Amazon’s launch of Dash might be the best look we’ve had so far into how Amazon thinks about omnichannel.
And, its plans to totally disrupt the grocery category, for a start.
Omnichannel was a topic of passionate debate at Innovation Project 2015 and a concept that all retailers are trying vigorously to enable. Pure-play etailers, like Birchbox, Nasty Gal and Warby Parker, are opening physical storefronts. Pure-play retailers like Max Mara, Oscar de la Renta, and Louis Vuitton now have online sites. Multichannel retailers like Nordstrom, Macy's, and Best Buy were among the early adopters of online and are doubling down on their ability to let consumers toggle seamlessly between digital and physical retail channels.
Of course, that’s why everyone is in such a mad rush to go “omni” – consumers with digital tools at their fingertips and a future that will be driven by the Internet of Things just puts more pressure on retailers to move right along with them.
Online marketplaces like eBay and 1stdibs and Alibaba and even Etsy – and more recently Groupon and Square - have put in place their own omnichannel onramps for merchants who are part of those marketplaces. Ma and Pa retailers can compete alongside big brands in virtual marketplaces that deliver hundreds of millions of eyeballs to their products while giving those consumers an easy way to buy and have their products delivered. And, some – like eBay and Etsy – also enable physical store card acceptance by making mPOS solutions available to their sellers.
It’s no big secret that Amazon’s ambition is to make Amazon the center of a consumer’s shopping universe – for consumers to start their discovery there and end up with a virtual basket of goodies bought and paid for on their site. And, that’s not entirely surprising since its virtual storefront was the only one it’s had now for more than 16 years.
Over that space of time, it’s built a marketplace behemoth around the notion of easy, one click checkout.
Access to a ton of products – now some 300 million of them that are easy and relatively low risk to the consumer to buy online – electronics, books, pet supplies, household products to name but a few.
Low prices - often the lowest and in being the lowest, disrupting online and physical retailers in the process.
Fast delivery. Prime customers get their goods in two days in exchange for paying Amazon $99 a year. And as has been reported many times, Amazon’s 40 million to 60 million Prime customers buy online a lot since it’s easy and free. And Amazon’s base of Prime customers is growing like a weed. It’s been reported that 7 in 10 free trial participants convert to paying Prime customers. That’s not surprising - Prime membership removes a big obstacle of having to spend a certain amount to qualify for free shipping. As a result, its members order more frequently and spend more annually with them. I’m sure that, like you, there have been days I’ve ordered three different times from Amazon because I forgot something in my prior order. And, I didn’t think twice about doing so because it felt “free” to load up my shopping cart with one item and Pay With Amazon.
That’s, I think, exactly the behavior that Amazon, with Dash, is hoping to capitalize upon.
And, in the process, move a big chunk of grocery purchases online and through Amazon – and to do it by enlisting the help of the big brand names that are dropping off of grocery shelves and consumer shopping lists.
Let’s start with why Amazon is going after groceries in the first place.
Can you say Maslow’s Hierarchy of Needs?
Turns out that the whole food, clothing and shelter thing drives a lot of consumer spending. Groceries represent about 8 percent, on average, of annual consumer spending. In the household budget pecking order, groceries come right after housing and transportation and before health care, entertainment and clothing.
In real dollars, the Bureau of Labor Statistics says that adds up to about $4k a year for the average family (as of 2013 - the latest year they published data). That’s up 2 percent from the year prior. That increase is attributed to higher food prices and a concerted focus on the part of consumers to eat more at home. The BLS also reports that since 2011, pre-tax income has risen by only $99 while grocery budgets increased $140 – further proof that buying food for the family is an important priority despite the wage/spending disparity.
And also why consumers have turned their shopping preferences away from more expensive branded products to private label ones – it’s an easy way to save money.
Hold that thought.
Consumers are also shopping for groceries differently.
Our Moms and Grandmas went to the store every week and did a “big shopping.” It’s just the way that groceries were bought. Stores weren’t always open 24 hours a day or even on Sundays or evenings. Mom and Grandma might not have had regular access to a car either and so had to make lists and be organized once they got to the store.
Today, consumers shop around.
They do a little shopping here and a little shopping there and visit some flavor of grocery store, on average 1.6 times a week, according to the Food Marketing Institute. Some might pop over to Sam’s Club to buy mayo or snacks or paper towels or canned tomatoes or milk or cereal in bulk. Others bop over to their “go-to” supermarket to pick up the essentials and then maybe even visit a specialty store to buy meats or cheeses. Depending on the week or the day, they’ll also visit a convenience store in the neighborhood to pick up odds and ends that that they may have forgotten or need for an impromptu dinner preparation.
