The world's largest Internet retailer is making a surprise leap into the fiercely competitive groceries market in Britain just as rival Ocado aims for a $2 billion IPO
Amazon (AMZN), the world's largest online retailer, is the first name many think of for books and DVDs. Yet, the group hopes British shoppers will soon be logging in to load their weekly groceries into its virtual baskets as well.
Amazon.co.uk announced yesterday that it was to take on Tesco (TSCDY), Sainsbury's (JSAIY), and Asda (WMT) with the launch of an online grocery store offering "free delivery on thousands of great value household, niche, ethnic and international products."
This is not Amazon's first foray into selling food. It launched Amazon Fresh in the US as a test project in 2007, but has limited its deliveries to its home town of Seattle. This month, the group also started selling food and drinks online through its German site.
While many experts said the move to expand grocery sales to the UK came as a surprise, not all were so shocked. One pointed out that Amazon.co.uk had already started selling specialist food items such as hampers, adding the company had been bulking up on buyers who specialised in consumable goods this year.
Amazon.co.uk is to offer a range of 22,000 products, which matches the scope of rivals including Tesco and Ocado. At its launch it talked of bringing brands including PepsiCo (PEP), Nestle (NSRGY), Kraft (KFT), and Proctor & Gamble (PG) to its British customers. A few of the "everyday favourites" it picked out included Ariel washing powder, Carte Noire coffee, Pampers nappies and Walkers crisps.
Natalie Berg, research analyst at Planet Retail, said: "This is big news in the online market. When the world's largest online retailer makes a play it is bound to shake a few things up." She added: "We have seen supermarkets move into selling DVDs and books. This is the first time it has happened the other way around."
Amazon will be stocking 2,000 products at its five warehouses around the UK, with its largest facility, of 800,000 square feet, at Swansea Bay in Wales. The remaining products, including fresh and chilled items, will be sent from outside suppliers.
James Leeson, the head of grocery at Amazon.co.uk, explained why the company had made the surprise leap into taking on the supermarkets. "Amazon.co.uk's aim is to be the place where customers can find and discover any product they want to buy online, and with the introduction of this new store there are thousands of household, niche, ethnic and international grocery items," he said.
He added the company had learnt from its experience of selling groceries in the US and would work to increase the selection of items available as, he noted, the company has "unlimited virtual shelf space."
Nick Bubb, a senior retail analyst at Arden Partners, said: "It will be a difficult business to put together, but Amazon is a past master at logistics so you would never bet against it."
Amazon's growth has been astounding over the past 10 years and total global sales rose 28 per cent last year to $24.5bn (£16bn), 10 times higher than in 1999. It has expanded from book sales to clothing, electronics and toys, to DIY tools and car accessories.
Mr Bubb added: "The group has consistently moved into new areas, and people who buy books and DVDs from the site would probably trust them with some groceries. It will definitely take some of the market."
Online grocery shopping in the UK is currently dominated by Tesco, which has 45.1 per cent of sales. Sainsbury's has a 14.1 per cent share while Asda is close behind at 13.7 per cent. Morrisons (MRWSY) is expected to launch an online shopping site in the near future and Marks & Spencer (MAKSY) has also said it is considering the move.
Gavin Rothwell, UK research manager at sector trade body and industry experts IGD, said that while online grocery shopping was currently small, at just 3 per cent of the total market, "it is the fastest growing channel and there is a lot of opportunity." IGD estimates that a market that was worth £2.6bn three years ago will hit £7.2bn by 2014.
Shoppers are becoming increasingly comfortable shopping online, and the retailers are constantly developing their sites and delivery, he added. Currently, 13 per cent of shoppers log on to do their food shopping regularly, and that is expected to hit closer to 40 per cent in the next few years. "Online grocery shopping is still a relatively new phenomenon; Amazon is looking to use the strength of its online brand and translate it into selling food," Mr Rothwell said.
Tesco insiders were "relaxed" yesterday after hearing the news, while Asda said increased competition would be positive for customers. Sainsbury's declined to comment.
Yet, Ms Berg of Planet Retail said Amazon faced "big issues to overcome, principally around the supply chain" to make the new business work. She added that in the online grocery market, "convenience is key."
"While Tesco and Ocado have one- to two-hour delivery windows, Amazon don't. That could be an issue."
She added that stocking just 10 per cent of the products it sells – while the rest come from third party suppliers – and the additional delivery costs, are sure to cause problems. "It will be useful for shoppers looking for niche products, such as ethnic foods," she said, "but it will struggle to become the weekly shop and match the breadth of Tesco."
Some analysts thought it was no coincidence that Amazon's announcement came just a day after rival delivery service Ocado confirmed it was to float on the London Stock Exchange, valuing it at up to £1.1bn. The retailer, which sells groceries from Waitrose, has a 10.6 per cent share of the online market. One said: "I'm sure Amazon would have had one eye on spiking Ocado's announcement."