Why Did Amazon Fresh Fail in Germany?

[00:00:06] You're listening to Retail Disrupted, a podcast that explores the latest industry developments and the trends that will shape how we shop in the future.

[00:00:16] I'm your host, Natalie Berg.

[00:00:29] On today's episode, we're going to be talking about the news that Amazon is terminating its online grocery service in Germany.

[00:00:37] Amazon Fresh launched in the German market in 2017.

[00:00:41] The service was available in three major cities, Berlin, Hamburg, and Munich.

[00:00:46] According to the information which first reported the news, Amazon will still play a role in the German grocery e-commerce space.

[00:00:54] But instead of delivering their own products, they're going to be focusing on delivering for their retail partners, Tagit and Rollik Group.

[00:01:03] And Rollik, if you haven't heard of them, they are an online grocer based in the Czech Republic.

[00:01:08] And we're going to talk about them a little bit later on in the episode.

[00:01:11] To help me break all this down, I'm delighted to welcome Boris Planner back to the podcast.

[00:01:15] Boris is a former colleague of mine.

[00:01:18] He's a friend.

[00:01:18] I've known him for nearly two decades now.

[00:01:21] And he is my go-to person for all things German retail.

[00:01:25] Boris, welcome back to the podcast.

[00:01:28] Yeah, Matt.

[00:01:28] Hello.

[00:01:29] It's good to be back.

[00:01:30] Thanks very much.

[00:01:31] It's so great to have you back on the podcast, Boris.

[00:01:33] It's like the old Planet Retail days when I was running the research team and you were the chief economist.

[00:01:40] And we used to meet up and have many great conversations about all things global retail.

[00:01:45] So it's a real throwback to those days.

[00:01:47] And I'm excited to get your views on Amazon.

[00:01:51] And it's so timely because we had a catch up last week and you kindly offered during our call, you kindly offered to come on the podcast as and when anything interesting happened in the German retail space.

[00:02:03] And literally the next day we heard about Amazon shutting down its online grocery service.

[00:02:07] So very, very timely.

[00:02:09] And I am looking forward to discussing this with you.

[00:02:12] Now, you are based in Frankfurt.

[00:02:14] So maybe you never had the opportunity to test the Amazon fresh service.

[00:02:19] But with your analyst slash economist hat on, what did you make of the offering?

[00:02:25] And I guess the second question to you, the obvious one that I think our listeners will most want to hear about is what is it that went wrong?

[00:02:33] Yeah, look, Amazon as an online player was active pretty much in a niche market.

[00:02:40] When they started Amazon fresh in 2017, the market got a bit nervous.

[00:02:45] People thought they would go very big, very fast.

[00:02:48] It then didn't happen.

[00:02:49] And it had the positive effect of alerting everyone else and triggering some investment with mainstream grocers in online.

[00:02:55] So what went wrong?

[00:02:57] Probably Amazon overestimated the speed at which e-commerce would develop in Germany.

[00:03:02] And that's for several reasons.

[00:03:03] That's partly because of consumers.

[00:03:04] We can talk about that.

[00:03:05] It's partly about the lack of early willingness with mainstream grocers to take the risk and invest in online.

[00:03:12] Germany is a more risk averse market than other countries.

[00:03:16] But also, you know, the structure of the German retail market is quite different from other countries.

[00:03:22] So discounters, the Aldis and Lidls and the like, they have got a combined market share of 43%.

[00:03:28] 98% of the population can reach a discounter from their home within 10 minutes.

[00:03:33] So it's very difficult to save time shopping online when such, you know, affordable stores are so close to your home.

[00:03:40] And obviously, there is potential for online grocery in Germany.

[00:03:46] And the market share of online more than doubled from 3% to 7% since the pandemic.

[00:03:50] But that looks still pretty small compared to other markets like the UK where online, you know, better than me, but probably is close to 20% now.

[00:03:59] The long-term potential remains remarkable.

[00:04:01] But I think Amazon is understanding that the market isn't developing as fast as they were originally hoping to.

[00:04:08] Yeah, I think there is certainly an element of underwhelm in all of this.

