Amazon, Walmart And The Vexing Question Of The British Grocery Market

Just as Walmart is pulling back from the U.K. grocery business, the market is awash with rumours of a big push by Amazon.

Last weekend it was reported that Amazon had made the most tentative of approaches to buy Waitrose, the upscale supermarket, in a move that would have mirrored its purchase of Whole Foods in the U.S. The report indicated that the approach was rebuffed, and Waitrose’s owner, retail partnership John Lewis, said it never happened, although the manner of the approach leaves plenty of room for plausible deniability.

But a potential major U.K. supermarket purchase by Amazon, and the proposed mega-merger between Sainsbury’s and Walmart-owned Asda — seen as a defence against the growth of the e-commerce giant — has brought into focus the Seattle-based firm’s ambitions in the international grocery market, and how e-commerce in general is radically reshaping the $7.5 trillion global grocery market.

Does Amazon need to buy to crack the grocery sector in countries like the U.K., or will its acquisition of Whole Foods give it the knowledge it needs to build a grocery business from scratch? As ever with Amazon, distribution and data are the keys.

The proposed merger of Sainsbury’s and Asda would be a partial pullback from the U.K. for Walmart nearly 20 years after it bought Asda, and is an indication of the fierce level of competiton in the country’s grocery market.

It is not a total retreat for Walmart. It would still own 46% of a combined Sainsbury’s and Asda, a company that would have 2,800 stores and £51B in annual sales.

But the fact that Walmart was willing to book a $2B loss on the value of its holding in Asda to help smooth the merger shows how keen it was to get the deal done. In part this was because Walmart needed to use the £3B in cash it received to reinvest in its U.S. business, particularly its online operations, to continue its domestic fight with Amazon.

But while the numbers eventually did not stack up for Walmart in the U.K., partly because of fierce competition that has pushed down prices, there are some figures that are clearly appealing to Amazon.

First there is the size of the U.K. grocery sector — £192B in 2017, according to Statista. That is 40% of the U.S.’ $640B, in a country with 20% of the population — Napoleon’s nation of shopkeepers is also a nation of grocery shoppers, and an appealing prize.

Then there is the fact that the U.K. is much more amenable to Amazon’s way of doing things than almost any other country in the world. Online grocery and fast-moving consumer goods sales accounted for 7.5% of the total market in 2017, according to Kantar, behind only Japan and South Korea globally and compared to 1.5% in the U.S. 

The U.K. is one of three countries where Amazon has launched its Amazon Fresh grocery service, alongside the U.S. and Germany. Launched in the U.K. in 2016, it had grown by 56% in 2017, but is still tiny: its revenue of £150M is dwarfed by an overall grocery sales figure of £192B and Amazon U.K.'s revenue of £1.46B in 2016, the last year for which figures are available.

Amazon does not necessarily need to make the acquisition of a U.K. supermarket chain to boost its presence in the sector — it is already learning how the food business works and how it can be boosted by its technology, after the acquisition of Whole Foods.

“Part of the idea of the Whole Foods acquisition was to give it a customer big enough to test its ideas and its technology and work out how to run a food business,” PropTech consultant Anthony Slumbers said.

“They got something out of the Whole Foods deal, which gave them a brand, credibility in the food space and knowledge of the food supply chain,” Houlihan Lokey Managing Director Shaun Browne said. “I think they will feel that’s what they need, and after buying Whole Foods they don’t really need the purchase of a [U.K. supermarket].”

But while the acquisition will have helped Amazon learn lessons about food retail in general, there is a lot to be gained from buying a U.K. chain, others argue.

“They are going to continue to try and make inroads into this market and that is a threat the traditional supermarkets are aware of,” Green Street Advisors Managing Director Hemant Kotak said.

“Where the existing players have the edge is their extensive footprint, something Amazon doesn’t have. If you think about last-mile delivery and being close to your customers, that is even more important when thinking about fulfilling grocery orders.”

Amazon Fresh services around 300 postcodes in and around London, from distribution centres in Bow in East London and Weybridge to the west of London. That limits the range of areas to which it can deliver.

A purchase of Waitrose on the other hand would give Amazon a network of 350 stores. Again these are weighted toward London and the South of England, but there are stores across the country, and as with Whole Foods in the U.S., Waitrose is seen as having stores in the wealthiest areas and best locations. There is also likely to be a big crossover of Waitrose and Amazon Prime customers to whom the company can try and cross-sell products and services.

It is not just the distribution of food with which the purchase of a supermarket chain would help. E-commerce giant Zalando's vice president of corporate real estate, Raimund Paetzmann, said at last month’s Bisnow London Industrial and E-Commerce event that supermarkets are ideal for fulfilling the last-mile delivery element of all e-commerce orders, given that they are set up for receiving deliveries.

“People talk about logistics and deliveries and traffic, but the milk has always needed to get to the supermarket,” he said.

Bloomberg estimates Waitrose might cost Amazon around £2B to acquire. It also raised the intriguing prospect of the company buying U.K. retailer M&S, which has nearly 1,000 stores across the U.K. The company has a well-regarded premium food brand but an ailing clothing brand.

The other element that the purchase of a supermarket chain in the U.K. would give Amazon is intimate consumer data. The company has said its idea of nirvana would be predictive retailing, where it knows what you want before you even want it. New York University professor Scott Galloway outlined a future where Amazon just sends you two boxes a month: a big one with everything it knows you want, and a much smaller one for a few returns.

The regular purchases consumers make at supermarkets and the amount of data that generates gets Amazon much closer to that ideal, PropTech consultant Slumbers said.

“Coupled with the distribution footprint, buying a supermarket chain gets them much closer to their goal of a frictionless system that gets you what you want as quickly as possible.”

All signs point to a purchase by Amazon in the U.K., but a lot can change with such large acquisitions. The company might decide to abandon its foray into food to concentrate on general merchandising, or potential targets might not be available. But at $7.5 trillion, the global prize could be one worth winning.