Despite a grocery market share just a tenth the size of U.K. giant Tesco’s, Amazon
Amazon’s mantra seems simple and familiar: go big, or go home.
In its latest attempt to disrupt the powerful incumbents, Amazon announced that it would price match and lock hundreds of grocery items on its website with the best deals available for Tesco Clubcard (the company’s famous loyalty program) holders.
The move feels bold and like a statement of intent, but the question now is whether Amazon’s lagging grocery arm can make genuine inroads and how Tesco, the discounters and U.K.’s so-called ‘big four’ grocers might respond.
This, after all, is the market that saw off Walmart after it bought Asda over two decades ago.
Unsurprisingly, Amazon hasn’t been shy about its ambitions. The ecommerce colossus has already declared that it aims to become the U.K.’s biggest online supermarket, yet it is playing catch-up. Despite launching in 2016, Amazon Fresh’s market share of online grocery is still just 3% according to analyst Mintel. Another analyst, Kantar, has Amazon even lower, at a paltry 1.6%.
That compares with market leader Tesco at over 30% market share.
Clearly the new initiative will generate a lot of interest from consumers and, given that it covers a relatively modest number of products, is low-risk – a far cry from taking on Tesco prices across the board. That said, it feels like more than a publicity-generator.
Rather, while Amazon has established itself as a major presence and disruptor in the U.K., the grocery market is hugely competitive and the big names have maintained a stranglehold on sales and this latest move perhaps reveals how tough Amazon has found it to gain a foothold.
U.K. Grocery Market Competition
In many ways matching the pricing strategy of the U.K.’s leading retailer keeps things simple, especially as Tesco puts huge efforts into price-matching German discounter Aldi (which in turn is threatening to muscle in on the big four by market share), enabling Amazon to compete with the discounters by default.
In the current cost of living crisis blighting Britain, Amazon’s latest move also enables it to target increasingly price-sensitive customers, with close to nine in 10 British consumers shopping at the internet retailer and more than 50% having access to Prime (needed to use Fresh).
And in truth, the breadth of the price-matching is modest. Amazon currently lists less than 300 products in the campaign, of which only a handful are own-label items.
By comparison, Tesco has more than 4,000 offers on Clubcard Prices every week, typically updated every two to three weeks. That means tracking the discounts will potentially be tough for Amazon, although it does have unrivalled history across non-food categories where it handles millions of price variations every day.
Margins Tighten At Amazon
What the decision to match Tesco prices will likely result in tightened margins for Amazon, especially as since March it has had to comply with the Groceries Supply Code of Practice, after the U.K.’s competition authority judged it had crossed the $1.2 billion annual grocery sales threshold. That means Amazon can’t delist suppliers if they are unwilling to drop prices.
However, what Amazon can’t control is how Tesco responds. It could choose to reduce prices on Amazon price-matches further, and further, making it clear it won’t be beaten on price, while Aldi and Lidl are unlikely to allow Amazon to undercut them.
Yet the big four are equally unlikely to be enthusiastic about a price war, much less one against a competitor as financially strong as Amazon. So they may well choose to do nothing, relying on their brand strength and consumer familiarity to see off this latest attack.
The reality is that in food sales Amazon has failed to break habits in the same way that is has achieved across many other product categories. The big grocers have huge store estates, click and collect and delivery options and national coverage.
By contrast, despite opening a handful of Fresh stores around London, Amazon doesn’t have a significant store estate or physical store brand to dovetail with, in the same way that is has with Whole Foods in the U.S.
Whether Amazon can take a significant bite out of the market share of the U.K.’s powerful grocery players remains to be seen.
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