It was the moment grocers had been dreading. Amazon, which has sucked so much of the profit out of selling books and CDs, is entering the food business.
The American online retailer has been stalking the sector for years, tinkering with its Amazon Fresh business in a handful of US cities. By forging a partnership with Wm Morrison, however, it will boast a range of fresh foods at a stroke.
Moreover, Amazon is entering a market in turmoil, as the big supermarket groups adjust to customers shopping increasingly online and with discounters. The three big quoted supermarket groups have lost 44 per cent of their value in the past three years and profit margins have been battered. Morrisons is ranked at No 4.
While online sales, along with convenience stores, are the only sources of growth in a sector that commands about half of all retail spending, supermarkets, especially those with large out-of-town stores, have had trouble adapting to the trend.
The cost of co-operation for Morrisons is smaller than for its rivals because it controls less than 4 per cent of the online market via its existing tie-up with Ocado. It owns abattoirs, processing facilities and packaging plants, assets that one analyst said are “just waiting to churn products out”.
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For its rivals, though, it looks like a market where it was already difficult to make money is about to become harder. “On the face of it, it’s a fairly modest development, but in the fullness of time we will look back and see this as being an incredibly seismic event in terms of the development of the sector,” Bryan Roberts, an analyst at TCC Global, a customer loyalty business, said.
“Our big mistake is to think of Amazon as a retailer, when in reality it’s more of a technology services business with a nice sideline in retailing. The very nature of Amazon means it is less concerned about the immediate level of profitability and it isn’t bound by the same constrictions as traditional businesses. It has a very long-term view and a patient set of shareholders who don’t demand an immediate return.”
While the internet has reshaped retailing, it takes only one pound in every 20 spent on groceries in Britain, and profit margins are worse than shop sales because the costs of delivery are not fully absorbed by charges.
The difficulty in selling groceries at a profit online can be seen in Ocado’s struggle to make more than a tiny profit in its 14 years trading.
Online growth has not been as explosive as many expected. Five years ago IGD, the grocery research body, predicted that online spending would be worth £9.8 billion in 2015; in the event, however it is nearly a billion pounds below that forecast.
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Tristan Chapple, of Phoenix Asset Management, said: “The volumes in the business have not grown a great deal . . . which means that they probably are not getting optimum volumes through their production assets. The Amazon deal should allow them to grow volume in a very capital-light way, which should impact profitability.”
Rickin Thakrar, of Haitong Securities, said that the Amazon deal cast some doubt over Sainsbury’s bid for Home Retail Group. He described the proposed tie-up between Sainsbury’s and Argos as a credible attempt to create a “Walmart-style general store”, but added: “Is this the right thing to be doing right now? I’m not sure.”