What Does Amazon’s ‘Nuclear’ Move To Offer Free Delivery On Groceries Mean For UK Supermarkets And Consumers?

by Jonathan Adams

Amazon has sent shockwaves through the UK groceries industry with the announcement that the ecommerce giant will roll-out free delivery of food and household supplies orders to Amazon Prime members. The service will be provided via Amazon Fresh, the $1.5 trillion company’s direct online groceries shopping platform and will apply to all orders of over £40.

Initially, the new free delivery offer will be piloted across 300 postcodes in London and the southeast. However, by the end of the year it expects to extend it to cities including Edinburgh, Manchester and Birmingham. Amazon Fresh orders of over £40 currently cost £2.99 and the tech giant also operates a partnership with Morrisons, offering 1-day delivery for a limited range of products.

‘Nuclear’ Option To Spark Online Order Price War With Traditional Supermarkets

James Bailey, who recently took over as chief executive of upmarket supermarket chain Waitrose commented on the Amazon move:

“It feels like the nuclear button has been pressed because [Amazon] have nuclear capacity behind them”.

“In some ways Amazon will be very disruptive because they are ambitious in groceries and they have all sorts of technological expertise. It is more proof they are committed to this market and while this doesn’t feel like a large leap forward, it is a signal of their intent.”

The UK’s supermarket industry is notoriously cut throat, with the main players struggling to maintain profitable margins amid fierce competition on pricing. The coronavirus pandemic’s boost to household spending on food and other home supplies such as cleaning products as millions worked from home has been a boost to revenues and profits for supermarket chains including Tesco, Sainsburys and Morrisons.

The shift to households ordering their big weekly shop online has also accelerated over recent months. Many shoppers who had never ordered groceries online before lockdown have gotten used to doing so and it is expected that a large proportion of new online customers will retain the habit going forward.

However, supermarkets have always struggled to turn a profit on online orders, which are more expensive to fulfil than serving those picking up groceries themselves instore. Competing with Amazon’s free delivery offer would be expected to wipe out recent gains made over the past few months and for most unsustainable.

Whether Amazon is itself able to offer free deliveries to the 15 million UK households (around half of the country) that pay an annual £79 for Prime membership is likely to be of little concern for the tech giant. Its goal is growing market share in the groceries sector, where it has long had big ambitions and it has deep enough pockets to view profitability of the service as a low priority in the short to medium term.

NBK Retail analyst Natalie Berg is quoted in The Times newspaper as saying:

“For Amazon profitability is a choice — no other UK retailer would dream of absorbing the cost of delivery.”

Amazon has already seen success from similarly aggressive tactics in its home market of the United States. Eight months ago the company dropped a $14 annual supplementary charge to Amazon Prime memberships to use Amazon Fresh. The move was a success and has helped significantly boost orders from Whole Foods, the upmarket bricks-and-mortar groceries chain it acquired for $13 billion in 2018.

Buying Whole Foods was then seen as a statement of intent that Amazon planned a major assault on the groceries market share held tradition supermarkets. That is proving to be the case.

Amazon Prime Subscription Numbers A Key Growth Target For Amazon

Amazon’s wider strategy is said by analysts to be to make Amazon Prime subscriptions irreplaceable for consumers by adding as many value-added services into it as possible. Prime members statistically spend more across all of Amazon’s platforms.

In the USA, market penetration is extremely high, with 112 million Prime subscriptions across the country’s 128.58 million households. Membership rates are also growing in the UK, thanks to perks including 1-day delivery on e-commerce purchases.

Significant investment has been made in the library of streamed entertainment content available through Prime, including buying the rights Premier League matches. That’s helped drive UK subscription numbers to 15 million – covering around 50% of all households in the country.

What Does Free Delivery For Amazon Fresh Orders Mean For Supermarket Rivals?

Offering Prime subscribers free delivery on groceries orders made through Amazon Fresh would not be expected to “blow Tesco and Sainsburys out of the water”, says retail analyst Richard Hyman. But it will “chip away at their market share”.

According to markets data firm Global Data, in 2019 Amazon held a 5.1% share of the UK online grocery market. Tesco held around 33% of the market and Ocado 15.7%. It’s now a more valuable market, with online orders doubling to around 14% of the whole groceries sector in just 4 months over the Covid-19 lockdown. Before that catalyst, it had taken 22 years for online groceries shops to build up to account for 7% of the market.

While the share of groceries bought online for home delivery can be expected to slide when life returns to normal, most market research suggests a large portion of recent gains will be retained. That makes it an even more enticing market for Amazon to try to capture.

There is unlikely to be any immediate body blow to revenues and profits generated by traditional supermarket rivals but they will view the strategic move with trepidation. Price wars have been undermining profitability for years and many, including Tesco, have recently come out of the other end of expensive restructuring designed to improve margins.

They will now fear that the recent upturn in fortunes will be short lived, with hardly time to catch their breath with the new threat to margins casting a long shadow. And as one of the wealthiest handful of companies in the world, sitting on cash reserves of $43.7 billion as of late March this year, Amazon casts a very long shadow indeed.

What Does The Move Mean For Consumers?

At least in the short to medium term, the move should benefit consumers. Amazon has already shaken up the UK market by introducing same day or 2-hour delivery for groceries orders. That forced competitors such as Ocado, Tesco and Sainsburys to respond by upping their own game and making similar offers.

Even if traditional supermarkets baulk at matching free delivery, they don’t have the other revenue earning streams Amazon does when it grows its Prime membership base, they are likely to make their own delivery charges and conditions more competitive in response. That can only benefit consumers.

Longer term, competition laws should prevent Amazon from building such a dominant market position that consumer choice is stymied.

However, there could be a sting in the tale for Amazon Prime subscribers if developments in the USA are mirrored here. There Amazon added enough services and benefits to make Prime subscriptions ‘almost indispensable’, before steadily raising its cost from $79 to $119.

British subscribers should expect a similar trend but if developments in the USA are anything to go buy, Amazon knows how to manage price increases in a way that doesn’t put members off to the extent they cancel subscriptions. The company keeps adding enough new value to keep them on the hook.

This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

Related News

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Know more