For some, this grocery store promiscuity is driven by the need to find the best prices. For others the multiple stops are driven by a lack of supply of their favorite products. According to a study done by the University of Northern Florida, at any given time, there are more than 100k possible SKUs that a grocery store could carry. Most have room for only 40k. Those 40k are chosen based on supply and demand and the appetite on the part of brands to spend slotting fees to “rent” the shelf space. In the case of Whole Foods, there’s a further hurdle – brands have to adhere to its organic food requirements. It’s why they no longer carry Chobani yogurt (and why I now do some of my shopping at – and divert some of my grocery dollars to - Stop and Shop). As a FYI, 54 percent of the brands carried at Walmart are not carried at Whole Foods.
Speaking of 54 percent, that’s how many American consumers have also bought at least something grocery-related online. But don’t get too excited by that stat just yet. Buying groceries online accounts for only about 4 percent of the total $620 billion annual grocery business, according to consulting firm Booz & Company.
In other words, buying groceries online is pretty much nowhere right now.
But that retail “blue ocean” is precisely why Instacart, FreshDirect, Peapod and others have cropped up to make it easy for consumers to outsource grocery shopping to someone else – and take grocery shopping online. And, why grocery stores are creating their own apps for assembling shopping lists and allowing consumers to place orders online to pick up in store.
Amazon, itself, got into the grocery business when it launched Amazon Fresh in 2007, a service that it expanded to LA six years later in 2013 and other cities including San Diego and NYC just last year. Last April, Amazon launched its Pantry Prime service in an effort to compete with warehouse clubs and Walmart. For $5.99, Prime members can load up a box with 45 pounds of groceries – individual boxes of Kraft Macaroni and Cheese, Honey Nut Cheerios and 1,998 other such items and have the big box of grocery goodies delivered to their homes. Amazon’s redefined bulk buying by giving consumers the chance to “bulk up” by buying one big box filled with individual items rather than one big box of the same item just to save a few dollars.
Who does the grocery shopping is also changing.
A survey done last year revealed that grocery shopping is no longer women’s work. In fact, more than half (54 percent) of the weekly grocery shopping is done in all or in part by men. Fifty percent of those men say that they aren’t told what brands to buy, and 40 percent of them say that in the absence of being told what to buy, their brand choices are influenced by advertising.
Now put all of this together … a non-discretionary category of retail spend, changing grocery shopper demographics and shopping habits, changing shopping habits and shoppers more generally, pressure on name brands to claw their way back into the consumer’s shopping basket, 270 million Amazon Prime customers that point and click a lot online already, and technology that makes the Internet of Things less like a Jetson’s episode and more of a reality …
... And then say hello to Dash.
Dash isn’t just a little plastic button that a consumer sticks on the front of the washing machine and uses to order Tide at will. It’s a commerce platform for matching consumers with the branded products that they like to buy. But not just any consumer and not at any retail store – high-spending Amazon Prime customers who shop at home – and already do on a regular basis – with Amazon.
For brands, it’s pretty much a dream come true and probably one of the closest things that they’ve had to this point to a one-to-one marketing opportunity. Can you imagine the giddy faces over at P&G who are now being presented with the opportunity to know EXACTLY who’s buying their products and how often – and who can, then in turn, redirect their marketing and advertising spend accordingly?
And, do it all inside the consumer’s home, without having to compete in a cluttered and competitive grocery store environment?
And in a way that eliminates the friction associated with remembering to put an item on a shopping list or even go online to make an order?
For now the experience is in beta mode, who knows maybe even alpha, and clearly designed to get information and feedback from users. It’s even likely the case that the brands featured in the early wave of Dash – Bounty, Tide, Glad, Gillette - are among the popular picks in Prime Pantry and/or Fresh.
The new Dash experience as described is about having little Dash buttons all over the house, stuck in the places where products are used so consumers can see supplies dwindling and order “just in time.” There will be Dash devices for laundry detergent in the laundry room to make ordering Tide easy.
And Dash devices in the pantry to make ordering paper towels and plastic wrap easy.
And probably Dash devices in the bathroom to make ordering razor blades, toothpaste and shampoo easy, too.
But probably not for long.
Dash v.1, if you’ll recall was a wand that enabled the scanning of barcodes. Dash v.2 are these little buy buttons. Dash v.3, if Amazon was so inclined, could further its branded hardware ambition and create a device that becomes something of an on-demand household commerce command central device. You could imagine Amazon Dash v.3 as a Kindle-ish-type product that is put inside the pantry, and/or the linen closet and/or out in the garage and/or the basement or mud room – in close proximity to where household items are stored and/or consumed to make it easy for consumers to punch up their orders in places that it’s easy for them to know when they can see they need more.
