Will Amazon eat grocery stores for lunch?

When Amazon Go appeared on the market, everyone started talking about an innovative breakthrough in paying for purchases. According to the author, Amazon Go is just a small fragment of how Amazon plans to “redraw” the scope of grocery stores, completely changing how and where people will buy products. At the same time, Amazon showed what the whole retail would turn into if Amazon’s invasion into the area of ​​food trade proves successful.

Retailers who have long been worried about the impact of the “ Amazon effect ” on their business have received another cause for alarm.

Amazon Go, the grocery store of the new format, opened in Seattle, USA last week. Right now, its only customers are Amazon employees who are tasked with verifying Amazon Go features. At the same time, according to the press secretary of the company, the doors for buyers will open in early 2017. Only a few details came to us about how Amazon Go realizes the opportunities that a customer gets inside the store. The combination of an Amazon Go application, an entrance / exit turnstile, in-depth training methods and sensors allows you to create a future store without cashiers and cashiers. When the buyer leaves the store, the goods that he has purchased will be paid for from his account on Amazon, and all items will be reflected in the electronic receipt.

Uber style business versus traditional retail

And of course, this is all really great. This is another important milestone in the history of retail, and now cash terminals are no longer needed to pay for purchases. We discussed this for a long time, and then another innovator in the field of retail - Starbucks - showed us that this is possible by launching a pre-order from the mobile just over a year ago. Today, using pre-order from a mobile brings Starbucks about 6% of all sales, and this figure shows a two-digit growth quarter by quarter. At peak times, according to Starbucks, a pre-order from a mobile accounts for up to 20% of all orders.
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The trend of pre-ordering and payment extends far beyond Starbucks.

Last week, Chase Pay teamed up with LevelUp to introduce this system in hundreds of thousands of fast food restaurants across the country. The LevelUp payment platform supports mobile payments and mobile takeaway orders. SetU Pribach, LevelUp CEO, noted that his customers from fast-food chains noticed changes similar to Starbucks, along with an increase in the average cost of orders, which sometimes exceeded 15%.

But to say that Amazon Go has improved the shopping process — the same thing as the main achievement of the iPhone — a breakthrough in the field of phone calls.

In other words - miss the most important thing.

Of course, Amazon Go has changed the way you pay for your purchases, but if you are a retailer, fear is not the cause. Just as Uber changed the perception and approach of customers to taxi services, and the iPhone changed the approach to using the phone, Amazon changes consumer habits in the area of ​​buying the most necessary for everyone and everyone - food.

What is interesting in the field of food retail?

The scale of the American food business is enormous.

Of the 606 billion dollars in annual sales (data for 2015), spending on grocery stores for home consumption accounts for 7.1% of all consumer spending (based on the median annual income of $ 56,516 and annual expenditures on products in the amount of 4.015 dollars).

The Food Marketing Institute reports that about 50% of the amount is spent on perishable foods such as meat (13% from 50%), vegetables and fruits (11% from 50%) and dairy products (8% from 50%). Non-perishable food remains another 25%, and non-perishable non-food items — paper towels, toilet paper, washing powder and detergents — another 7%.

Today, the purchase of all of the above is still happening in physical stores. Online sales today are a negligible amount of just $ 7 billion, or just over 1% of total food sales. Going to a grocery store is a well-established ritual that, on average, takes place 1.6 times a week.

At least for now.

But Amazon has “laid eyes” on grocery stores and has been changing them for a while.

Pantry, launched in April 2014, Dash - launched in March 2015 and the Dash replenishment system, which was released a little later that year, focused on redistributing 32% of sales of products considered online by consumers as mainstream products. A huge part of consumers visits the grocery store at least once a week in order to replenish stocks of basic goods that do not require additional searches and studies. By giving Prime customers the opportunity to buy Bounty paper towels, Tide washing capsules or large packs of Milk-Bones dog biscuits online, Amazon thereby eliminated the hassle of visiting the store, buying, and delivering the purchased goods home. Paying an extra five bucks for delivery is an easy and desirable compromise for many Prime customers.

Shortly after the events on the market and in the kitchens of millions of Americans, Alexa and her audio speaker Echo appeared. These are the very kitchens where moms and dads have recently looked at the empty shelves, making a list for going to the grocery store. Now you can ask Alexa to add what you need to the weekly shopping list and place an order using a simple and convenient voice command.

These subtle changes in habits have affected not only the movement of sales of bulky goods from physical stores to online and to Amazon. It is about changing the very approach of consumers to make purchases in grocery stores, including how they use traditional stores to buy food.

This is how a complete picture of events associated with Amazon Go is formed, and it becomes clear how retail will change.

More than just grocery shopping

Think about what is happening.

Amazon is the driving force behind commoditization of the food product category, including the same non-perishable products and goods, which, according to customers, are the main ones. To help consumers overcome the main obstacle - to get used to buying such goods via the Internet - was possible through cooperation with brands whose products the consumer already knew, bought and trusted her: Bounty paper towels, Tide laundry detergent, Pringles chips, Folgers coffee.

But a grocery store is a low-margin business, and delivering large-sized items to a consumer’s home is quite expensive — which confirms the growing cost of delivery to Amazon. Amazon's promotion of its brands in key categories is one of the levers to control the cost of sales, not to mention the completeness of the buyer’s ability to purchase products. In a report published by 1010data last month, two categories - the sale of batteries and baby wipes - appear to confirm this theory.

The report says that today Amazon accounts for 94% of all online battery sales (with a total market valuation of $ 113 million). Batteries are also one of the positions placed in the magic zone of impulse purchases near cash desks in physical stores. Amazon not only simplified the purchase of batteries using the Internet and robbed high-margin sales from physical grocery stores, it launched its trademark, which captures about a third of the market and is on the way to outshine the sales of such brands as Eveready and Duracell.