[00:04:12] I think that perhaps the market hasn't grown just as quickly as maybe a lot of analysts and spectators had thought it would during the pandemic.

[00:04:22] There was a real feeling that this was an inflection point for grocery e-commerce.

[00:04:29] And I'm not talking specific to Germany here, but globally, it felt like this was going to be the thing that propelled e-commerce that would finally get people buying their groceries online.

[00:04:40] And, you know, as we've seen, especially in grocery, it turns out we actually like shopping in stores.

[00:04:49] So there's a lot to unpack there, and I don't want to dwell on that.

[00:04:53] Grocery e-commerce in the UK, if we look at penetration rates, it's actually even lower than 20%.

[00:04:58] I think it's hovering around kind of 11% to 13%.

[00:05:01] So, again, it shows even in one of the most sophisticated online grocery markets in the world, it's still, you know, kind of inching along.

[00:05:11] It's not, you know, I guess I always go back to the fact that if a pandemic can't propel us forward in terms of online grocery penetration,

[00:05:20] well, I'm not really sure what can.

[00:05:22] And, you know, that's a whole other topic for another time.

[00:05:25] I loved your point, Boris, just now about how 98% of German shoppers can reach a discounter within 10 minutes.

[00:05:33] I mean, that says it all, right?

[00:05:35] Yes, the discounters are trading on the concept of value.

[00:05:39] And, of course, value doesn't just mean low prices.

[00:05:42] It's that combination of price and quality.

[00:05:45] But there's also a convenience element here, and you can see why it's been hard for German grocers to compete with that.

[00:05:52] So I'd love to dive a little bit deeper here, Boris.

[00:05:55] You touched on something that we often refer to in the industry as the Amazon effect.

[00:06:01] And one thing we have to give Amazon credit for, even if they are shutting down their Amazon Fresh service,

[00:06:07] but I think one thing we have to give them credit for is igniting change.

[00:06:11] Because, you know, the industry, the rest of the industry scrambles to keep up with Amazon's innovations.

[00:06:17] And ultimately, the customer ends up benefiting.

[00:06:20] And you touched on the specifics of the German market.

[00:06:25] You know, the competition being tough, birthplace of Aldi and Lidl, so discount shopping being firmly entrenched, and the market becoming digitized.

[00:06:34] And I spotted a statistic from PwC.

[00:06:37] They said that 17% of German consumers now buy groceries online, which is twice as many as three years ago.

[00:06:44] And 32% of Germans would like to buy their groceries online in the future.

[00:06:48] So even though the discounters have such a strong presence, there is this growing desire to buy groceries in different ways.

[00:06:56] So I'd love to get your thoughts, Boris, on how you've seen the sector evolve, the online grocery sector.

[00:07:02] And obviously, COVID was a huge catalyst.

[00:07:06] But how have you seen it evolve?

[00:07:08] And to what extent do you think Amazon has played a role in driving this change?

[00:07:12] Yeah, I think Amazon has played a vital role in driving the change.

[00:07:16] Germany, as a typically risk-averse market, was dominated by retailers in the mid-2010s,

[00:07:22] who were hoping to probably not have to invest in grocery e-commerce too much because it's big investments.

[00:07:29] The profitability is doubtful.

[00:07:31] And German retailers, they tend to wait and see how the market develops, how consumers develop.

[00:07:35] And then suddenly, in 2017, Amazon makes the announcement to set up an online food shop in Germany.

[00:07:41] And that really woke up people.

[00:07:45] And now we've seen a number of really, really promising and good initiatives that probably wouldn't have developed as fast as they did without Amazon.

[00:07:53] So Rewe Online, for example, they are available in around 80 cities, I believe, now in Germany.

[00:08:01] And that covers a pretty big percentage of the German market.

[00:08:05] Rewe also has a stake in Flink, which was the winner of the big consolidation battle in Quick Commerce.

[00:08:10] And then Edeka, the grocery market leader, they're invested in Picnic, which is probably one of the world's or at least Europe's most promising e-commerce forecasts,

[00:08:22] which is also expanding fast now.

[00:08:24] So Amazon really helped to wake up a sleeping market and drive dynamics.

