Amazon might be planning to launch online food service Fresh in the UK - but against Tesco, Sainsbury, Asda and other major players, has it bitten off more than it can chew?

Neil Saunders
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Amazon will have to tackle, and bring down, some giant players if it is to thrive (Source: Getty) (Source: Getty)

If there were an award for the company that most shaped the retail zeitgeist over the past 10 years, then Amazon would most certainly be a contender. Its innovations have changed the way we shop.

Such a pioneering status inevitably creates a great deal of interest. However, along with the interest come some hype: including the belief that Amazon, with its Midas like touch, will dominate and thrive at whatever it turns its hand to.

So it is with Amazon’s plans to launch its Fresh concept in the UK. The media has served warnings on the Big Four grocers, with words like ‘bloodbath’ and ‘battleground’ being used to describe the harmful impact on long established players.

Such predictions do contain a grain of truth. With virtually no volume growth in the UK grocery market, and a competitive environment that is characterised by overcapacity, it stands to reason that any new entrant is an unwelcome additional pressure. Such is the zero-sum nature of today’s grocery market that any sales Amazon Fresh manages to generate will come from some other player.

However, success in grocery has never been about just making sales. In order for the model to work, players need to sell in high enough volumes. This is especially true in online grocery where already wafer thin margins are exacerbated by the high costs of fulfilment. It is on generating sufficient volume that Amazon is likely to come unstuck in the UK.

The main issue for Amazon is that that it is not entering a market in the early stages of rapid growth. Unlike in the US, where online still accounts for a minuscule 1.1 per cent of all food and grocery spend but is growing rapidly, the UK is at a more advanced evolutionary stage. Last year, some 5.7 per cent of all UK grocery spend was made online; and while the channel continues to grow faster than physical stores, growth is much slower than it once was.

In some ways, a larger more mature market seems attractive, not least because Amazon will have a bigger pool of spend it can try to tap. However, one of the reasons the UK market is more advanced is because the players in it are sophisticated – much more so than in the US where the online offerings of the leading grocery retailers are few and far between. Unlike its launches in various American cities, the playing field in UK online grocery is not a clear one for Amazon. It will have to tackle, and bring down, some giant players if it is to thrive.

Regardless of its ultimate success the launch of Amazon Fresh is certain to do one thing: keep the big players on their toes.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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