for less than 0.5% of total grocery sales in the US.
However, according to forecasts from IBISWorld, the US online grocery industry is expected to grow 9.3% per year to $10bn through 2018, compared with 1.2% growth each year from 2007 to 2012.
The rise in online food sales will be driven by declining unemployment and increased internet usage, the researchers suggest.
“Falling unemployment will decrease consumers’ free time, making internet food shopping more attractive. Moreover, as people return to work, their incomes will grow, further stimulating industry demand. Input price increases will also be easier to pass on to consumers, allowing for profit growth,” IBISWorld told just-food.
Despite the growth projections, online food retailers face some hurdles. While consumers have become more than comfortable ordering books, DVDs, clothes and electronic items over the internet, there has been somewhat lukewarm interest in ordering perishable goods online in the US.
There have been high-profile failures. California-based Webvan was founded in 1999 and at its peak served customers in ten cities. It went bankrupt in just two years. Bricks-and-mortar retailer Publix Super Markets, which operates in the south-eastern US, pulled the shutters down on its online delivery service in 2003.
“Over a decade ago, we went through the Webvan debacle and there were many more players as well (Streamline and Home Runs),” Stern says. “There is a bit of scepticism, still, over the economics given the scale and complexity of the US market. Clearly, Amazon changes the game a bit but I’m not sure everyone will rush to follow.”
According to a report by Retail Economics, it believes there are four basic reasons why online grocery shopping will never become popular in the US. Firstly it suggests expense, given retailers are operating a low margin business with extremely high operating costs, and then there is the lack of competition in the category. There is also a lack of excitement in food shopping compared to other general merchandise, and, the analysts suggest, it adds “complexity” to your lifestyle.
Nonetheless, despite the failures and setbacks, there are a modest number of successes on the US online grocery scene.
Amazon’s closest competitor in L.A. will be Safeway Inc. In the eastern parts of the US, there two notable operators. Peapod claims to be the largest internet grocer in the US and is expanding, notably with services like click-and-collect. There is FreshDirect in New York, part-owned by UK retailer Morrisons, and which is looking to serve more zip codes. The operation delivers food in some parts of New York City and it’s looking to expand its service into the Bronx.
Amazon will not be a direct competitor in the short term; Illinois-based Peapod’s core markets are in eastern states and the service has only gone as far west as Milwaukee but the retailer and FreshDirect will be watching Amazon carefully as it unfolds its grocery business.
Euromonitor’s Grocery Retailers in the US report also notes: “Several store-based retailers including Wal-Mart, [Ahold banner] Stop & Shop, and Harris Teeter have added buy-online-pick-up-in-store services or reduced fees for curb side pick-up services. And Peapod continues to expand its markets and offerings.”
Stern, however, believes the biggest player to watch will be Wal-Mart, which he says “has the pockets to compete”. While, according to Euromonitor, less than 2% of Wal-Mart’s sales are from internet retailing, investments in search, mobile and social will help it compete in this growing channel.
Speaking at the Barclays Retail and Consumer Discretionary Conference in New York just last month, Neil Ashe, CEO of Wal-Mart’s global e-commerce unit, said the online channel would be its “next growth engine”. However, last week he conceded to Reuters ahead of Wal-Mart’s annual meeting last week that there were no immediate plans to expand its US online grocery delivery beyond a test in California because the retailer was not yet convinced about demand.
Aside from Wal-Mart, Stern also points to Kroger. “Our largest grocer that has been relatively conservative to date,” he says.
Janney Montgomery Scott analyst Jonathan Feeney concurs. He believes that while Amazon must fund all its growth with either “freshly built or extended distribution”, it will contend with players whose costs are “sunk” – many of which, he says, are already “underutilised”.
“As such we expect the most efficient operators like Wal-Mart and Costco who enjoy similar motivation to capture traffic for general merchandise will be willing to defend their territory on price as needed.”
AmazonFresh’s short-term impact is most likely to be most felt at traditional stores in and around L.A., which have likely seen increased competition from other formats in recent years.
“Incremental competition from Amazon will likely exacerbate the incursion from mass, club, dollar, neighbourhood markets and drug stores over the past decade,” Feeney says.
“We see retailers that are important in high density urban centres of the early Amazon roll-out, such as Safeway and Whole Foods Market, as more vulnerable. Less obviously, a successful move towards online grocery could undermine the value of big centre store brands’ hard-won real estate, especially those in highly competitive categories, particularly those with high private-label share.”
Interestingly, Euromonitor points to ‘showrooming’ as a “significant issue for many bricks-and-mortar retailers in the face of increased competition from online retailers”.
Showrooming, the analysts say, means traditional retailers “lose sales from consumers who conduct research in stores but ultimately purchase online or from a competitor. It is very difficult for bricks-and-mortar retailers to compete on pricing with pure internet retailers due to the additional overhead of operating physical stores and due to the sales tax advantage in some states.”
Much, of course, will depend on the success of Amazon. It is uncertain just how big an impact its latest roll-out will have just yet.
There is no doubt that the growth is there, but whether that is sustainable is another question. There was an increase of 15% in online food sales year-on-year in the US in 2012, Euromonitor noted. An increasing need for convenience has boosted the attractiveness of internet shopping, and so too has the growing use of mobile devises and tablets to make purchases and browse online. And, as competition increases, the growth of internet retailing is likely to drive prices down overall, it suggests.
It is wise to remember Amazon is an internet retail giant that has the ability to lead consumers – with its already well-established non-food offering – into greater acceptance of buying food groceries online.
Feeney has faith Amazon has what it takes to change consumer habits. “Online marketing in the food group broadly seems vastly overrated: consumption is flat/down over the past five years despite much more digitally based advertising. If anyone can change that, Amazon can.”