[00:08:29] And I think people are now at a point where they understand that e-commerce is going to be an important part of the future of retail.

[00:08:35] Currently, 7% market share, 17% of people shop online quite regularly.

[00:08:41] They don't shop everything online, but so the market share is probably around 7% now.

[00:08:46] But I think consumers, they don't ask which business model a retailer prefers to operate.

[00:08:52] They just shop in a way that is easy and convenient for them, like we did when we were 20 in not such a long time ago.

[00:09:00] So, and, you know, the digital natives, they are entering their prime spending years now.

[00:09:05] And with them, there's new shopping habits coming into the market, new ways of getting informed.

[00:09:10] Let's remember what a big share of purchases are probably happening in stores still, but are digitally influenced.

[00:09:16] And all the marketing and loyalty is becoming digital now.

[00:09:19] And then, you know, in a short while, Gen Alpha will become independent consumers and they are the first AI natives.

[00:09:30] So they grow up with artificial intelligence as a normal thing.

[00:09:33] So again, this will influence the way they get informed and make decisions and shop.

[00:09:38] And I believe online grocery has a potential of reaching perhaps 15% market share by the end of this decade.

[00:09:45] Just to go back to Amazon, I think Amazon's main problem with grocery is that it's not perceived as a credible food destination.

[00:09:55] I don't think shoppers tend to think of Amazon when they think of, you know, lettuce and apples and milk.

[00:10:01] So to what extent is that case in Germany?

[00:10:05] It's pretty much the same.

[00:10:06] So if you go and look at the online offer on the Amazon platform of Tegut and probably Knospa slash Rolex is going to look very similar.

[00:10:14] Well, that looks like the standard Amazon offer.

[00:10:17] And that is the contrary of inspirational.

[00:10:19] It really is designed to almost scare off people.

[00:10:22] I would say it's so terribly transactional.

[00:10:24] And you need to understand what you want before you even start shopping.

[00:10:29] You want bananas.

[00:10:30] You enter bananas as a search term.

[00:10:32] But, you know, there's very few areas where you can actually explore and get inspired and then perceive shopping as something that is fun and entertainment.

[00:10:39] And then you do a lot of surprise purchases that you weren't planning to do before.

[00:10:43] I think there's a lot to learn from Asia where e-commerce from the start has been designed as a pastime activity that's entertaining.

[00:10:50] And Amazon is looking so transactional.

[00:10:53] And I think what's been catching up with Amazon, not least in grocery, which is such an experiential category,

[00:10:58] what's been catching up with Amazon is the fact that people have higher expectations now on how fun shopping should be

[00:11:04] and how inspiring it should be, how easy it should be to navigate through aisles to discover new things.

[00:11:12] And I sometimes wonder why can't online shops really visually replicate a physical supermarket where people virtually can walk around

[00:11:18] and there's big opportunity for the next generation of technologies here.

[00:11:22] Amazon looks a bit, you know, 2010s, I would say.

[00:11:27] A little bit dated.

[00:11:28] Yeah.

[00:11:30] Yeah, yeah, yeah.

[00:11:30] And I think as a consumer, you are naturally pulled to alternative offers, I would say.

[00:11:36] Yeah.

[00:11:37] And I mean, I would, I would, I agree with a lot of what you just said, but I would also counter that and say that I think with food shopping,

[00:11:44] that yes, it would be nice for it to be a little bit more experiential and feel a little bit more native, I guess is the right word,

[00:11:53] where you're walking through a kind of digital supermarket.

[00:11:56] And I'm pretty sure Walmart experimented with something like this and, you know, what kind of role, I don't know,

[00:12:02] the metaverse might play or some, some form of the metaverse.

[00:12:05] So it's just a little bit more intuitive for the shopper.

[00:12:07] But I'd also make the case that I think with food shopping, food shopping is habitual.

[00:12:12] We buy the same stuff week in, week out.

[00:12:15] It's non-discretionary.

[00:12:16] We all need to eat.

[00:12:17] So I think in that sense, transactional isn't maybe as bad as it might be for non-food shopping.

[00:12:24] I think that with grocery retail, there is a real opportunity to take the chore out of food shopping.

