“The Amazon Effect” is a new series from One Click Retail that breaks down specific product groups, comparing Amazon’s performance in that category to total retail sales (online and offline) and considering the effect Amazon has on that specific industry as a whole.
Amazon has experienced significant growth in 2016. With its transformation from online bookseller to eCommerce megastore now complete, many industries not traditionally associated with eCommerce are feeling “The Amazon Effect” – and one of these is the Grocery industry.
On Monday, Amazon published a video announcing Amazon Go, a new kind of physical grocery store. The first of them, which will open to the public in Seattle early next year, will be the eCommerce giant’s first brick-and-mortar grocery store after already operating a number of physical bookstores in the US.
But Amazon Go doesn’t operate like other stores: it is checkout-free. Customers download the Amazon Go app and tap their phones against a scanner when they enter the store. Amazon’s proprietary “Just Walk Out” technology tracks what you pick up from the shelves and automatically charges your account when you leave. No checkout required.
The question is, how will Amazon’s significant commitment to Grocery affect the industry as a whole? To understand this, we need to consider the performance of Amazon’s Grocery product group so far and in relation to total U.S. Grocery sales, both online and in-store.
- $800 billion: The total value of the U.S. Grocery market.
- $33 billion: The online sales value of the U.S. Grocery market.
- $1 billion: Amazon’s total Grocery sales YTD 2016.
- 55%: The growth of the U.S. Grocery market since 2014.
Grocery as a major product group on Amazon is a relatively new development, but rapidly growing. However, it’s important to realize that eCommerce and brick-and-mortar Grocery sales are two very different things, at least until the Amazon Go and other proposed Amazon grocery store formats begin to meaningfully compete.
Americans spend about $800 billion per year on groceries, while the entire U.S. eCommerce market is worth less than half that. So when we talk about online grocery sales, far from the largest eCommerce product group, we’re talking about a small share. Then when you consider that Amazon’s share is a fraction of that, we can understand why established bricks-and-mortar grocery chains are focused on developing their own eCommerce platforms.
Our numbers support the assertion that shopping for groceries online and in-store are different. When we compare Amazon’s 2016 YTD sales in the Grocery product group to total retail grocery sales, we find that only 3 categories make the Top 10 on both lists: Coffee, Chocolate Candy and Snack Bars/Granola. Cold Cereal, Soup and Crackers appear on the brick-and-mortar list, while Energy Drinks, Bagged Tea and Spices/Seasonings appear on Amazon’s.
When consumers go online, what they’re currently looking for is different from when they walk into a store. This is true to some degree in all industries, but the differences stand out in Grocery. If you’re shopping for dinner tonight or breakfast in the morning, you’re not going to go to Amazon. But if you’re looking for the best price on something bulk, lightweight and non-perishable, you’re likely to check online offerings. Whether or not Amazon can fundamentally change this behavior is a question that may be answered by how well Amazon Go succeeds.
At the moment, most major grocery chains don’t appear to be investing in a siloed eCommerce strategy. Rather, they’re focusing on an omnichannel approach of online, offline and mobile to deliver the ultimate in-store experience, which they see as their major competitive advantage. Due to logistical complexities and consumer shopping habits, it is no surprise that online grocery sales account for very little of the total share. But if there’s one company that knows a thing or two about logistics and how consumers shop, it’s Amazon.
The trend points squarely in the direction of Amazon’s success. While some brands are experimenting with direct-to-consumer sales, as in Oreo’s new holiday-season e-commerce site, most brands are leaving the logistics to online retailers like Amazon, and for good reason. Amazon’s best-selling categories are gaining an impressive amount of penetration, with Drink Mixes at 6.7% and Bagged Tea at 5.5%, and with the top-performing Coffee category pulling in over $200 million so far this year.
It’s also a proven sales channel for new brands, since both brick-and-mortar incumbents and new, online-only market entrants are finding success through Amazon, bolstered by innovative products and smart investments. For example:
- When Walkers encouraged repeat consumers by offering Subscribe ‘N Save and Bai Bubbles leveraged promotions, both climbed to the top of their categories.
- Orgain Protein Powder leveraged consumer relevant key words to optimize their Amazon search presence.
- Bob’s Red Mill and Viva Labs both innovated an eCommerce-specific approach: the former developed eCommerce-optimized packaging; and the latter concentrated their eCommerce optimization on the products that were generally lacking in brick-and-mortars.
The success of the Grocery product group on Amazon, largely thanks to the investment they have put into optimizing their logistics and supporting new and niche brands, has no doubt encouraged their expansion into the brick-and-mortar space. With the advent of Amazon Go and its other proposed grocery formats in the U.S. and elsewhere, there is every reason to believe that Amazon’s investment in the Grocery industry is going to pay off for them and for the brand manufacturers that develop a comprehensive eCommerce strategy.