The Sector Amazon Desperately Wants to Get Into

This sector is by far the biggest one in the retail industry. Amazon’s biggest R&D project is in this industry. Amazon’s biggest acquisition was in this industry. Amazon really wants to get into the grocery industry.

Why into groceries, a notoriously low margin sector with red ocean type competition on prices? It is not only the sheer size of the $674 billion market for grocery stores. There are other important reasons why groceries provide Amazon with great opportunities.

The more there is self-service and bulk purchasing, the more there is potential for online retailing. Especially for Amazon.

Firstly, the grocery sector has been the slowest sector of retailing to move online, and thus has a lot of potential online. In the US this could be partly because Amazon has not invested a lot in online grocery. 

Secondly, the grocery industry is dominated by huge players. Out of the 10 biggest retailers in the world in 2017, five were grocery retailers and three had significant revenue coming from groceries.

Thirdly, traditional grocers have moved more and more towards self-service and bigger stores. With this mindset, the online channel, which requires doing the work for the customer, has not been very tempting. The more there is self-service and bulk purchasing, the more there is potential for online retailing. Especially for Amazon.

Despite the big volume and self-service, grocery retailing is rather different from the traditional online business in a number of ways:

1) The majority of the products are fresh and have a long shelf life.
2) Shopping baskets contain large amounts of different products (30-50 products in an average online order).
3) Products are harder to pick because they have to be inspected for spoilage.
4) Individual prices of the products are low.
5) Products are bought spontaneously requiring fast delivery: hours instead of days.

Despite the difficulties related to the sector, the grocery sector offers huge potential for Amazon.

A new level of purchase frequency and life-time value
The purchase frequency of groceries is many times higher than in other retail sectors. An average household buys groceries 2-3 times per week, whereas an average loyal customer of Amazon purchases products on a fortnightly basis.

This frequency of purchasing provides opportunities for utilising the logistics capabilities that Amazon has been building. Due to the big size of orders and heavy weight of the products, groceries is one of the few product categories in which home delivery provides a big advantage over click & collect.

The popularity of home delivery combined with the purchasing frequency could provide opportunities for conveniently delivering the other (non-food) orders that Amazon delivers. It would be convenient for both the customer and Amazon to get all deliveries bundled into one. As the most frequently bought sector, groceries is the part which would drive the bundling.

Due to the big size of orders and heavy weight of the products, groceries is one of the few product categories in which home delivery provides a big advantage over click & collect.

Another advantage from groceries comes from the high lifetime value for the customers. The purchasing frequency, everyday nature of the products, and the rather large average basket sizes create huge lifetime values for the customers.

According to some estimates, an average Amazon Prime customer spends $1400 per year on Amazon. This is roughly the amount which a family with two children spends in a couple of months on buying groceries.

With this increase in purchasing volume, Amazon would grow its revenue significantly, thus truly challenging Walmart as the biggest company in the world. Even though groceries has a notoriously low margin, Amazon has some further advantages in becoming a bigger player in groceries.

Frequency driving the flywheel further
Groceries would also provide even more traffic to Amazon.com, therefore fueling the flywheel into faster turns. After all, the flywheel starts with big volumes of customers coming to the website. Increasing the average purchasing frequency from monthly to weekly would increase the website’s traffic significantly.

Incremental additional sales in the general merchandise are also a side product of selling more groceries. Like with the hypermarkets, the everyday purchasing of food is a great place to entice people to buy some non-food products which they otherwise might not have purchased at all. 

This all provides a further lock in for the Amazon Prime customers, who could buy almost everything they need from the website. Making Prime more enticing is after all one of the most fundamental reasons for the majority of the actions the company is doing nowadays. 

With the growing purchasing frequency and multitude of products bought come the increasing amounts of data with much more fine detail.

With the growing purchasing frequency and multitude of products bought come the increasing amounts of data with much more fine detail. This would give Amazon’s mighty machine learning and product suggestion capabilities further material to work with. Additionally, groceries would be a big driver of Amazon Echo adoption, as adding grocery products to shopping lists is one of the more potential uses for Alexa and other voice assistants. Lastly, the groceries sector is ripe for some rethinking.

Grocery buying is consumer behaviour deep in forecastable routines, but still very spontaneous. People tend to buy groceries very routinely with similar products in the basket week after week. This provides great possibilities for smart subscription services. Also the online fulfilment and store layouts are something that are ripe for some change as restaurants are challenging grocery stores ever more.

Arhi Kivilahti is a retail analyst and the CEO of Ada Insights.  At SHIFT 2020, Arhi will talk more about online grocery retailing. You can read more of Arhi’s thoughts and insights into the retail industry on his LinkedIn.