Grocers Encounter Fresh Challenges to Compete With Amazon

Amazon recently started its rollout of Amazon Fresh in the United Kingdom, offering same-day and next-day delivery and collection options with a minimum order value of £15 for Amazon Prime customers.

This expansion builds on the retailer’s grocery efforts in the United States. In Summer 2020, Amazon opened its first Fresh location in Woodland Hills, California. This move differentiates Amazon’s grocery options beyond its Whole Foods subsidiary, which primarily focuses on higher-end organic and specialty goods.

Many believe Amazon Fresh is primarily a threat to the larger retailers, but using a £15 basket with same-day delivery for free could seriously affect smaller grocers. For example, Aldi and SPAR made strides to embrace online grocery for the first time as COVID-19 prompted rapid demand for e-commerce. With online shopping volumes more than doubling for grocery retailers in only five months, smaller convenience stores should begin to consider what this means for their existing technology and service offering.

Amazon’s efforts are setting the company up to become the first truly digitally native omnichannel grocer. But how can traditional grocers compete?

Amazon’s fresh service offering starts with a partnership

What sets Amazon apart is its ability to define strategic partnerships along with a data-driven, tech-first approach that’s been inherent to its core business model. Their system is completely event-driven, with total visibility across the entire supply chain. This is in stark contrast to “traditional” grocery retailers that, at their core, still have monolithic technology stacks.

Apart from superior technology, Amazon’s breadth allows the company to enter the market at a loss. According to a price comparison study from analytics company Ascential, Amazon Fresh pricing is 6.9 percent lower than its nearest competitor. Interestingly, that competitor is Morrisons, which recently entered a strategic supply arrangement with Amazon to offer Morrisons products to Prime members, with free delivery options in select areas for both Morrisons and Fresh orders over £40. It will be interesting to see how Amazon Fresh will perform in partnership with a traditional retailer.

Amazon Prime members are already accustomed to the convenience of next-day or even same-day shipping – an uphill battle for grocers challenged by slower fulfillment models or an abundance of product substitutions.

Think about a traditional grocery delivery experience. Consumers go online or access an app, book a slot, submit their order and typically get a delivery in two to five days. But with outdated technology, traditional grocers struggle to guarantee fulfillment in time and in full. Though traditional grocers achieve a reasonable order picking and fulfillment performance, many lack real-time visibility of what is available and where, making slot and pick location fixed and not flexible in a way that accommodates shifts in demand.

If digital disruptors like Amazon start taking market share from the traditional retailers, it will put their margin under increasing pressure, as economy of scale is absolutely critical. And without significant change, traditional grocers cannot compete on a level playing field.

 For grocers, looking to compete takes a multi-step approach to tackling digital business transformation:

Going digital

COVID-19 has fundamentally changed the grocery retail sector. The online sales growth previously expected over the next three to five years materialized in four to five months.

This rapid shift gave digital natives like Amazon the opportunity to accelerate entrance into the grocery market. It will affect the landscape as it is now, and for retailers large and small. For grocers to remain competitive, investment in reshaping the business and embracing a digital-first mindset now is critical to remaining competitive and owning a share of the market.