Amazon In The Grocery Business - Why This May Not Be The Future of Retail

Published: Wed Feb 28 2018

Amazon, the giant internet retailer, decided to move into the Grocery business. That news was delivered in June of last year when Amazon announced that it was purchasing Whole Foods. Then, in January of this year, Amazon opened up its first grocery store in Seattle, Washington State, USA.

This move into the grocery business by Amazon has been well received. When the Whole Foods announcement was made the Amazon share prices rose by 2.4%. Then, when the first store was opened, the share prices of Amazon went up by another 2.5%.

Interestingly, the new grocery store by Amazon is based on using new technology so as to minimize the number of workers and reduce labor costs. Notably, the new grocery store has no cashiers! Amazon is also hinting at using virtual carts and apps to replace the entire checkout procedures.

At Bouchard Fintech, we have scrutinized this move by Amazon. Let us examine if this is the future of retail.

Reducing costs and automating the grocery stores are notable events and may yield positive results. Still, it is way too early for other retailers to follow suit. After all, this is not the first time that new technology has been introduced into the retail world. It is also not the first time that technological advances failed to gain traction with the buying public. In the past, new ideas, automation and technology did not always function as advertised. In other instances, the technology worked but the cost savings were not enough to offset the associated costs.

However, the truly important test is whether the public will accept the new technology. For a new concept or new technology to take hold it must be liked by the buying public. A new technology must also be acceptable to a sufficient segment of the market. In percentage terms, it usually means that at least 15% of the public is willing to adopt the new technology and that a significant portion of buyers are willing to try it out.

Our research, at Bouchard Fintech, indicates that Amazon Go will face two very important challenges. The first challenge has to do with initial cost and expected savings. The second challenge has to do with customers adopting the new technology.

On the costs front, the initial up-front costs are going to be very significant. From research and development to setting up and perfecting the technology, the amounts will quickly add up. Then there will be the on-going costs of monitoring and maintaining the technology. As such, it is way too early to say if those costs will be recouped and whether or not the savings will be significant enough to warrant the expenses.

On the customer adopting the new technology front, the challenges may be harder to forecast and more difficult to overcome. Why so? Well for Amazon Go to work there has to be a very high level of customer tracking and customer surveillance. For many customers added monitoring and surveillance is not at all welcome. One study in the UK found that about one fifth of the public had serious reservations with a telephone app that tracked them.

What Does This Mean For Other Retailers?

Before trying to copy Amazon, retailers will want to consider their own particular situations and consider the associated challenges. Additionally, there have been historical experiments with retail technology that should also be kept in mind.

History lesson regarding Radio Frequency Identification (RFID)
The new technology of RFIDs was supposed to galvanize the entire shopping and retail experience. Introduced some two decades ago, RFIDs would use radio frequencies to track products, objects and items. The promise was that retail would be transformed by having RFIDs on each and every item and by eliminating the need to scan items at the check-out counters.

In the grocery business attaching RFIDs is no easy task. The number of individual items is simply staggering and the products move off the shelves at a highly rapid pace. The profit margins on many items are very tiny. In the end, it did not make financial sense to tag each and every item in a grocery store with RFIDs.

This technology did not truly catch on as the associated costs of tagging each and every item were simply too high. The anticipated costs savings could not be realized, at the time, and so RFIDs did not become mainstream.

History lesson regarding the self-service checkout
Self-service counters or Self-checkouts as they are sometimes called, did achieve some measure of user acceptance. The idea makes sense for smaller quantities of items. It also made sense for retailers where floor space was very tight and where the labor costs are simply too high. Still, they remain a less interesting option for the majority of customers.

Stores have made self-service checkouts an option in many locations but the reality is that they have experienced a narrow margin of success. In urban settings such as New York City, some customers make use of the self-service checkouts but the numbers are still small. Larger customer adoption has been noted in places like London, UK and parts of the Netherlands. Still, they are more likely to be available in smaller convenience stores where the items being bought are fewer and space is limited.

So far, retailers in the USA have not rolled out self-service checkouts in any large numbers. The financial equations have not made these options worthwhile, at least not to date. Additionally, there are real and perceived limitations to what the self-service counters can accomplish. There are frequent operational and human errors as well as customer confusion. In order to clear those issues out, retails have to employ staff members to assist and thereby lose a considerable portion of the promised labor cost savings.

History lesson regarding Electronic Shelf Labels

The Electronic Shelf Labels are electronic labels that allow stores to set a price of an item using a digital display. When this new technology was first introduced it seemed to make sense to both the retailers and the customers. The prices would be clear to see and they can be quickly adjusted electronically. However, that was not how it initially worked out. Display units were very expensive and the displays themselves were small and hard to read.

Some ten years later, Electronic Shelf Labels have been adopted by a number of retails but certainly not by all of them. Countries that have higher labor costs were quicker to implement this technology. Over time the display units were improved and their costs have come down. The technology used has also improved and now allows more data to be displayed. Discounts and specials can be quickly changed to better meet the demands of retailors. As such, more retailers are opting to make use of these in their stores.

History lesson regarding Mobile Payments
Mobile payments have generated a considerable amount of interest and anticipation. The promise of mobile payments simply resonated with the public and generated a lot of buzz. Paying by using one's smart phone sounded so cool and so very convenient. For retailers, the promise of reducing how much they pay out in credit card fees was and remains a tempting solution.

Many retailers are looking at creating their own mobile payment systems. The opportunity to receive payment directly from consumers is very tempting. Skipping third party service providers and avoiding credit card fees are no brainers for savvy retailers. Still, for consumers, they already have many convenient payment options. Those options include debit and credit cards with chip and tap (contactless) technology. The challenge for retailers is more focused on how to get the customers to adopt the payment apps that are offered by the retailers. To achieve that, shrewd retailers are trying to incentivize consumers by giving them added loyalty points, extra bonuses and special discounts.

Where does this leave retailers? So far, the markets have shown a real interest in Amazon Go. This entry by Amazon into the grocery business and into operating actual stores is being watched carefully. Amazon could be on to something big here and convert its business prowess into a successful venture in the grocery world by adopting new methods and new technology. Still, Amazon is taking on big challenges and considerable risks. Much of what is being tried will be new and there are real costs associated with this experiment.

Amazon, of course, has the resources, including vast amounts of money, to be able to test these systems out. Few other retailers, in Bouchard Fintech's estimates, may be as innovative or as well-funded as Amazon. Ultimately, customer acceptance is going to be the key. If consumers adopt the new Amazon model then that would be a good incentive to follow their example. However, most other retailers are not as well funded as Amazon. For them the costs may simply be too high, at least for the time being. Therefore, if this technology is to succeed for other retailers it would have to make good operational and financial sense. The benefits, including monetary ones, will need to truly outweigh the costs.

The above material was researched and written by Bouchard Fintech.

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