Amazon may launch grocery sooner than expected

Frank Chung
MAY 24, 2017
news.com.au

AMAZON may launch its grocery service in Australia sooner than expected, but fresh food delivery remains a “complex” challenge for the e-commerce giant, according to UBS.

In its third annual survey supplier survey, presented to the Australian Food and Grocery Council forum in Brisbane on Wednesday, the investment bank revealed Amazon was already in talks with one fifth of grocery suppliers, “suggesting a launch in grocery may be earlier than we thought”.

“Will Amazon Fresh/Pantry enter Australia any time soon? Likely, suppliers were almost unanimous in their view that Amazon Fresh/Grocery will enter Australia in the next three years,” wrote UBS analyst Ben Gilbert.

Amazon had been in contact with 29 per cent of non-food suppliers and 23 per cent of packaged food suppliers in the survey, but no fresh food suppliers.

“Almost all suppliers (around 96 per cent) believe Amazon will set up a physical presence in Australia, with around 18 per cent of suppliers in contact with Amazon,” Mr Gilbert wrote.

“While an Amazon Pantry rollout seems likely, given supplier contact in the non-fresh category, we believe a Fresh entry within the next three years is unlikely, given: i) No supplier contact; and, ii) Complexity: It took Amazon around eight years to get to 1 per cent share of the US grocery market and break even.”

And despite warnings of the impending arrival of Aldi’s German rivals, suppliers put the likelihood of Lidl or Kaufland setting up shop in the next three years at 51 per cent.

The only contact with either chain, both of which are owned by the Schwarz Group, was in the packaged food category, where only one supplier had been in talks with Kaufland. None of the respondents reported any contact with Lidl.

“A Lidl entry, in our view, will be detrimental to industry margins, with industry feedback suggesting that when Aldi and Lidl co-locate margins rebase 150-200 basis points,” Mr Gilbert wrote.

“The above said, we believe the threat of a Lidl entry is further (5+ years) away as: i) It focuses on its US expansion; ii) The Schwartz group roll out their Kaufland brand in Australia; and, iii) None of the suppliers surveyed have been approached by Lidl yet.

“While industry feedback suggests Kaufland will have a physical presence by 2020, we believe that: i) An untested business model; and, ii) Large-format site scarcity in Australia (in particular east-coast), will limit Kaufland’s success.”

UBS believes the overall grocery market, which recorded its lowest level of growth in three decades last financial year due to heavy discounting led by Woolworths, will recover this year.

Mr Gilbert said Woolworths was “turning around faster than expected” and is expected to be the best-performing retailer over the next 12 months, while Aldi’s growth is set to “re-accelerate”. UBS last month suggested the German discounter was running out of steam.

He said the “negativity towards Coles … surprised us”. Coles is expected to be “one of the worst performers over the next 12 months, a marked reversal vs. the 2016 survey”.

“We believe pressure at Coles will continue near term as Woolworths regains momentum and Aldi refurbishes its east-coast fleet, in line with supplier expectations, ranking Coles equal third from a sales perspective over the next 12 months.”