In the US, Amazon has made significant improvements to its grocery offer. Amazon usually launches new initiatives in the US and then replicates elsewhere, so these developments might provide a guide for your market.
There are three key reasons Amazon is prioritising the US.
- It’s Amazon’s largest market, it’s estimated it has over 100m Prime members, it delivered $160bn net sales (68% of the worldwide total). It’s also a profitable market, with the North American region achieving $7.3bn of net income in 2018.
- Amazon has an established grocery business to develop. The $13.7bn acquisition of Whole Foods Market, means it has 479 stores and $17bn net sales.
- There’s a sizeable opportunity; we forecast that the US grocery market is worth $1,520bn and online only accounts for 2% of the market.
The five big developments:
1. Moving to one-day delivery
Amazon will invest US$1.5bn in its fourth quarter so Prime members get free one-day delivery (it used to be two-day). It wants to make its offer more convenient and differentiate versus competitors, to help it acquire and retain customers. Amazon is incurring additional costs, such as buying inventory and transporting stock closer to shoppers’ homes. We expect Amazon to respond by opening more stores, using them as micro fulfilment centres to reduce last mile delivery costs.
Source: IGD Research
2. Offering single unit deliveries
Amazon is now offering Prime members free one-day deliveries of single items for as little as $1. Previously, to protect profit, Amazon offered these as add-on items for orders over $25. Through this development Amazon can now cater for the top up mission and its product assortment will improve (many branded manufacturers restricted their ranges to larger packs to deliver a profit).
Amazon will remain focused on profitability and will continue to make the supply chain more efficient, with initiatives such as shipping products within their own container. It also has a huge opportunity to improve profitability through Amazon Advertising, a business that delivered $10bn net sales last year.
3. Rapid delivery through Amazon Fresh
Amazon Fresh has always offered a broad range, capable of meeting shoppers’ needs for a ‘main shop’ mission, but that same range is now available with a delivery within the hour. Amazon is investing to make its offer more convenient and to differentiate versus competitors. It means that Amazon Fresh can cater for all missions, such as food for now, food for later today, top up, main shop, stock up and planned events.
4. Amazon Fresh free for Prime members
Amazon has removed the $14.99 fee for Prime members wanting to use Amazon Fresh, and made deliveries free of charge from Whole Foods Market. It’s invested in Whole Foods stores, so they can fulfil online orders. This has increased Amazon’s order capacity, enabling Prime members, from across the country to place an online grocery order. Amazon now has the confidence to scale, having established picking and fulfilment processes that deliver against its value of operational excellence.
Amazon has consistently invested in its Prime offer and has put through several price increases (originally $79 to $99 to its current $119/ year). It needs to improve its offer, as the US online market is intensely competitive. For instance, Walmart recently launched unlimited delivery for an annual fee of $98 and Kroger is rolling out Ocado’s successful Smart Platform.
5. Trialing new stores
In addition to rolling out checkout-free stores, Amazon Go, next year, it’s reported that Amazon will open non-Whole Foods Market stores across the country. These stores will help drive awareness of Amazon’s grocery offer, help it acquire new Prime shoppers and act as mini fulfilment centres, close to shoppers’ homes, thereby reducing last mile delivery costs and enabling rapid delivery.
Source: IGD Research
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We look at the scale and scope of the US online channel, key trends shaping its development, retailer strategies and the growth opportunity over the next five years.
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