AmazonFresh will introduce two major online grocery innovations
Daniel Lucht of ResearchFarm writes that AmazonFresh should be seen in the context of the logistics build out in the US. According to many analysts the main driver behind the Fresh roll out is to encourage cross shopping across categories. By offering fresh groceries combined with the updated prime membership and same day delivery, Amazon will enable shoppers to order their bananas and bread at the same time as a new flat screen TV. While there is merit to this logic - and over the long term much of the future of Amazon’s grocery business should play out like this - we believe it’s not the whole story. Especially at the moment, as Amazon is rolling Fresh out carefully city by city, this comprehensive offer of combined groceries and non food orders is still years away from being available to most shoppers.
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Simply put for now, the attraction of fresh groceries to Amazon is slightly different. Only with the basket sizes and shopping frequency achievable through the Fresh offer will the retailer be able to make the logistics set up work profitably. Fresh baskets contain more than 20 times the items of the standard Amazon basket, while in value terms they are on average more than twice the size. In Seattle AmazonFresh shoppers used the service on a weekly basis, five times more often than the average frequency on the regular Amazon site (we provide the relevant data points in our report). Seen in this light, Fresh becomes a central linchpin to the logistics setup, and in combination with proprietary logistics and prime, Fresh will drive basket spend and frequency and tie the most loyal and highest spending customers closer to the retailer. Fresh then justifies the huge risks and investments into the FC build out, vendor flex, kiva, proprietary Amazon logistics and same day and Sunday delivery.
While Fresh’s ROI will take time to materialise, because online grocery is hard to operate profitably, even for Amazon, the opportunity for the development of the Fresh service is much bigger than driving cross-shopping alone.
The innovations AmazonFresh could eventually introduce into online grocery are twofold. First, AmazonFresh would become the first online grocery marketplace operator at scale and Amazon always functions best as a business when it is operating at scale. If successful, this would herald a true revolution in online grocery shopping, the next step in the journey in the development of the sector.
When one looks at the transformation the online marketplace model has forced on retailing as a whole over the last decade, the potential of such a move in grocery should become evident. Most readers will remember newspaper stories about the first eBay seller millionaires, and something similar could happen in the grocery sector, facilitated by AmazonFresh with artisanal bakers, farmers and others the likely candidates to really drive top line growth. Amazon would then enable small scale, independent high street greengrocers, butchers and organic foods stores to widen their reach through the online channel and serve both new shoppers and their existing loyal shopper base across channels, capturing more of their spend and share of wallet.
Amazon would cut out today’s inefficiencies in grocery shopping by offering a platform for shoppers and sellers to meet and do business, especially in cases when this would be difficult to achieve in the bricks and mortar world due to physical location, distances and drive times. Amazon would of course sit in the middle of this ecosystem, and charge its fees.
Second, the other major innovation Amazon could introduce into online grocery is utilising the physical footprint and logistics build out for Fresh to run a marketplace for takeaways and basically copy the business strategy and success of Just Eat and Delivery Hero but add their own logistics infrastructure. Such an offer would provide an integrated delivery solution of fresh groceries and ready-made meals sourced from 3P food service players from a single touch point. Amazon is already offering a similar service in Seattle called Spotlight.
Just as any other business, Amazon get things wrong from time to time and Fresh is perhaps Amazon’s boldest bet yet - on the biggest category in retail. To be on the safe side, we would advise retailers and manufacturers to assume that the dynamics in online grocery retailing will be transformed and formulate their strategies in response, rather than just ignoring Bezos’ next vector of attack.
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