What if ……… Amazon Bought Sainsbury’s?!

Warm, woozy weather and we’ve been  saturated with Wimbledon, Lions, cricket and more. Pass the Pimm’s, please! But, global food industry developments have had their moments, too and not least Amazon’s purchase of Whole Foods Market. We chuckled no doubt as you did at the spoof exchange between Jeff Bezos and Amazon Echo’s Alexa: [JB] “buy me something from Whole Foods, Alexa”; [A] “buying Whole Foods, Jeff”; JB “oops, ah … oh, go on, then”! It’s hardly fanciful when one considers that Amazon has a market cap. of close to $500 billion and Whole Foods was snapped up with small change for $13 billion.

Amazon has been experimenting with bricks & mortar grocery stores, albeit with its own twist – Amazon Go the store without a till or checkout staff. But surely, it’s impressive share price growth reflects the market rewarding Amazon for its disruptive technology and not having to invest in hugely expensive retail store infrastructure?

Last Year, back in Little Britain, Sainsbury’s purchased Home Retail Group owner of Argos online and catalogue seller of general merchandise. Its rationale was to boost sales growth, improve its delivery networks and sell their products to each other’s customers. This rings true for the Amazon-WFM deal, too. Particularly for fresh foods, being close to customers is essential to be cost effective in distribution and maintain quality of perishable products. Equally important for Amazon if it wishes to have a competitive fresh food platform, it must have strong relationships with fresh food suppliers and this Whole Foods can deliver. Like traditional grocery retailers, Amazon knows that excelling in fresh foods wins customer trust and loyalty and provides a huge opportunity to build a strong private label presence which is, increasingly, the only way that major retailers can differentiate themselves from the competition – Wickedly Prime is the first tentative steps in Amazon doing exactly this and, frankly, the initiative looks like a baby step! Mind you, Whole Foods hasn’t earned its spurs in private label either – the 365 everyday value products, designed to fit the millennial-friendly new Whole Foods 365 store format is OK without generating gushing revues.

Picture: L.A. Times.

Taking the longer view, we believe that traditional super/hypermarkets have lost the battle for most shelf stable (even basic frozen) groceries. Routine purchases with little emotional involvement will become the bailiwick of online providers. The field of battle is focused at the point where “fuelies” are transmogrified into “foodies”. It’s happening right now – shoppers and consumers are increasingly interested in food experiences. The National Restaurant Association (NRA but not the gun one!) put it nicely “menu trends today are shifting from ingredient-based items to concept-based ideas mirroring how consumers tend to adapt their activities to their overall lifestyle philosophies” (e.g. “let’s have a local/sustainable meal”, rather than “let’s have beef for dinner”!). Now, clearly, this approach isn’t for every household (it depends on income, household composition, day/time in the week, i.e. relaxed time or frenetic time), etc. Sometimes foodies will want to shop physically and touch the products and talk to knowledgeable vendors but other times the smart phone will do as an intermediary. Just look how traditional supermarkets are reconfiguring their stores – as a supplier, you don’t want your product to be in the middle aisles, the morgue as it is known, because shopper interest is focused on the periphery or the special gondolas where there are fresh foods, interesting prepared snacks, mini-meals and meal solutions, and exotic international foods that will give you “food cred” around the office water cooler.

Now, whether Amazon can make it in fresh foods is a moot point. But, the company has a track record of investing for the long-term and Amazonians are not over-awed by big name grocery incumbents such as Walmart. Amazon Fresh shows intent and is pushing in multi-directions – it’s just filed a meal kit trademark for its own label in the USA to compete directly with Blue Apron (the largest meal kit operator in the USA) and Germany’s HelloFresh which is active in the UK. The strap line for Amazon is “We do the prep., you be the Chef”! Successful or not, Amazon will do damage while it is trying to establish a financially viable fresh food platform. Any implications for us in Little Britain as we fret about Brexit and gaze forlornly at our navels? Well, we think so!

First of all, why bother with our little island? Well, two reasons for starters:

• Amazon are already making an online grocery play here with Amazon Fresh – which gives Amazon Prime customers paying £79/year (free next day delivery of non-food items) the opportunity to pay another £7 month for unlimited same day delivery of fresh and frozen foods for baskets over £40. Amazon uses its partnership with Morrisons to supply Morrisons own brand products at prices competitive with the other major retailers’ value brands;
• And the UK is, along with China and South Korea, a leader in online grocery shopping. With a 6.5% share of the grocery market and sales in excess of £10 billion, online has traction and, although growth is slowing, it’s optimistic but not unreasonable to expect a 10% share by 2025 (say £20 billion sales). For online grocery, we are well ahead of the US and will remain so and there’s lots of learnings for Amazon that can be applied in the slower growth American market.

Next steps for Amazon in fresh foods in the UK?: continue to learn from its Amazon Fresh Now experience and the partnership with Morrisons; observe the extent of the damage that the discounters place on the big four retailers – IGD forecast that Aldi/Lidl may increase their combined market share of groceries to 14+% over the next 5 year and the incremental 4% will come out of the hide of the Big 4 (although robust price inflation may ease the pain for them, their share prices will be under pressure); and don’t be completely surprised if Jeff Bezos asks Alexa to buy Sainsbury’s!

Why buy another bricks & mortar retailer, you may ask, and if Amazon is so whimsical why not buy its current grocery partner Morrisons?: Here’s why:

• Sainsbury’s have made a decent fist of online grocery delivery and there’s much for Amazon to learn from them about selling perishables.
• Sainsbury’s have an excellent supply base for fresh foods and have good in-house technical staff who understand the challenges of retailing perishable food.
• Sainsbury’s can teach Amazon and Whole Foods a thing or two about delivering a successful private label programme.
• Sainsbury’s have a customer base that is more online friendly than Morrisons, with geographical strength in the richer South of the country and an excellent crop of millennial shoppers edging into familyhood – younger two person household shoppers are key online grocery customers for frequent small basket purchases and families with young children are disproportionately into the larger weekly online shop .

• Sainsbury’s has 600 supermarkets and 800 convenience stores (and may have much more if it swallows Nisa) giving it a great platform to distribute groceries to nearby located well-heeled consumers.
• Sainsbury’s comes with heritage – it’s been around for close to 150 years.
• At current share values, Sainsbury’s has a market cap. of around $7 billion – pop in a purchase premium of 20% and Amazon could mop up JS for a modest $8.5 billion – peppercorn monies we’d say! Mind you, Amazon would have to cosy up to the Qatar Investment Authority (largest shareholder), the Sainsbury family and, of course, the UK Competition and Markets Authority.
•  In the UK, Sainsbury and Amazon combined would make a very powerful multi-channel retailer and longer-term success will be earned by the retailer that can service the customer best wherever and whenever the customer demands.

That’s enough for this blog, do you think the Pimm’s has gone to our heads? Do enjoy your Summer holidays. Miguel is off to Spain and David, as ever, is on one of his talking tours in Asia and the Antipodes. Adiós!