Image Credit: Jeff Sandquist
Nouse Business previously this year dedicated an entire double page spread to what we saw as increasingly aggressive, invasive and immoral market practices being adopted by the world’s single largest consumer conglomerate, Amazon.
Just this week the CEO’s of Amazon, Facebook, Apple and Google appeared before the U.S Senate’s judiciary committee to answer accusations that the relative size has become so substantial that their combined market size now means they pose a threat to US competition and innovation. At the same time that Jeff Bezos sat before the judiciary committee arguing why Amazon’s market monopoly was in fact not a monopoly the company was orchestrating its next market expansion.
As a result of the pandemic, online food sales have almost doubled with shoppers preferring the click of a mouse instead of the discomfort of sweating underneath a face-mask to buy their household essentials. The online grocery market is expected to grow 76.2% to £19.5bn in 2020. This is no well-kept secret as Amazon have been watching the spike in demand with a keen eye, on Tuesday 28th July they announced they will expand their Amazon Fresh service.
Amazon Fresh will offer free delivery on orders over £40 requiring a two-hour delivery slot whilst one-hour delivery slots have a £3.99 fee. Orders under £40 will cost £3.99 for two-hour delivery and £6.99 for one hour, however. The minimum order value will also be lowered from £40 to £15. The emphasis then is to encourage larger orders by flexible shoppers as those less willing to spend big online are squeezed with a higher delivery fee.
Russell Jones, country manager of Amazon Fresh UK claims the move is not a response to shopping habits during the COVID-19 pandemic; “We’ve been planning this for a long time. It’s a big step up in volume.” Indeed, Amazon Fresh has existed since 2016, though one cannot argue the pandemic has made the manoeuvre a timely one. The new benefits will be free for prime members, entangling consumers more than ever in Amazon’s web of opportunity. Users will be able to choose from over 10,000 products including fresh, chilled, and frozen food. Interestingly, the revamped platform will sell Morrison products allowing lower distribution costs for Morrsions, and better value products for Amazons’ customers.
Amazon have been accused of creating a “postcode lottery” as initially they will only deliver to 300 postcodes in London and the Home Counties. The strategy is clearly to target higher-income middle class consumers who currently use Ocado and Waitrose for online food deliveries. These consumers are more likely to be prime members therefore can reap all the rewards on offer, enticing them to use the Amazon Fresh platform.
Online shoppers in Birmingham, Manchester and Edinburgh may also soon benefit from the changes as Amazon revealed they could deliver there before the end of the year.
The online grocery delivery market is a starkly competitive one. Tesco probably offer the biggest challenge to Amazon’s latest venture with the impressive offer of 7pm same-day delivery if ordered by 1pm and delivery fees of between £2 and £7. Sainsbury’s is pricier, as orders under £40 are charged £9 and the minimum order value is £25, however the supermarket recently launched its “Chop Chop” app. This is similar to Deliveroo in that up to 20 items can be chosen for delivery within 1 hour and a flat fee. Morrisons seemingly accepted their fate by joining forces with amazon and selling their products via the Fresh service.
Competitors will fear that a company valued at £1.2trillion may use its resources to aggressively undercut delivery fees even if it incurs a loss initially. The problem Amazon’s rivals face is that online grocery delivery is only one of many revenue streams for the Seattle giant, whilst supermarkets rely heavily or solely on online delivery for profits. Retail expert Richard Hyamn points to this exact issue: “Amazon has deep pockets and the massive luxury of not needing to make a profit from food retailing. This is just as well because no one really makes much if any money from online food retailing now.”
Amazon undercutting competitors on the surface appears to be of benefit to the consumer as we pay lower prices for the same service. However, what happens once all competition falls away? The monopolist puts the prices up as demand exceeds supply. This is the danger of accepting Amazon as initially a minor competitor in many different markets, because eventually they may become the only major player left.
As consumers, we can enjoy the lower prices Amazon offer, it is the model and the basic economic model of economies of scale that has provided the expansion of the Seattle based monopolist since its conception as a garage book seller in 1994. However Amazons gradual expansion into every more diverse markets demonstrates both its ambition and intention to become an ever large and all-encompassing monopolist. We are all tempted by they ridiculously competitive market rates but as we were warned by the U.S senates judiciary committee this week “todays competitor, is tomorrows monopolist”.