Ocado, the pure-play online grocery retailer, faces a massive challenge to its business after Amazon launched its AmazonFresh food delivery service in London on Thursday, marking a first entry into the UK market for the company.
Starting today, AmazonFresh is rolling out a full grocery service at competitive prices in parts of central and east London from a distribution center in the east of the capital. Initially it will use external delivery firms to get groceries to customers.
“We are launching with a comprehensive offer in a limited area and will take our time to hone and improve our service,” Ajay Kavan, AmazonFresh’s vice president said.
As Kavan notes, Amazon’s offering will be limited to begin with, but the fact that one of the world’s biggest internet companies is launching grocery delivery in the capital should be enough to seriously worry the UK’s grocery retailers as a whole. Ocado however, should be particularly worried, given the fact that it operates almost exclusively in the same space as AmazonFresh will.
In its history, whenever Amazon has turned its hand to new businesses, it has generally enjoyed huge success — other than of course the Fire tablet. The American retail giant has such a huge resource pool that should the initial experiment prove a success, it has the capacity to cause a huge disruption to Ocado.
Bryan Roberts, the Insights Director at retail marketing firm TCC Global told the BBC: “While there is no cast-iron guarantee of success… I’m tempted to believe that we’ll look back on today as something of a disruptive game-changer up there with the entry of Aldi and Lidl.”
“Convenience, ultra-competitive pricing and customer service will find favour with urban shoppers and will heap immediate pressure on retailers that do sizeable business in the capital. The model is scalable and the popularity of the Amazon Prime ecosystem around the UK will mean that it will find a receptive audience,” Roberts added.
Roberts’ thoughts are echoed by analysts from US-based research firm Bernstein, who note in analysis circulated to clients on Thursday that given the upmarket standard of the food on offer with AmazonFresh, it is the likes of Ocado, as well as Sainsbury’s, that will be worst hit by Amazon’s move into groceries. Here’s an extract from Bernstein’s report:
The entry of AmazonFresh into the UK doesn’t come out of the blue but it will further worry investors about the fundamentals and prospects of the UK food retail market. While we have written in great detail about the limits those offerings (amazon has tried for 17 years to develop Amazon Fresh in its home market of Seattle, with very little to show for it), that won’t be the focus on investors in the short term. Given the London focus and upmarket bias of the offer, we would expect Sainsbury’s to be most impacted from an investor sentiment point of view. However Tesco, and Ocado (outside our coverage) have the largest London based online food retail and therefore will be exposed as well.
So far on the day, share price reaction from Ocado has been limited, with the FTSE 250-listed stock down just 1.9%, the equivalent to 5p.
However, Ocado shares have been slipping steadily in the last week, and since June 2 have lost nearly 9% of their value for without an obvious catalyst, besides the impending launch of AmazonFresh, for the slide. Ocado is also down 27.5% since the beginning of April. Here’s how the slide in the last week or so looks:
One frequently discussed option that could help Ocado weather the storm brought by AmazonFresh would be to sell up to Amazon. Rumours have swirled for months in the City of London that Amazon wants to buy and that Ocado is interested. For instance, after a rumour appeared in the Daily Mail’s Market Report in January, Ocado shares jumped nearly 18% in a morning. Back in November, Credit Suisse said Ocado should just give up and let Amazon acquire it.
However all rumours have been consistently denied by both companies, and there has never been any concrete evidence that a takeover is on the cards.
It is worth noting that when it comes to Amazon’s threat, Ocado isn’t completely defenceless. The company has one huge advantage over Amazon, and that’s in its grocery logistics. While Amazon has a pretty much unrivalled ability to store and distribute hard, non-perishable goods like CDs, TVs and tablets, it is relatively new to the grocery space, and doesn’t have the same skills as Ocado for looking after perishable goods that need to be refrigerated.
Ocado, on the other hand, has some of the most sophisticated grocery distribution technology anywhere in the world, custom designed for the company in conjunction with tech firm Cambridge Consultants. The tech is so sophisticated that Ocado is marketing it to other retailers.
The company also has big growth potential, given that it currently only really operates in the south of England on any major scale. So while, Ocado should be pretty fearful of what AmazonFresh might do to it, it shouldn’t all be doom and gloom.
While in the short run, Ocado is likely to hit the hardest by AmazonFresh’s UK launch, Bernstein notes that the move is just part of a broader shift towards online shopping, that in the end will affect both Morrisons, with whom Amazon is partnering, and Asda. Here’s the quote:
Morrisons & Asda are poorly positioned for the channel shift: By contrast to Tesco and Sainsbury’s, Asda and Morrisons are poorly placed to benefit from the channel shift. Morrisons has the smallest online offer which can only reach ~50% of the UK population. Aside from a small forecourt retail business, neither Morrisons nor Asda have a convenience business.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.