The same thing happens with baby wipes. In the same report, 1010data, it is reported that sales of children's wet wipes under the Amazon trademark rose by 266% year-on-year. Estimated 1010data, in terms of sales, Amazon’s share in the market will be 16%, which puts it in third place, behind such leaders in the category Huggies and Pampers.

In both cases, 1010data concluded that consumers with more than three times the probability of buying goods under the Amazon trademark than the products of the category leaders. This is an important point for another reason: Kantar's latest research suggests that 55% of online shoppers each time purchase products of the same brand from the same seller. Also, consumers spend almost three times more money on online groceries. Therefore, changing consumer preferences on Amazon, and then on Amazon-branded products, brings three potentially large “dividends” to the company: Amazon becomes a seller that consumers prefer, and they buy goods with an Amazon label, and Amazon becomes a grocery store in which consumers spend most of their money on products.

Simultaneously with the transfer of the purchase of non-perishable products to online and to Amazon, the company began to conquer those 50% of the segment, which are much harder and harder to move to the online segment of perishable products. But instead of changing consumer habits in terms of buying meat, fruits, vegetables, and dairy products, Amazon decided to create a new type of physical store.

Amazon Go is a small area store selling only perishable goods. Payment of purchases is as simple as possible, as long as the buyer makes his choice. The choice itself is simplified due to the small area of ​​the outlet, because the buyer does not need to wander through the 60,000 square feet of the store to find everything you need. In addition, Amazon Go offers finished products, and this is another reason to visit the store more often. High throughput helps to get a larger share of total consumer spending on products (which is approximately 15% of the total consumer budget), as well as on high margin products.

Why even one percent matters

Skeptics doubt Amazon’s ability to succeed in food retail and point to the fact that online sales in this segment today account for only 1%. These are undoubtedly the same people who calmed others around ten years ago with convincing arguments that 98% of all retail sales still take place in physical stores. While retailers were lounging, the retail ship gave a leak (in many categories very serious), having flown on an iceberg called Amazon. The categories in which sales in physical stores fell particularly hard when they went online, by coincidence, turned out to be the same categories in which Amazon built its online business: electronics, stationery and sports goods gave online 18, 33 and 25% of the total sales respectively. And they gave most of it to Amazon.

But by the way, do not worry - 90% of retail sales still occur in physical stores.

Grocery stores will be the next to feel the change. It seems that with the advent of Amazon Go, Amazon not only radically changes the approach to buying products, but also lays the prerequisites for transforming the entire segment.

The upcoming transformation helps a little, a double blow deals a drop in food prices. Traditional retail, faced with stiff competition, does what it does best: offers discounts. According to analysts, Walmart, which makes 50% of all sales at the expense of food, gives discounts that have not been seen since 2009. And Amazon is to blame. Kroger, the largest grocery chain in the country, lost more than a quarter of its value when the company lowered prices to lure shoppers to stores. Buyers, having grasped this cunning plan, began to carefully select products only at reduced prices.

The race to the bottom is in full swing.

While traditional grocery stores compete to offer the greatest discounts, Amazon leads the transformation of food stores, relying on a new model of small stores, where convenience and self-service come first. Amazon has denied reports that it plans to open 2,000 Amazon Go stores - perhaps because it plans to open 6,000 (just kidding). But in order to change the balance of power in the grocery business and change customer habits, Amazon Go will hardly need such a large presence in the market as Kroger. Amazon became the largest retailer by market capitalization with its 300 million customer base, capturing a very small percentage of the total share of retail sales, but with a large share in certain categories. This bridgehead has provided Amazon with many other promising opportunities to move forward, conquering new retail frontiers.

In less than 20 years, grocery stores will experience the Amazon effect, which has already predetermined their future path.

Uber has been around for about seven years and the company managed to make it so that the days of more than a hundred-year-old taxi industry are already almost numbered. In San Francisco, the number of taxi trips decreased by two thirds. For two years in Los Angeles, their number fell by 42%. In New York, Uber received 51% in the business travel market , two years ago it was about 9%. The company is confidently moving towards a big chunk in car rental. Today, 15% of people going on business trips claim that they have started to use car rentals less, because it’s easier for them to use Uber or Lyft.

As soon as consumers find a suitable alternative, they do not need much time to become their new habit, and even more so they don’t care about the incomes of “former pets”. This means that it’s time for grocery stores to stop hiding behind the fact that they still have 99% of their purchases, and, while there is still time, to start taking some actions besides discounts, in order not to become a rake, as the industry shipments.

And the rest of the retail sector should do the same. If Amazon succeeds in the food sector, the company will not stop there.

When Amazon introduced the Dash button in 2015, I wrote an article that raised the question: can Amazon do the same thing with the products that it did with the books? In this article, I suggested that online purchase of consumer goods, such as paper towels, laundry detergent, toothpaste and dog food, can change the use of grocery stores in general. And that buyers will use them rather dottedly, for example, stopping by on the way home for the few products that they will need in the evening to prepare dinner — and this will lead to huge changes in the traditional food trade.

Amazon’s invasion of the food sector also resembles Amazon’s online entry. According to Bezos, books were the category of goods that everyone bought and they could be easily traded over the Internet. Food also fits these parameters - and some other products. Most of us eat three times a day, seven days a week, 365 days a year. Today, buying non-perishable goods online is not so different from buying books. It activates a completely new way of shaping the processes of acquiring products online and offline, and creates a new retail business model.

Twenty years ago, 100 books were sold in a bookstore. Now sales of books in stores make up a little more than 50%, and this figure decreases - with an increase in the number of online sales on Amazon.

So let the transformation of food retail and retail in the broadest sense begin!