The economics of Dash could get quite interesting too and will have to if Amazon wants to turn Dash into cash. To the consumer, it has to be not only easy to use, but economical. And with Amazon’s penchant for plowing revenues into subsidies for new products, it’s a sure bet that the cost to Prime consumers will surely be subsidized.
I also have a feeling that Amazon will also use Dash and its entire grocery experience to reinvent the grocery business model, one subsidized by the brands who may be feeling a bit disenfranchised by the traditional grocery store channels. Brands are already used to being charged slotting fees to rent space on the grocery shelf alongside the 39,999 other brands in the store. Spending that money is about as much control as these brands have in getting their products in front of consumers. It’s entirely plausible that Amazon could charge brands the digital equivalent of slotting fees for having their brands “slotted” front and center in the home via their Dash platform. And even more for the ability for those brands to promote their products to those consumers in other ways, e.g. discounts, coupons, and/or other offers. It also wouldn’t surprise me to see Amazon do what all good grocery stores do – create a loyalty program that gives consumers lots of other reasons to turn their grocery store affinity their way.
Brands, of course, will have to do their own math to see if what Amazon ultimately proposes makes good business sense. Here is the tradeoff they’ll have to assess:
The Dash Proposition: the cost and incremental sales opportunity of being the only brand in that category inside the home of a consumer and the data opportunity to gain some intelligence about who is using their products and at what frequency.
The Traditional Grocery Store Proposition: The cost and incremental sales opportunity of being positioned favorably inside a traditional grocery store, in competition with other products and and store loyalty programs that may incent consumers to buy private label grocery products. It certainly seems like a math problem that brands might like to be given the chance to solve.
And so here’s how Amazon uses this potential grocery store disruption to redefine what it means to be “omni” in this category.
Grocery is one of those retail categories that most only ever really envisioned as a physical retail experience. And, most grocery stores with online sites and apps, by and large, only provide consumers with information on specials, the ability to build a shopping list and place orders that can be picked up in store, including prescription refills.
More or less the classic omnichannel experience using an online presence to drive foot traffic to store.
But AmazonFresh, Prime Pantry and now Dash are totally blowing up what it means to be omni in grocery. They’re taking an almost exclusively physical retail shopping experience and making it a totally digital experience. And, they’re doing it in a way that gives consumers choice, access to brand name products and with Fresh, the ability to order from their favorite local delis and restaurants.
And all without ever having to physically visit the storefront and with a site and user interface that is easy to use – Amazon digital grocery shopping baskets are easy to fill and checkout is one click.
It certainly appears that Amazon is creating the same kind of disruption in the grocery category that they did to books and electronics.
It’s doing it by going after the “stuff in the aisles” that accounts for 50 percent of a grocery store’s sales – cereals, household products, canned goods, snack foods, baking supplies and spices.
Think about the potential impact Amazon could have in this segment. If it could capture even as much as 10 percent of grocery spend in the U.S., Amazon would become 60 percent as large as Kroger ($108B in sales in 2014) which is one of the world’s largest grocery retailers.
So far all of these toes in the waters are just that – toe in the water experiments as a way to learn how consumers take to their grocery proposition. If Amazon is able to scale the grocery business, it will do to grocery just what it did to books and electronics - force price pressures on all of the stores in the grocery category, including the local grocery and convenience stores that sell similar branded items and may already feel the competitive pinch that’s the result of the consolidation that’s sweeping through the industry. And create further consolidation in a category that is already consolidating. In 2013, the Top 20 grocers drove 64 percent of U.S. grocery sales – up from 60 percent five years prior and 39 percent in 1992. And while the big guys may be getting bigger, their margins aren’t getting thicker - grocery margins remain 1 to 3 percent of sales.
What’s interesting though is that now in grocery, just like in every other retail category Amazon has disrupted, it’s doing it by giving consumers access to the branded products that they know and can feel confident buying from Amazon at a price that’s cheaper and with delivery that’s efficient. It took about 16 years for the retail bookstore category to be all but ceded to Amazon online (Borders filed for bankruptcy in 2009 and it's been pretty downhill for everyone else since then). Consumer electronics and the big and small stores that used to dominate those categories no longer do either – a shift that’s taken about seven years thanks to the availability of consumers with smartphones and a financial crisis that made consumers more price sensitive.
That means that Amazon’s potential to do to grocery what it did to books and electronics could be dramatically accelerated now that it has 40 million to 60 million consumers on its Prime digital roster and a consumer mindset that’s willing and able to buy online from Amazon and already does a lot.
I guess it’s time for grocers to take stock of how to embrace the digital world and the digital consumer that lives within it.