Opinions expressed on this blog reflect the writer’s views and not the position of the Capgemini Group

How Amazon is changing the face of the UK supermarket sector

Over the past couple of years we have seen discounters, Aldi and Lidl, take market share from the Big 4 supermarkets (Tesco, Asda, Sainsbury’s, Morrisons). As Sainsbury’s calls time on the joint venture with Netto, does this indicate discounters are nearing their growth limit? Perhaps it suggests Sainsbury’s sees a bigger threat from the online giant Amazon instead? Certainly the move to purchase Argos would suggest Sainsbury’s believes diversification is the way to prosper.

So, while Amazon is moving into the grocery sector, the proposed Argos purchase takes Sainsbury’s a step closer to taking on Amazon in general merchandise. Is this the new direction for the supermarket sector?


Growth of the online market

The online grocery sector is expected to grow significantly to £17.6bn by 2021, a growth of over 68% from today’s value, according to the food and grocery research body IGD. While over the same period, hypermarkets and supermarkets are predicted to see a decline in sales followed by slight growth from 2019 onwards. As the millennial generation (19 to 34 year olds) come of peak spending age, it seems the growth in online is here to stay; at least for now.


Entry of Amazon

The entry of Amazon into the UK grocery sector could have as large an influence on the sector as the impact that Aldi and Lidl have had. Their combined market share currently accounts for about 10% of the UK market; having more than doubled in the past 3 years.  This same period has seen prices increasingly under pressure, yet our expectations of service and delivery speed have increased; this has resulted in a profit decline for the Big 4.

The UK launch of Amazon’s weekly shopping venture ‘Amazon Fresh’ has long been anticipated. Its growth is difficult to predict, but even if a market share of just 3% is achieved, it will be still worth £1.9bn by 2021. Normally we would look to the US to predict potential impact on the UK market, however, the online grocery market models are quite different in the two countries and Amazon Fresh has seen limited growth since 2007. Will expansion be more rapid in the UK? Only time will tell.

One player that will be keeping a close eye on Amazon Fresh will be Ocado. Recent statements from Ocado clearly show they believe they provide a level of service and breadth of offering that will mean continued prosperity in an increasingly competitive market. Ocado’s chief executive, Tim Steiner, said: “We have been gaining share in the online grocery market and expect this to continue. The last few years have shown, beyond doubt that British shoppers are choosing the benefits of grocery shopping online and we believe the momentum of channel shift away from bricks and mortar stores will continue.”


The fast delivery market

Amazon’s service ambitions have already forced the market to raise its game in relation to speed of online delivery. While Ocado already offers same day grocery home deliveries, Sainsbury’s is trialling this in three stores and offers Click & Collect from store; Asda and Tesco are also trialling a same day Click & Collect grocery option. Furthermore, Sainsbury’s is trialling 1-hour deliveries via the Chop Chop app to customers in the catchment area of Wandsworth store.


Continued growth of multichannel retailing

The presence of Amazon in the UK has already led to the large grocers to consider their grocery offer, speed of deliveries and how customers receive their products. These changes are putting more and more pressure on the traditional ‘Bricks & Mortar’ and ‘Bricks, & Clicks’ retailers to adapt. As customers only get increasingly demanding, retailers need to think how best to service them, make profit and ensure their operating models are sufficiently robust to carry them in to the next few years.

Growth will only continue – but are retailers ready? Many haven’t overhauled their back end systems for some time, so maybe this is the time to review capex spending plans. Strategic order orchestration and control tower technologies are designed to accommodate end-to-end stock visibility and help omnichannel retailers to make better informed decisions – any stock, anywhere principles are becoming increasingly important to ensure the right stock in the right place at the right time. Few retailers are able to deliver on these principles right now, least of all the Big 4; a potential Achilles heel when compared to the likes of Amazon.


The future?

Growth in the online market will bring growth to all, however, the growth of Amazon (Fresh and GM) will continue to raise questions for the supermarket sector. A profound shift will need to take place – is there space for all to prosper? Profitability has been hit in recent years, change will be needed for the supermarket sector to not just weather the storm, but to live with the storm as the norm and readjust their rhetoric.

About the author

Ian Hughes
Ian Hughes
Ian is a Senior Consultant and experienced retail project manager. His depth of expertise within logistics and supply chain is derived from having run significant operations and programmes in retail for over 20 years.

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