Last week, I suggested the worst may finally be over for Tesco (LSE: TSCO), J Sainsbury (LSE: SBRY) and WM. Morrison Supermarkets (LSE: MRW), as plunging sales finally levelled off. But now they may face a fresh and frightening challenge that could send sales tumbling again.
Global retail behemoth Amazon, Inc (NASDAQ: AMZN) has long had the UK grocery trade in its sights, and reports suggest it may finally be ready to pull the trigger.
Given how Tesco, Sainsbury’s and Morrisons have wilted under the sustained assault by relative minnows Aldi and Lidl, you have to question whether they can withstand an assault by “indestructible growth powerhouse” Amazon.
Food Fight
Amazon has dismissed the reports as rumours and speculation, but the rumours and speculation are getting stronger by the day.
This follows the firm’s move to sign a 10-year lease on a 300,000 feet warehouse in Surrey, that, ironically, used to belong to former indestructible growth powerhouse Tesco. Amazon has also leased another two other warehouses that are able to hold fresh food.
You might ask what took Amazon so long, given that its Fresh food delivery service has been feeding Seattle, New York and California since 2007. Some reports suggest Amazon Fresh UK could launch as early as next month.
Getting Fresh
So how scared should the big supermarkets be? Given that Tesco gave up selling TVs and electronics because it couldn’t compete with online giant Amazon, I would say the answer is pretty scared.
It partly depends on what Amazon offers. In the US, customers have to sign up to Amazon Prime, which costs around $300, or £190, a year. In return, they get free delivery on orders over $35 (£22).
Amazon Prime is currently £79 a year in the UK. If it asks Fresh customers to pay more, it may hit resistance, with Tesco, for example, offering £1 delivery slots or free Click+Collect on orders above £40, or anytime free deliveries for £60 a year (and £30 midweek).
Another barrier is that Amazon Fresh only offers around 20,000 products, barely a third of Ocado’s range. I can’t imagine that many shoppers would want to go to the effort of splitting their order between their usual supermarket and Amazon, especially if it means doubling up on delivery charges.
Also, Tesco has been pioneering home grocery deliver since 1997, a full decade before Amazon introduced its much more limited operation in the States.
Rules Of The Game
Amazon faces a tough fight, but you can never write it off. Given its model of prioritising growth over profits, it’s in a position to throw big money at its new venture. That will help it stand the high costs that come with storing, handling and distributing fresh food.
Same-day food deliveries could give it the edge. And consumers do like Amazon, despite concerns about how little tax it pays in the UK, whereas they remain cynical about the supermarkets, particularly former favourite Tesco.
We don’t know for sure whether Amazon Fresh will launch. We don’t know how much it will cost, and how many products it will offer. But we do know that Amazon has a history of being a game changer. And we also know that Tesco, Sainsbury’s and Morrisons are vulnerable when the rules change.