[00:12:30] And I think there's also a huge opportunity to provide more recipe inspiration.

[00:12:36] We're certainly seeing a lot of that with generative AI.

[00:12:38] From Amazon's perspective, there is an opportunity for them to disrupt the status quo.

[00:12:44] I think the fact that they have terminated their Amazon Fresh service in Germany,

[00:12:51] and they have also scaled this back in the UK.

[00:12:54] So earlier this year, I'm not sure if you're aware of this, Boris, but earlier this year,

[00:12:57] they scrapped Amazon Fresh in five cities in the UK.

[00:13:03] So Glasgow, Portsmouth, Sheffield, Leeds, and Newcastle.

[00:13:07] And that service had been trading for a similar amount of time as the one in Germany.

[00:13:12] They're still offering Amazon Fresh to shoppers in London and Manchester.

[00:13:15] So I think it's interesting that after kind of seven, eight years of testing grocery e-commerce,

[00:13:22] that they've decided to make such significant changes.

[00:13:24] And I think it gives us an indication of where they see the opportunities going forward.

[00:13:29] Because at the end of the day, Amazon is a tech company,

[00:13:31] and their USP isn't selling apples and bananas.

[00:13:35] It's licensing their technology to other retailers, in this case, within grocery.

[00:13:41] I really think that, you know, we've said for a long time that at some point,

[00:13:44] they're going to have to make the decision as to whether they want to be a grocery retailer

[00:13:49] or they want to be the rails that the grocery retailers run on,

[00:13:53] that they want to be the infrastructure.

[00:13:55] So, I mean, there's lots to unpack here.

[00:13:57] But I think it's interesting, the partnerships that they've had

[00:14:00] and how that's really going to be their focus.

[00:14:02] So in the UK, you know, they have storefronts for Morrison's, Coop, Iceland.

[00:14:06] And there's always been on and off rumors about Waitrose potentially coming on the platform.

[00:14:12] They also sell products from Booths, which is a northern British grocer.

[00:14:17] So partnerships are really important.

[00:14:18] And I think that helps them achieve that kind of credibility

[00:14:21] and also helps them learn a lot about selling groceries online.

[00:14:25] So it'd just be interesting, I guess, like with their partnerships in Germany.

[00:14:30] I don't know.

[00:14:30] Do you think that more German grocers might be more willing to partner with Amazon

[00:14:36] now that they're no longer a competitor?

[00:14:38] I think so.

[00:14:39] I think that's possible.

[00:14:40] And mainly if we look at the Tier B and Tier C of more regional retailers,

[00:14:44] there are some partnerships in place already.

[00:14:46] For example, Amazon has this online partnership with Teegut

[00:14:50] and Teegut is going to continue to sell fresh food.

[00:14:53] Amazon itself is going to limit itself to dry groceries.

[00:14:56] But through their partnership with Teegut,

[00:14:58] people will still be able to buy fruit and veg from Amazon.

[00:15:01] And then they have a partnership in place with Bünding,

[00:15:04] which is a regional retailer from northern Germany.

[00:15:07] They buy private label from them, economy private label,

[00:15:09] because they found out the German market is so price competitive

[00:15:12] and price is so important to consumers here

[00:15:15] that they need entry-level private labels.

[00:15:19] So they have a Marcant label.

[00:15:21] They've been offering and sourcing from Bünding,

[00:15:24] but they also developed their own economy range,

[00:15:29] which is called Our Essentials,

[00:15:30] a long time before they're now finally starting

[00:15:33] to do something similar in the US,

[00:15:35] where they're just launching Amazon Saver.

[00:15:37] So I think on that level,

[00:15:39] but then also sharing technology,

[00:15:41] there's partnership opportunities

[00:15:42] because a number of retailers have been experimenting

[00:15:45] with checkout-less stores or with grab-and-go formats.

[00:15:49] And, you know, one leading player here, again,

[00:15:52] you know, Teegut, you know,

[00:15:54] the parent company of Teegut,

[00:15:56] Mikorov from Switzerland,

[00:15:57] they are really accelerating growth

[00:16:00] of their TO format now.

