Amazon primed for a battle royale with Britain’s supermarkets

The move to offer free delivery on groceries was long expected – and feared, says James Moore

Free food deliveries are next on the menu for Amazon Prime subscribers (Getty/Amazon)

Britain’s supermarkets haven’t had long to bask in the glow of the record sales the pandemic has delivered.

Amazon has moved its tanks further onto their virtual lawns with a view to grabbing a much bigger share of the grocery market than it has so far secured.

In a move that was long expected (and feared), the group is offering free delivery on orders over £40 to its customers in most of London and parts of the southeast, with a promise to expand the service across the nation’s postcodes over time.

More than 40 per cent of the UK population is estimated to have access to a Prime subscription, and the logic is easy enough to discern: if you already pay for it, why shell out for Tesco?

The offer may look more compelling still in the event that a second coronavirus wave and/or a Boris Johnson no-deal Brexit leads to the sort of disruptions to supply and shortages that were seen during the early days of lockdown.

Amid a surge in demand, online grocery orders became extremely difficult to obtain for people who had grown to rely on them. It affected even a specialist such as Ocado, which has more cause than most to fear this development. Its frothy shares weren’t much dented by the announcement, perhaps because its investors knew it was coming sooner or later.

It and its grocer peers will have learned lessons from their experiences last time around. They will need to draw upon them because the new(ish) kid on the block has the capacity to make them look very bad if it happens again. The staged rollout will afford Amazon the opportunity to deal with any bugs that emerge in its systems.

Even assuming the UK avoids that pair of nasties, with its vast resources, and limitless ambition, Amazon still presents a formidable challenge.

Persuading a significant chunk of the public that it is a food retailer may prove harder than it looks at first. British consumers can show a surprising degree of loyalty to their favoured grocers, possibly driven by the fact that food shopping is routine chore which encourages habitual behaviour.

But here’s the thing: Aldi and Lidl both proved that if your offer is sufficiently strong and you’re willing to sustain the losses necessary to encroach upon the territory of powerful existing players, then the customers will come in the end. So this is far from an insurmountable obstacle and Amazon will surely take every opportunity to promote the service aggressively to its Prime subscribers.

Whether this is a good thing for the UK market is an open question. It is fiercely competitive, and yet Tesco still enjoys an operating margin of just over 3.5 per cent against, for example, 2.5 per cent for its French buying partner Carrefour.

Before the emergence of Aldi and Lidl, competition was a lot less feisty than the Big Four supermarkets liked to pretend as can be seen from the fact that margins were comfortably above 5.5 per cent.

Yet part of Amazon’s ability to drive prices down (if this is the ground on which it chooses to fight) and sustain losses is driven by its ability to cross-subsidise its ventures and its clout will ultimately afford it the opportunity to diminish competition if it is allowed to do that. The competition regulators who blocked Sainsbury’s attempt to merge with Asda need to be alive to this.

The existing supermarket groups will also draw attention to the taxes they pay by contrast to Amazon, with its multinational avoidance practices and its vast warehouses cited in areas where business rates are low.

This is a better point for them to make with politicians than with consumers, who are already grappling with how to redress the balance between the virtual high street and the bricks and mortar one. Given the bare-knuckle brawl Amazon’s long-awaited move will create, they’ll use whatever tactics they can to tip the scales back in their favour.