Amazon entry into food giving other retailers nightmares

The Canadian grocery marketplace is in for dramatic change, and that should be of benefit to consumers

HALIFAX, N.S. May 19, 2016/ Troy Media/ – E-retailing giant Amazon has signalled a clear commitment to food products – and to millennials – with its new line of private-label foods.

Amazon’s move to food bearing its label follows in the footsteps of Target and Walmart. And the shift sends a clear signal about greater strategic intentions that should shake the foundations of the food retail industry.

More than anything, Amazon’s creation of the private-label food portfolio is driven by millennials.

The generation that grew up with the Internet is embracing Amazon’s evolution. Millennials appreciate quality, taste and affordability. Most importantly – and unlike previous generations – they are brand agnostic. Boomers are historically brand loyal but they are gradually becoming less active buyers. So major retailers like Amazon have their sights clearly set on millennials.

As the battle for millennials’ money heats up, the private label game in the food business will only intensify.

In Canada, Sobeys recently moved to entice customers to visit the centre of their stores with an aggressive discount strategy. The intent is to keep customers buying the food retailer’s high-margin private labels, Our Compliments and Sensations. It may not be a good fit with Sobeys’ core strategy, but the chain opted to at least play defence in the private-label game.

Not surprisingly, Walmart Canada also ramped up its private-label strategy in response.

Private labels are a goldmine for food retailers. While they have been in Canada since the end of the Second World War, they have been in greater demand over the last couple of decades. Retailers, who already control their own shelf space, also gain control of quality, manufacturing conditions and product development with private labels.

Typically, they rely on outsourced innovation. That allows retailers to develop marketable products without taking the high-risk road of spending millions on research and development. This, too, is a powerful tool for low-margin food retailers.

Amazon has yet to release an exact list of products for its label, but reports suggest that suppliers like Happy Belly, Wickedly Prime, Presto! and Mama Bear are under consideration. So millennials are clearly on Amazon’s mind.

These products will reportedly be available only to Amazon Prime members. The company’s Prime members pay $99 now to get quick product shipment, access to movies and TV programs, music streaming and unlimited photo storage. And with food product purchases, they will avoid having to fight through busy aisles and a long wait at the cashier, as you find at retail giants like Costco. This is another very attractive feature for millennials, who really value their time.

Loblaws, Canada’s No. 1 food retailer, has had a different approach with its President’s Choice label, one of the most recognized Canadian brands. Not only does it have a strong market position, but the infrastructure behind the label is also robust, including a loyalty program and a Shoppers Drug Mart connection.

The reign of President’s Choice will be difficult to supplant, but one can never underestimate the ability of Amazon to transform an industry. Amazon owns a vast database on its customers and uses it in real-time to serve them.

But Amazon’s new strategy won’t just impact competitors. It will also be a problem for national brand vendors that now offer products through Amazon. Now those vendors will have to compete against Amazon’s private label.

Amazon is serving notice to Canada’s food distribution establishment. Most Canadian food companies are barely in the online game. And the fact that food sales are not the core of Amazon’s business is likely keeping the leadership groups at Loblaws, Sobeys, Metro and others up at night. Amazon’s size and reach give it the ability to beat most competitors on price. And since 88 per cent of customers would always pick a private label if it is cheaper than a well-known national brand, such a competitive advantage is key.

The Canadian food retail industry has seen more changes in the last five years than in the previous two decades. This latest substantial shift ramps up the process of change even further.

Canada’s food retailing landscape was once dominated by a small handful of players. Now, Walmart and Costco have muscled in to hold a combined 20 per cent market share, and Amazon is on the rise.

A dramatic change in the food retail industry is being served up for Canadian consumers.

Troy Media columnist Sylvain Charlebois is Dean of the Faculty of Management and Professor in the Faculty of Agriculture at Dalhousie University. Sylvain is included in Troy Media’s Unlimited Access subscription plan.

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