Our current marketing patterns might undergo major restructuring in the near future.
By the end of the year, Amazon will offer free delivery on groceries to Prime members across the UK through Amazon Fresh, as the online grocery market is expected to grow by 33% to reach an estimated value of £16.8bn in 2020.[1]
Amazon Prime members can currently order groceries totalling £40 or more for free from over 300 postcodes in and around London, with a surcharge of £3.99 if the total value of the basket is below £40[2].
The total minimum order value must be above £15 to use Amazon Fresh - lower than all other UK supermarkets with the exception of Tesco, who have no minimum value but instead place a £4 surcharge.
Should this news be of concern? For incumbent firms operating within the online grocery market, Amazon’s actions could certainly pose problems. Waitrose CEO James Bailey likened the announcement to Amazon pressing the “nuclear button” in a recent interview with The Times.[3]
According to statistics website Statistica, Amazon is currently valued at $1233.4bn[4] (£933.26bn), making it the 4thmost valuable firm on the planet. Although they currently own 3% of the UK online grocery market at the time of writing[5], Amazon can cross-subsidise Amazon Fresh in an effort to build consumer loyalty within a market they are not well-known to operate in. With profits found in the company’s traditional ecommerce operations, Amazon can compensate for any potential losses made by offering consumers unrealistically low prices to build their brand and consumer base within the online grocery market.
Amazon also has the infrastructure in place already, with the company stating “we have retrofitted existing buildings and also expanded our fulfilment network in key locations in order to best meet customer demand,”5. Low set-up costs mean the upscaling of Amazon Fresh can happen quickly and sustainably, therefore not giving their UK competitors much time to respond to this incoming threat.
Predatory pricing could certainly arise as a problem in the future for the online grocery market. It is unclear whether the free delivery Amazon Fresh is offering could constitute, but there are also opportunities to cut prices for products to the point where other firms cannot compete. The practice of predatory pricing is regulated in the UK by the Competition and Markets Authority, although it is notoriously tricky to prove. Firms can argue lowering prices is a result of market competition, and any lowering beyond what other firms can afford was not deliberate.
With Amazon currently finding themselves subject to an antitrust investigation, led by the U.S. Federal Trade Commission and attorneys general from New York and California[6], one may be concerned with how the firm will conduct themselves in this new market.
The short term effects of Amazon increasing their presence in the market are likely to be positive for consumers. Free delivery and competitively priced goods will force competitors to lower their prices in order to retain their current customers. A price war may ensue, with supermarkets such as Tesco and Sainsbury’s responding to Amazon’s low prices by lowering their own prices further, which Amazon will then respond to - and the process repeats. What results is consumers being able to enjoy cheaper goods at the consequence of firms forgoing profit.
In the long term, however, a price war may prove detrimental to consumers. Supermarkets may start leaving the online grocery market if Amazon can undercut prices enough that competitors are sustaining significant losses for too long. Once the incumbent firms begin to leave the market, Amazon could start to monopolise online groceries, becoming a price setter instead of a price taker. At this point, Amazon may then increase prices on products if they so wish.
Regardless, it is noteworthy that the current Amazon Fresh is undoubtedly in its infancy, holding a slim cut of the market compared to the likes of Tesco who hold over 30%.5 Building a brand in a new market can prove a difficult challenge, even for a firm that is internationally known. A recent example of this is Dyson’s attempt to enter the automotive industry, which was officially called off in October 2019 after £2.5bn investment as the CEO James Dyson stated “we simply cannot make it commercially viable.”[7]. There is no guarantee Amazon will grow significantly in the online grocery market, less so that they will eventually own a monopoly within it.
However, Amazon is one of the biggest companies in the world for a reason - they are known to flourish in markets they enter, whether that be electronics or video-streaming platforms. Only time will tell what will happen to Amazon Fresh, but if anything is certain, it is to expect a disruption to the online grocery market as we currently know it.
By Charles Cornes
3rd Year Economics
[1] News, M., 2020. Online Grocery Will Grow By Around 33% In 2020. [online] Mintel. Available at: <https://www.mintel.com/press-centre/retail-press-centre/mintel-forecasts-online-grocery-sales-will-grow-an-estimated-33-during-2020> [Accessed 20 August 2020]. [2]Amazon.co.uk. 2020. Amazon.Co.Uk Help: About Amazon Same-Day Grocery. [online] Available at: <https://www.amazon.co.uk/gp/help/customer/display.html?nodeId=202052140> [Accessed 20 August 2020]. [3] Walker, E., 2020. Can Amazon’s Free Food Delivery Get Me To Break Up With Ocado?. [online] Thetimes.co.uk. Available at: <https://www.thetimes.co.uk/article/can-amazons-free-food-delivery-get-me-to-break-up-with-ocado-6hqvf8z5z> [Accessed 20 August 2020]. [4] Statista. 2020. Biggest Companies In The World 2019 | Statista. [online] Available at: <https://www.statista.com/statistics/263264/top-companies-in-the-world-by-market-value/> [Accessed 20 August 2020]. [5] Ft.com. 2020. Amazon Challenges UK Supermarkets With Free Grocery Delivery. [online] Available at: <https://www.ft.com/content/517de4f2-4d9e-4f4a-bd45-24ba8a5a0da2> [Accessed 20 August 2020]. [6] Investopedia. 2020. How Amazon Makes Money. [online] Available at: <https://www.investopedia.com/how-amazon-makes-money-4587523> [Accessed 20 August 2020]. [7] Dyson, J., 2020. See The Story Behind The Dyson Electric Vehicle | Dyson Automotive. [online] Available at: <https://www.dyson.co.uk/automotive.html> [Accessed 21 August 2020].
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