[00:16:01] And then the mainstream grocers,

[00:16:03] Edeka, Riva, Aldi,

[00:16:05] they've all been experimenting

[00:16:06] with their own checkout-less stores

[00:16:08] and grab-and-go formats.

[00:16:09] So I think on the level of the more regional grocers,

[00:16:12] there's a real opportunity here for Amazon

[00:16:14] to do partnerships,

[00:16:15] especially the grab-and-go technology

[00:16:17] over the next few months

[00:16:18] is going to become more affordable for retailers.

[00:16:20] And the sort of economic viability of that format,

[00:16:25] along with the successes,

[00:16:26] the popularity with consumers,

[00:16:28] that's going to make a number of retailers

[00:16:31] think about partnerships with whoever.

[00:16:33] And then Amazon obviously has a good chance

[00:16:35] to position itself here.

[00:16:36] Yeah, yeah, really interesting.

[00:16:38] It'll be interesting to see what happens internationally

[00:16:39] if they decide to scrap Amazon Fresh

[00:16:43] or really limit it to the big cities

[00:16:45] and then focus on those partnerships

[00:16:47] and that could be really how

[00:16:49] Amazon's grocery strategy evolves.

[00:16:51] That's probably more lucrative

[00:16:53] than them being an online grocery retailer

[00:16:55] and enables them to kind of capitalize

[00:16:59] on their technology prowess.

[00:17:01] So really interesting stuff for us.

[00:17:03] I just want to wrap up

[00:17:05] with getting your thoughts on Rolik,

[00:17:08] the Czech startup that I mentioned

[00:17:09] at the beginning of our conversation.

[00:17:11] They have really ambitious growth plans for Europe.

[00:17:15] They're planning to launch in 10 new cities

[00:17:17] over the next six years.

[00:17:19] And it's interesting that at least in Germany,

[00:17:21] they are looking to Amazon to make that happen.

[00:17:24] It sounds like they have

[00:17:25] a really interesting business model.

[00:17:27] So instead of trying to take a physical supermarket

[00:17:30] or a physical superstore

[00:17:31] and translate that proposition online,

[00:17:34] their focus has been on operating smaller warehouses

[00:17:37] and then collaborating with local producers

[00:17:39] and local sellers, butchers, fishmongers,

[00:17:42] that kind of thing.

[00:17:43] They have 17,000 SKUs.

[00:17:45] And the other final interesting fact

[00:17:48] that I will share about this business

[00:17:49] is that Rolik means baker in Czech

[00:17:52] and they actually bake bread at their DCs.

[00:17:55] So there you go.

[00:17:56] Boris, what do you make of Rolik?

[00:17:59] I know it's branded differently in Germany,

[00:18:01] but what do you make of it?

[00:18:02] And do you think it's doing a good job

[00:18:04] differentiating from the existing grocers?

[00:18:06] Yes, I think they do a good job.

[00:18:08] They expanded into Germany some years ago,

[00:18:10] set up headquarters

[00:18:11] in their first urban operations in Munich,

[00:18:13] then expanded to Hamburg and to Berlin

[00:18:18] through their merger with Brinkmeister

[00:18:20] some months ago.

[00:18:22] And they do a good job.

[00:18:23] So the product range in Germany

[00:18:24] is a bit smaller than internationally.

[00:18:25] It's 15,000 SKUs.

[00:18:28] There's a minimum order value of 39 euros,

[00:18:32] free delivery from 79,

[00:18:34] but they're very flexible in terms of delivery.

[00:18:37] They can deliver within three hours

[00:18:39] and they keep listening to customers

[00:18:41] and just introduce more precise delivery time slots,

[00:18:45] narrowing it down from one hour to 15 minutes.

[00:18:48] And I feel they're in touch with customers

[00:18:51] and I think they're a great partner

[00:18:52] for a player like Amazon.

[00:18:54] Boris, it's always great to get your views.

[00:18:57] Thanks again for coming on the podcast

[00:18:58] and I hope to talk to you again soon.

[00:19:00] That's been fantastic.

[00:19:01] Thanks for mentioning it.

[00:19:02] All the best.

[00:19:08] Thank you for listening to Retail Disrupted.

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