When Amazon and Morrisons announced an online grocery shopping alliance yesterday, the markets approved. Morrisons’ share price rose while those of its main rivals sank. When Amazon starts delivering food and other items from the supermarket chain to homes later this year, customers are likely to approve as well. The immediate effect of the new deal will be to offer consumers a new way to have cheap food delivered to their doors, in some cases within an hour. Whether this is good for customers or competition in the longer term, though, is another matter.
Amazon has already ventured into online food retailing in America. It was only a matter of time before the company took the plunge in Britain. Groceries are the only sector of the retail universe in which the online giant is not yet a player in Europe, and it is thought to have been looking for a way in for the past five years.
Amazon will start small, for now. Morrisons has only 4 per cent of Britain’s online grocery market, but experience suggests that it would be foolish to underestimate the ambition of the company’s chief executive, Jeff Bezos. As he expands into territory occupied by Ocado and the online operations of Tesco, Sainsbury’s and Asda, he should expect at best a wary welcome from the competition authorities, the taxman and the discerning British shopper.
Adam Smith, the original sage of free-market economics, would be impressed by the effect of competition on food retailing in Britain. It has produced dizzying choice and startling prices, including the flat introductory rate of 25p for all goods in the first easyFoodstore, whose shelves were stripped bare in under a day last month. In general this newspaper sides with Smith. On Mr Bezos’s new departure we reserve judgment. He is entering an industry in turmoil. The big supermarket chains are being undercut by discounters and forced to invest in online operations even though few have managed to make them profitable.
Average margins in the sector have fallen from about 5 per cent to half as much or lower. New out-of-town supermarket projects have been shelved, jobs are at risk and squeezed suppliers are, too often, forced into unenviable choices between animal welfare and preserving their margins.
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The internet and online retail are forces for good. The big chains, clearly, must adapt to survive, and as they do consumers will benefit from greater choice, convenience and downward pressure on prices. Nor have small food producers been elbowed aside. They can now sell online through numerous specialist sites that give them a prime location on the digital high street. No one knows the future of online shopping, just as no one forecast Amazon’s astonishing growth when it was founded in 1994. But that does not mean it should be granted unfettered access on its own terms to a retail sector on which everyone’s health depends.
Mr Bezos takes pride in a revolutionary business model that has enabled his company to grow bigger than Walmart and bigger than the next nine online retailers combined in terms of market capitalisation. That model invests virtually all its profits in acquisitions and keeping prices low, leaving profits close to zero and the company’s tax bill a tiny fraction of its turnover.
In conquering the book business, Mr Bezos told his negotiators to pursue small publishers as a cheetah would “a sickly gazelle”. One of his former lieutenants has since described the result as a race to the bottom.
Such a race is not what Britain’s food sector needs. Pricing aimed at beating back rivals is not just bad for competition and ultimately consumers, but illegal. Mr Bezos’s acumen and ambition are extraordinary, but there is a fine line between admirable aggression and monopolistic bullying. He should be careful not to cross it.