June 7, 2013

Amazon's food delivery challenge in Germany

Amazon.de pickers (photo: Amazon)
Working for the Yankee dollar: Amazon staff picking orders in Germany
After years of tests in hometown Seattle, Amazon could start its “Amazon Fresh” food delivery service in Los Angeles today. The online retail giant intends a roll-out to at least 20 other metropolitan areas in the US and to move overseas in 2014. Amazon already offers a staggering online assortment of 500,000 food & non-food items in the States. It will soon be offering 18,000 fresh food lines in selected Californian zip codes. Delivery will be free on orders of $35 or more.

Outside the US, where Amazon made 43 per cent of its total revenues ($61bn) last year, the company already has, for instance, quite a substantial food offer in the UK. Their local site even offers more than 1,000 lines of jam! But it's still not a full shop and lacks fresh food. More importantly, do British customers really use it on a market dominated by Tesco.com?

Meanwhile, what might work in the States on those wide, open plains, where rural communities are often badly served by modern retail, could run up against a wall in heavily urbanised and concentrated Germany. Could the Americans be biting off more than they can chew on their largest foreign market?

German specifics

Here consumers are generally tech-savvy, but they are obsessed with price when it comes to food. There is also a hard discounter (Aldi, Lidl, Netto, Penny, Norma etc.) on almost every street corner.

Amazon Germany would therefore need to create huge economies of scale and a very profitable product mix to compensate wafer-thin local retail margins.

Boom in general merchandise

Admittedly, German online sales are booming in such areas as pet food (Zooplus, Fressnapf), toys, health & beauty (Amazon), furniture, shoes (Zalando), fashion, and entertainment electronics. But fresh food with its demanding cold chain and packaging requirements has proved a much harder nut to crack.

Whereas online orders, thanks largely to Tesco.com, already account for around 4.7 per cent of food sales in the UK, they remain a subliminal 0.2 per cent here in Germany. At first blush, this is surprising when more than half of all Germans who order online (51 per cent) say that they would like to have food delivered to their home.

Yet intrepid online start-ups like Food.de or innovative clicks & mortar retailers such as Rewe, Bünting, Real or Kaiser’s Tengelmann still face an uphill battle in a price climate where most customers want more, but aren’t prepared to pay for it.

Feeble outlook

“I don’t think one can expect any big surges in growth over the next three to five years or that new categories will emerge on any relevant scale,” says Lars Hofacker, who runs the e-commerce research division at EHI Retail Institute (EHI).

Interestingly, Hofacker points to recent EHI research showing that most German customers do not demand same-day delivery.

Apparently, most expect their orders to arrive within two to three days, and one in four consumers are even happy with delivery times of one week or more. “Same-day delivery is still a niche, free dispatch is more important to customers.”

This is perhaps just as well when more than three-quarters of all German online retailers still aren’t able to offer customers a specific delivery day, let alone a time slot (just 13 per cent).

The cost factor

At least, however, there is enough critical mass in the segment for some figures to have emerged. The usual charge of €5 or €6 for online food deliveries clearly doesn’t cover the cost of picking orders in local fulfilment centres and delivering them to customers.

This is not even compensated by a higher average online spend and generally more prosperous customers.

Initially, it is cheaper for multi-channel retailers to organise in-store collection points which reduce fixed costs. A.T. Kearney and the University of Cologne compute that this model incurs labour costs of around €7 to €8 per order.

But this solution only works up to a point. When weekly orders start hitting four-digit levels, semi-automated central distribution centres for drive-ins become more economical.

Such DCs can reduce labour fees to around two-thirds of the total cost base which includes infrastructure and energy costs. Here cost per order sinks to around €4 to €5.

On average, A.T. Kearney computes that home delivery costs retailers around €6 per order. If one looks at, for instance, REWE online, which charges €5 for orders of more than €40 and only €2 for orders over €150, it is clear that the maths still don’t add up.

Add to this an inevitable percentage of returns, and one has the makings of a little horror scenario.

But maybe Amazon.com is on another script and using a different kind of slide rule?
Related articles in German: Lebensmittel Zeitung, no. 23, 07.06.2013, by Manuela Ohs bzw. Lebensmittel Zeitung, no. 22, 31.05.2013, by Birgitt Loderhose et al.

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Comments for this article are closed.

  1. Tim
    Created 31 January, 2014 18:43 | Permanent link

    Christopher Caldwell writing in last weekend's Financial Times also did a dissection of Amazon. He made the following comment:
    "In many US towns, there is no longer any mom-and-pop store down the street, and retail options have shrunk to two: a well-functioning Amazon versus a malfunctioning Amazon."
    So the closing sentence on this blog post sums it up rather neatly.

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