What does the Morrisons-Amazon deal mean for the UK grocery market?

1st Mar 2016

Morrisons potentially stole a march on its nearest supermarket rivals yesterday, by announcing a supply deal to allow Amazon’s Prime Now customers access to Morrisons’ fresh and frozen products.

The agreement is seen as something of a coup for Britain’s fourth largest supermarket, which has struggled to retain market share in recent years, thank to the rise of discount stores such as Lidl and Aldi, and its inability to react quickly enough to digital movements such as click and collect and home delivery.

Morrisons’ chief executive David Potts tried to play down the significance of the announcement, possibly as a result of the supermarket’s recent difficulties, calling the deal a “low risk and capital light wholesale supply arrangement that demonstrates the opportunity we have to become a broader business”.

But for Amazon, its latest expansion into groceries is arguably only surprising in terms of the brand it’s picked to partner, given the investment it has ploughed into Amazon Fresh in the US and the fact that Prime Now was already offering a limited number of chilled items to certain postcodes in London as early as October 2015.

Tough times ahead for competition?

Perhaps the most significant aspect of the deal is the tremor it will have created across the grocery sector, given the fragile state many of the UK’s big supermarkets currently find themselves in and the threat Amazon has posed to move into the food sector in recent years, thanks to the clout it brings with it.

John Ibbotson of the retail consultants, Retail Vision believes the deal could completely shift the goalposts in terms of which organisations are deemed the UK’s biggest players in the sector:

"It's now game on for the rest of the ‘Big Four’, who suddenly don't look so big after all. Tesco could soon be about to find out what it's like to be David rather than Goliath.

"The problem…is that if you pay £79 a year for Amazon Prime, you get the delivery free. Amazon seems content to deliver at a loss indefinitely. By contrast, it costs the Big Four approximately £20 to make a food grocery delivery, for which they can only charge up to £5.

"Deliveries have just become permanently loss-making. The ramifications of this for the grocery sector are huge. The only winner is the consumer. The Big Four are fighting back with click and collect, but who will want that if Amazon delivers to your door in one hour?”

Indeed, at present, 54% of European consumers use click-and-collect for shopping due to the lower cost involved.

There’s no guarantee that Morrisons will increase its market share, while it can certainly guarantee to see its margins fall as it has to give a larger cut to Amazon than it would through its own channels.

However, a number of retailers have expressed concern over the model being unsustainable, with home delivery more favourable with those that have the logistical capabilities to make the model work. And as Ibbotson states, the attraction of home delivery to the customer is only likely to increase if the costs can be shifted away from them and onto the business.  

Catherine Shuttleworth, CEO at shopper marketing agency, Savvy believes the Morrisons-Amazon partnership offers an example of the innovation required among supermarkets unable to sustain their current online shopping models:

“As the smallest player of the big four retailers [in terms of online presence], Morrisons is the only supermarket that can risk building a relationship with Amazon and allowing them to pitch into the UK grocery market and gain a foothold.

“We are confused as to how Amazon's logistics are currently able to deliver chilled and frozen products and will await with interest the true delivery of the PR statement! What is clear is that this announcement demonstrates the strategic importance of the online shopper in UK grocery and the need for different thinking to achieve growth.”

The sheer volume of sales attributed to Amazon’s Prime membership is almost certainly set to drive this ‘different thinking’ among other supermarket brands. Recent research from ParcelHero, found that Prime members shop 50% more frequently with the company than non-members and spend an average of £1,000 a year, as opposed to £450 a year for non-members.   

How low a risk for Morrisons?

Chris Field, a retail analyst and chairman of Retail Connections is more pragmatic, suggesting the deal is at best a testing ground for both parties rather than a signal of intent for the future, and that Morrisons might yet be cutting off its own nose to spite its face by entering into the deal.     

“It all looks like a good idea, given how much time and money Waitrose had to spend before it sold out at a profit from Ocado. This time, the two partners should be able to get to market quickly.

“That said, Morrisons is already struggling and there are pros and cons to going in with a partner. There’s no guarantee that Morrisons will increase its market share, while it can certainly guarantee to see its margins fall as it has to give a larger cut to Amazon than it would through its own channels. Just because the deal is ‘low risk and capital light’ doesn’t mean it will work; both parties need a more compelling business case to make sure they are both committed. I give it a year.”

If this prophecy were correct, given Amazon’s scale, Morrisons would almost certainly bear the brunt of the fallout, despite Potts’ suggestion that the deal is low risk.

Amazon, on the other hand, become a far more frightening proposition to grocery providers, regardless of how the initial deal with Morrisons pans out. As Milan Kotecha, director of retail & commercial markets at Delphix explains, this all centres around its competitive edge when it comes to IT infrastructure and data use.

“Amazon is the new powerhouse of retail and is known for continuous innovation and IT delivery.

“As consumers lose interest in where groceries come from, traditional chains will have to work harder to provide a sublime digital experience gratifying users with continuous improvements.

"Amazon’s deal with Morrisons is a warning to the wider industry. Grocery is now a data-driven business and supermarkets have to remove the bottlenecks to innovation now, or risk becoming irrelevant. This won’t be achieved through the same thinking as the past, but through a new vision using IT as a service broker for the business, able to run multiple business initiatives in parallel using data as a service.”  

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