Amazon Fresh goes stale in blow to Jeff Bezos’s supermarket dream
When shoppers arrived at the opening of Amazon’s first Fresh store in the UK to try its “just walk out” technology in early 2021, many found there was already a wait to just get in.
Following much fanfare over the launch, customers were more than happy to queue for a look inside the new concept shop.
“I’m not sure what I even put in my bag,” one shopper said after exiting. Still, for her, the whole experience had been a “great novelty and a good convenience”.
Two years later, the novelty has worn off.
On Thursday night, Amazon said it would shut down some stores and pause its current deployment. The online retail giant took a $720m (£590m) writedown on its current bricks and mortar portfolio.
Andy Jassy, Amazon’s chief executive, said the US giant was “not going to expand the physical Fresh stores” until the company had established how it could provide a “different offering”.
This was a significant volte face. Amazon, a name synonymous with online shopping, had plunged billions of dollars into physical shops and wanted to become a leader in grocery – an industry worth around $6 trillion.
The company made waves in 2018 when it spent $13bn to buy upmarket grocery chain Whole Foods, before launching its Amazon Fresh shops and Go convenience stores that allowed customers to “just check out”. Rather than queuing for the till, shoppers tapped in using the Amazon app. They then simply picked up items and put them straight in their bag, before walking out of the shop without paying.
The experience, which many found weirdly similar to shoplifting, was monitored by a web of cameras, scanners and sensors. These added every item a user picked to their digital account, before billing them. Its other shops also include snazzy digital experiences, such as paying with a sensor that scans the palm of your hand.
As recently as 2021, grocery was highlighted as a key area of focus for founder Jeff Bezos when he took on his new role as executive chair.
But so far, Amazon’s gimmicks have only had limited success. It closed at least one grocery location in Dalston, East London, after just 18 months. Meanwhile, last summer, reports suggested it was halting plans for a big UK push, amid concerns that it was not making the headway it had hoped to achieve.
“We were always sceptical about the Fresh concept,” says Shore analyst Clive Black. “The reality is they just haven't taken off and I think Amazon itself would be hugely underwhelmed by the traction that they have been getting.”
Few have embraced the “Just Walk Out” concept it pioneered, suggesting rivals have not been impressed. Tesco has experimented with its GetGo checkout-free experience, but only on a tiny scale.
Amazon has also struggled to gain a foothold in the market. According to the latest figures by Kantar from last summer, Amazon holds just a 0.8pc share of the online and offline grocery market.
This is dwarfed by all the major UK supermarkets, who currently hold between 28pc of the market – Tesco – and 5pc – Waitrose. More recent data from Kantar suggest Amazon's online grocery share is still only around 2.2pc.
A report from TWC last summer suggested that just one in five customers would be interested in trying an Amazon Fresh store if it opened near them, whilst around 11pc had tried.
“It’s fair to say that Amazon is not a force at all, either in bricks and mortar or online grocery,” says Ged Futter, a former Asda buyer and grocery consultant. “The volumes that Amazon does, well they don’t even register. Basically, they don’t have any power. They might say they've got power globally, but not in grocery they don't.”
Some think Amazon’s struggle to lure shoppers has been inevitable. One insider suggests many of the sites that Amazon took were never going to work, after the retailer went "headfirst into opening a load of stores".
“The Amazon mentality was that it would work anywhere, because everyone knows Amazon,” says a source who was involved in the rollout. “Actually, what they found was that, when it comes to grocery, everyone has their loyalty to other brands. People came in because it was a novelty, and then they went back to the traditional grocers.”
Brian Olsavsky, Amazon’s chief financial officer, said this week it had “decided to exit certain stores with low-growth potential”, a tacit admission that its expansion plans had gone awry.
Shore Capital’s Black says: “We have held the view for some time that to get a material place in the UK grocery market, Amazon really needs to acquire a major grocer.”
Despite speculation that Amazon considered a swoop on Waitrose and Morrisons to gain stores, no deal has ever materialised. Instead, Amazon has struck home delivery tie-ups with Morrisons and Co-op.
Amid a cost of living crisis, figures from Assosia out last year suggested prices had not risen as sharply at Amazon Fresh as at rivals. Assosia data found that the price of a basket at Amazon had gone up around 3.7pc in the year to last July, compared to a 7pc rise at Waitrose and a 10.6pc rise at Morrisons.
Yet part of Amazon's struggles lies in the fact that it was not cheap to begin with.
“Amazon is not a cheap place to shop,” Futter says. “What their Fresh stores are are convenience stores, and convenience stores are not cheap. They're expensive, because they're more expensive to run.”
This is particularly true for stores that rely on checkout-free technology – as Amazon has with its Fresh sites.
Julian Skelly, head of retail at the consultancy Publicis Sapient, says Amazon’s heavy investment in technology and gadgets at the till are not yet paying off, while rivals are finding cheaper alternatives.
“The likes of Aldi and Lidl are putting in self-checkouts, where you only need to employ one person anyway,” Futter says. “So that seems a much more cost effective way of doing it, then putting in lots of technology.”
Kitting out new stores with pricey tech may have, at one time, seemed easy for Amazon to do. But, like the rest of the tech sector, Amazon has been subject to a brutal correction in its share price which has made funding its operations more expensive. Its stock fell by around half in 2022 amid an online retail slowdown. Growth has failed to keep pace with the rapid expansion of digital sales seen during the pandemic.
Sales in its physical stores grew by 6pc to roughly $5bn in the three months ending in December 2022, contrasting with a decline in online sales. However, the growth rate of its bricks and mortar shops has slowed from double digit increases last year. Overall, Amazon fell to a $2.7bn annual loss in 2022, its biggest ever.
In grocery, Amazon has already had to make some changes. In the US, it has upped the amount it charges for its Amazon Fresh grocery delivery service. It has removed free delivery for Prime customers in the US on orders over $35. The threshold is now $150, while some orders will come with fees of as much as $9.95.
Signs of pressure are cropping up across its retail footprint. The company closed 68 high street shops across the UK and the US last year, which included its book stores, pop up shops and its 4-Star brand - its “mini department store” concept. A big-box store, expected to be stocked with groceries and clothes, was scheduled to open in the US this January but has not been launched.
For years, Amazon has been seen as a major disruptor in industries, having the heft to shake up entire sectors if it turned its eye to them. When it first made its splash in groceries with the takeover of Whole Foods, grocery chiefs were unsurprisingly shaken.
Yet, now, it seems, perhaps they did not have much to fear. Amazon may have been telling shoppers to “just walk out” of its Fresh stores. It seems like, after all that, it should have been more worried about getting them in.