Amazon’s data prowess and customer knowledge will drive its growth in retail grocery and make it an ongoing threat to brick-and-mortar food retailers, according to a new analysis from Brick Meets Click.
So far, Amazon has established a “strong beachhead in grocery” but gained only a fraction of the overall market by capturing “the low-hanging fruit,” Brick Meets Click said in its “Guidance for 2020: What’s Next for Amazon in Grocery?” report, released yesterday. The Barrington, Ill.-based strategic advisory firm noted, however, that Amazon has set its sights on becoming the main source of groceries for a higher number of affluent U.S. households.
“We anticipate that Amazon will focus on three areas to help strengthen its grocery business over the next year or two,” Bill Bishop, chief architect at Brick Meets Click, said in a statement.
Those strategies, he said, include aggressive customer acquisition by leveraging the Prime customer benefits program to spur more upscale consumer purchases; strategically located physical retail outlets to better meet customers’ store-based grocery needs; and an optimized product mix that blends strong private labels and profitable advertised brands.
“To get to its ultimate win in grocery, Amazon is going to have to go after the business the big players currently own, and this means leveraging its digital connections in a physical store network,” Brick Meets Click said in the report. “Winning in grocery is essential to Amazon because it provides the coverage and purchase frequency Amazon needs to achieve its end game: the build-out of dense delivery and service networks that will allow it to dominate a broad set of verticals in the B2C market.”
Amazon upped the ante in grocery this past fall when it folded AmazonFresh into Prime, eliminating the extra fee and essentially making online grocery delivery free for member orders of $35 or more. That move bolstered the already formidable Prime offering and further enhanced Amazon’s ability to know customers in detail, according to Brick Meets Click.
The consulting firm added that Prime Now, Amazon’s same-day grocery delivery service (including from Whole Foods Market stores), has won kudos from users as an “ultra-fast grocery delivery option.”
“The richer data set that Amazon is able to develop as a result of leveraging Prime to accelerate its appeal among high-value, affluent households is powerful,” the report said. “It will enable Amazon to do in grocery what it’s done in other parts of its business: identify offers and services that provide greater value for each household.”
Not only will Amazon’s rich data enable it to target the best shoppers, but that intelligence also will help steer the company towards strong locations for brick-and-mortar stores. The acquisition of Whole Foods in 2017 gave Amazon a good start with an attractive customer base. Yet Brick Meets Click observed that Prime hasn’t swayed many members to become shoppers at Whole Foods, whose U.S. footprint is less than 500 stores.
Likewise, the Amazon Go cashierless stores have garnered much attention as well as plaudits from shoppers in major U.S. markets, though at 25 locations their reach is limited.
“It’s not lost on Amazon that more than 90% of all groceries are still bought in-store,” the study stated. “To grow its grocery business beyond the current share/level, we can expect Amazon to make an aggressive move into physical locations concentrated where they have existing customers.”
Industry buzz has continued about reported plans by Seattle-based Amazon to launch a supermarket chain separate from Whole Foods. Most recently, published reports have centered on Amazon opening a grocery store this year in Woodland Hills, Calif., and possibly in the broader Los Angeles area. Earlier accounts have said Amazon was mulling acquisitions of small grocery chains and looking at potential supermarket openings in San Francisco, Seattle, Chicago, Philadelphia and Washington, D.C.
Brick Meets Click noted that Amazon will hold a “big advantage” in site selection.
“Armed with its expanding base of household grocery purchase data, Amazon will be able to be smarter about identifying trade areas where there are enough active and potential grocery customers to ensure that each store will be profitable in a shorter time frame,” according to the report. “This reduced risk of underperforming stores will give Amazon a big cost advantage over brick-and-mortar competition, which will likely be evaluating store locations using the traditional metrics. And it will realize this benefit even before using performance data to tailor product assortments to reduce out-of-stocks and increase inventory turns after its stores open.”
On the products side, Amazon is cultivating an assortment of national brands to which it sells advertising and provides efficient fulfillment. “This means Amazon can sell CPG products without having to subsidize any of those products to drive sales,” Brick Meets Click explained. The e-tail giant also is boosting customer loyalty and gross profit dollars with a burgeoning portfolio of “high-quality, well-differentiated” private labels. In addition, the company avoids unintended loss leaders by staying atop a product’s handling cost versus its sales and gross profit.”
“With this mix, Amazon will be able to deliver greater value to customers while generating above-average profits,” the study said.
Though some analysts say Amazon has struggled in grocery when up against stronger supermarket competition, Bishop emphasized that it’s wise for traditional food retailers to keep an eye on this disruptive company.
“Today’s grocers are clearly in a race with Amazon to keep up with rising customer expectations, and the best way to compete is to know what’s next for Amazon,” he said. “This paper offers a framework for understanding the competitive threats posed by Amazon along with guidance on how to respond both in the short and long term.”