Amazon’s tie-up with WM Morrison marks the online store’s boldest step into any grocery market outside the US.
But its plan to sell Morrisons own-brand products is not the all-out assault that retail analysts had been preparing for. Its limitations suggest that — like traditional supermarkets — Amazon has wrestled with how to make money out of delivering groceries to customers’ doors for little more than they would pay for them in store.
Monday’s deal will add hundreds of products to two food delivery services that form part of Amazon’s £79-a-year Prime service.
Fresh and frozen items from Morrisons, such as ice-cream and orange juice, will be available via Prime Now, which dispatches couriers carrying insulated carrier bags to deliver orders within one or two hours.
Amazon Pantry will offer a broader range of non-perishable items, including Morrisons chocolate bars and smoked almonds.
But customers are unlikely to view either service as a substitute for a weekly shopping trip. The online services offered by major supermarkets charge as little as £1 or £2 to deliver an online grocery order of any size. Pantry charges more than that to deliver a single bag, which can hold about 12 boxes of cornflakes or 15 bottles of Bourbon whiskey.
Rather than competing head-to-head with existing services that are popular and cheap, analysts say Amazon is trying to carve out a niche of Britain’s lucrative convenience market.
“Convenience stores are pretty big in the UK and they are already more expensive than the bigger stores, with prices that are about 6 per cent higher,” says Richard Clarke of Sanford Bernstein.
“If you’re Amazon, that’s where you can charge extra and still come out with a reasonable-sounding number.”
At least for now, Amazon’s grocery ambitions appear narrower in Britain than in the US, where it has launched a fully-fledged delivery service in cities including Seattle, New York and Philadelphia.
The American service offers a full range of groceries, which can be delivered in one-hour slots, or before dawn to customers who are happy to have food left outside their front door in temperature-controlled “totes”.
But Amazon has been slow to expand its food delivery service, even in the US, and the price it charges there — an extra $200 a year on top of the regular $99 prime subscription — would be unlikely to attract many customers in the UK, where annual grocery delivery plans are available for £60 (about $84).
Supermarket executives express surprise at the prospect that Amazon would invest the considerable resources required to create an online-only grocery service in a market where prices are low and competition fierce.
Analysts say that like Ocado, an online supermarket that has no physical stores, Amazon would have to invest in new warehouses and computer systems if it wanted to expand AmazonFresh to the UK.
In contrast, most major British supermarkets have set up online operations with little capital outlay, by retrofitting stores with technology enabling them to serve as small distribution centres. When the stores are closed, staff use specially adapted trolleys to pick items and load them on to vans for delivery to internet shoppers.
Many supermarket executives view labour-intensive online orders as less profitable than serving customers who pick products off the shelves themselves and drive the shopping home in their own cars. But they are loath to see even lower-margin customers defect to another supermarket, and lose the contribution they make to covering the fixed cost of running stores.
In Amazon’s main business of selling items such as books and electronics, often for delivery within one or two days, it counts its highly efficient warehouses as one of its main advantages.
Ocado says its automated fulfilment centres lend it a similar advantage. For every hour that an employee works in its newest facility, the company says it can put more than 200 items in baskets for delivery to customers.
Such sophisticated technology helps save on labour costs, but the cost of installing it is equivalent to five weeks’ takings, a large cost to recoup from the grocery industry’s thin margins. Amazon would face a similar handicap, against competitors that have sunk money into physical stores.
Mr Clarke describes Amazon’s grocery services as “reasonably niche — aimed at the cash rich, the time poor, or early adopters of technology that just like to try things out for the sake of them”.
That is hardly enough to open a new front in the battle that has seen German discounters Aldi and Lidl claim 10 per cent of the UK grocery market.
But for an internet pioneer trying to capture a bigger part of what its customers spend, it may be enough, for now.