Finally, Amazon is in a fair fight

If Amazon won’t automatically have the biggest scale and the lowest prices, how is it going to win the grocery wars?

Take a guess at how many new products get added to Amazon every day.

(we’re talking about separate, distinct products here…)

(and it’s a big number…)

The answer: 480,000. From 2013 to 2015, an average of 480k new products were added to Amazon every single day.


The “Everything Else” Store

Jeff Bezos’s plan hasn’t changed since 1993: he’s building “The Everything Store”. The shop with the biggest selection and lowest prices on Earth.

And his plan has worked well so far because selling things on the internet is scalable.

In other words he could take his successful bookshop and add on a DVD shop, and a nappies shop, and an office furniture shop. They could all be sold on the same website using the same warehouses and delivery trucks.

The bigger his shop got, the more Bezos could cut prices, in a big virtuous circle. Lower prices put his competitors out of business. That’s Amazon’s big advantage and in a nutshell, that’s how Amazon has taken over.

But Amazon’s business model has a weakness. It works well for everything except the most important product category of the lot – the category that accounts for 20% of all consumer spending – food.

Big warehouses vs. many warehouses

Amazon uses a relatively small number of giant fulfilment centres (12 in the UK). They’re big and super-efficient, and they can serve the whole country in a day or two.

Now that’s great for “everything else”, but it’s useless for selling food because food is perishable.

Because food is perishable, 12 giant fulfilment centres wont do. Grocers like Tesco have to be close to their customers. They need lots of small distribution centres and hundreds of individual shops, with fridges in each of them. Tesco has 28 distribution centres in the UK, and around 3,300 shops.

In other words, Amazon’s big advantage over its competitors – its super-efficient distribution network – is nullified when it comes to fresh food.

So for the first time in ten years, Amazon is in a fair fight. It won’t have the lowest prices by default. It’s going to have to find another way to win.

A fair fight

And that is why Amazon bought the US Grocer Whole Foods for $13.4bn on Friday. According to Redbush Securities, the deal gives Amazon “440 refrigerated warehouses within 10 miles of probably 80% of the [US] population.”

As my old colleague John Stepek put it in MoneyWeek, “By buying Whole Foods, Amazon has acknowledged that there are elements of food retail and distribution that it can’t just “disrupt”. In effect, it’s joining the fray, rather than bypassing whole sections of the industry.

Walmart has 4,100 stores to Whole Foods 440. So Amazon is still a long way behind. But for the first time, it has a toehold in most American markets.

So if Amazon won’t automatically have the biggest scale and the lowest prices, how is it going to win the grocery wars?

That’s a big topic. I’ll dig into it, in detail, in tomorrow’s Risk and Reward.

And by the way – if you’re interested in Amazon but not signed up for my Amazon for Pennies report, then you’re seriously missing a trick.

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