Food for thought: Amazon's grocery ambitions and the limits of digital commerce

After a short test among Amazon employees that began in March, AmazonFresh Pickup went live last week in two Seattle locations. This is the latest example of Amazon’s continued push into the world of physical retail, competing head-on with online-to-offline grocery pickup programs by retail behemoths such as Walmart and Kroger.

But in this market, Amazon no longer has the advantages it once held over physical booksellers. As grocery stores prove increasingly innovative and tech-savvy, can Amazon viably compete in their domain, where digital expertise may not be enough?

David Ryder/Bloomberg

A significant opportunity

A 2017 report by the Food Marketing Institute in conjunction with Nielsen found that 23% of U.S. households bought groceries online in 2016, up from 19% in 2014. Food Marketing Institute expects that this will shift to over 70% of households within ten years. With such a change in consumer behavior occurring in a relatively short timeframe, the race is on for capturing this opportunity.

However, incumbent grocery stores are not likely to give ground easily.

With 56% of Walmart’s net sales coming from groceries, it can be expected that it will tenaciously protect this line of business. Walmart’s economies of scale, store count and distribution network could challenge the Jeff Bezos’ aphorism that “your margin is my opportunity”. Amazon’s ability to compete with the comprehensive inventory of any big box retailer will be an uphill battle.

Kroger has been adding technology at a rapid pace. Its ClickList system is a "best of both worlds" setup, where customers can shop online and schedule a pickup time, but still be greeted at the store by an employee who helps load the groceries.

"ClickList makes it easier for customers to engage with us," Kroger payments chief Kathy Hanna, one of PaymentsSource's Most Influential Women in Payments, said in an interview published in March. "They are extremely busy and have children and parents, jobs, etc. The digital platform helps make the grocery experience a lot easier."

Ultimately, a system like Kroger's accomplishes what Amazon hoped to do with its separate Amazon Go concept store: Provide a cashier-free supermarket experience. Considering that Amazon Go has reportedly encountered issues as it tried to scale up, the e-tailer may find itself behind the curve when taking on tech-savvy grocers.

Nonetheless, forecasts for Amazon’s trajectory are aggressive.

According to research by Cowen & Co., Amazon aspires to become a "top 5" grocery retailer in the U.S. by 2025. To get there, it would require an estimated $30 billion or more in annual food and beverage spending through its sites, up from $8.7 billion in 2016.

To achieve this goal, Amazon's service offers some interesting enhancements to the standard grocery pickup model — notably, the ability to have an order ready in fifteen minutes and no minimum order amount for AmazonFresh who pay $14.99 per month for grocery delivery.

To deliver on this promise, Amazon's two AmazonFresh Pickup locations have deployed car licence plate scanners that recognize customers as they arrive. Order accuracy and speed of service are likely to be important at the point of order collection, but consumers may feel less rushed about their bulk grocery shopping than they do for on-the-go ordering for coffee and pizza.

Science project, not science fiction

AmazonFresh Pickup is yet another foray for the retailer from the online to the offline, alongside other proof of concepts such as Amazon Go and Amazon Books.

Even if these projects fizzle, they serve a purpose. Amazon needs to test and iterate in the wild rather than in a sterile environment such as a corporate campus. The e-tailer has the advantage of a blank canvas for designing the grocery store of the future, which may present a significant advantage in improving on the archaic model of pushing a heavily used cart through crowded grocery aisles.

However, there is a ritualistic nature to the weekly grocery shop and for the less tech savvy, Amazon may struggle to gain traction with the masses.

Its sweet spot may therefore be in urban locations where data analytics can facilitate inventory that is tailored to the purchase preferences of the zip code. Unfortunately, in these locales, the ability to warehouse fresh groceries may be limited and car ownership is also undesirable. Nonetheless, Amazon’s physical retail aspirations are unlikely to go away.

In the words of Bezos, “Put the customer first. Invent. And be patient.”