Over the last few months, Amazon has launched a couple of prominent online grocery offerings in the UK – already home to one of the world’s most competitive grocery markets.
Amazon began by testing one-hour delivery of chilled and frozen foods in select London and Birmingham postcodes in October 2015 via Amazon Prime Now, which was swiftly followed by the launch of Amazon Pantry just a month later. To many industry observers, Amazon Pantry competes head-to-head with Ocado as both are online-only grocery retailers.
So how does Amazon’s pricing compare? We carried out analysis for both these launches against the six supermarkets who currently sell online in the UK and found Amazon to be the overall winner on price:
- In a comparison of 49 chilled and grocery products at launch, Amazon Prime Now was the clear price leader, with the average product found to be 45% more expensive on Ocado than on Amazon (Figure 1);
- Analysis of Amazon Pantry pricing across c. 3,000 products at launch revealed that all supermarkets were notably more expensive than Amazon Pantry on the exact same products (Figure 2); Revealingly, Ocado had the highest product assortment overlap with Amazon Pantry at 79%. This month, we updated our analysis and Amazon Pantry has continued to maintain its significant price advantage: competitors were priced between 18% and 26% higher on 2,774 identical items (Figure 3)
Figure 1: Amazon Prime Now pricing vs UK supermarkets, October 5 2015
Figure 2: Amazon Pantry pricing vs UK supermarkets, November 22 – December 7 2015
Figure 3: Amazon Pantry pricing vs UK supermarkets, January 12-18 2016
Does an Amazon-Ocado deal make sense?
Earlier this month, Amazon UK boss Christopher North announced that it would be ramping up its Pantry offering in the UK, which currently sells just 4,000 grocery and household products. Amazon clearly has ambitions to add fresh products to Pantry’s range – the final piece of the jigsaw – but lacks both the storage and transport infrastructure in place to support the delivery of perishable items. Which is where Ocado comes into play.
Ocado’s CTO Paul Clarke has previously stated that when it comes to food, Ocado has more automation in its warehouses than even Amazon, processing over 150,000 orders a week. “There is nobody, as far as we know, anywhere in the world, with our level of automation when it comes to these grocery fulfilment centers.”
An Amazon-Ocado deal has been rumored endlessly for years, but speculation that Amazon may be looking to acquire the online-only grocer resurfaced this week following a report in the Daily Mail. With Amazon planning to launch a fully-fledged grocery delivery service in the UK, analysts have suggested that the most cost-effective and quickest way to do this would be to buy Ocado.
As the UK online grocery market becomes ever more competitive and Amazon’s commitment to grocery and FMCG has clearly increased, the plausibility of a connection is greater than ever. Ocado is a strong player with solid logistics and technology infrastructure and could accelerate Amazon’s expansion in the UK.
If the deal were to go ahead, Amazon would not only be acquiring Ocado’s expertise, but its customers, fulfillment and delivery fleet, delivery routes and optimization algorithms. Amazon would also need to unwind Ocado’s existing tie-ups with other UK grocers (Waitrose and Morrisons), as well as pre-empt future relationships with US grocers. Ocado had previously been linked to deals with France’s Carrefour and US group Safeway as part of plans to extend its business.
And although Amazon has a predominately build vs. buy culture, there is precedent in its acquisitions of Zappos and Quidsi for accelerating growth in a key market through M&A activity.
Online grocery sales continue to accelerate
It’s no secret that Amazon has long held ambitions to disrupt the grocery market: the e-retailer has increasingly been focusing in the CPG/FMCG space both in terms of its growing portfolio of products such as Pantry and AmazonFresh in the US, as well as new devices and interfaces oriented to CPG/FMCG products such as Dash and Echo.
Now Amazon wants a piece of the fast-growing (and highly lucrative) online grocery market, stepping up the pressure on traditional supermarkets who will be keeping a close eye on how a potential deal develops.
Any tie-up would further accelerate the growth of online grocery sales, set to be the fastest growing segment of the UK grocery market as consumer shopping preferences continue to move online. In the next 5 years, online shopping is set to almost double in value to £17.2 billion according to IGD, whilst 50% of growth in the CPG channel in this period is expected to come from eCommerce.
Time will tell if the rumours turn out to be true but 2016 certainly promises to be an interesting year for the UK online grocery market. Expect lots of change and continued developments.