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Amazon starts UK grocery service

Amazon is joining the fray in one of the world’s most cutthroat grocery markets. The e-commerce giant said on Thursday its AmazonFresh food delivery business would now be available to users of its Prime membership plan in central and east London, the first time the service has been offered outside the US.

Customers will be able to order from a catalogue of about 130,000 items including those of major high street brands as well as independent local producers. Same-day delivery will be available, allowing shoppers to order at lunchtime for a delivery as soon as 5pm.

"We are launching with a comprehensive offer in a limited area and will take our time to hone and improve our service, based on our learnings and feedback from our customers," said Ajay Kavan, vice-president of AmazonFresh. "We will be very methodical and considered in how we roll this service out further in the UK."

After an initial 30-day free trial, the service will cost about £7 per month on top of the subscription fee to Amazon’s Prime service, currently £79 per year. No additional charge is incurred for orders of more than £40, but under that threshold, shoppers will pay about £4 for delivery.

Delivering groceries in the UK will test Amazon CEO Jeff Bezos’s philosophy of sacrificing profits to keep prices low and build customer loyalty.

The Seattle-based company is joining a crowded market of British grocers including Sainsbury, Tesco and internet grocer Ocado that have been engaged in a price war for years. The competition has benefited shoppers, but made it difficult for the companies to make money.

AmazonFresh was hoping for better success than it had found so far in the US, where the service had not gained much traction, said Sucharita Mulpuru-Kodali, an analyst with Forrester Research who tracks the retail sector. The delivery service required a $299 annual subscription fee from customers that many had found not worth the cost, she said.

The company has not added a new city for fresh grocery delivery in about 18 months.

Still, with a dense and affluent population, London is an enticing market for grocery delivery. According to the research firm Mintel, more than 10% of shoppers get all their groceries delivered to their homes rather than going to a store. The UK market is forecast to be worth £9.8bn this year and as much as £15bn by 2020.

"The British consumer is far more likely to buy their groceries online than in the US or Germany," according to an October report by the research firm Euromonitor. "Online grocery shopping is becoming embedded in average consumer behaviour in the UK."

Amazon, already the dominant online retailer in Europe, signalled its ambitions to build a food service in the region in February when it announced a partnership with Morrisons.

The deal established Amazon Pantry in the UK to deliver items such as pasta sauce, potato chips or beverages.

Even as the popularity of grocery-delivery has grown in the UK, the challenge has been making money. Companies struggle to manage an inventory of perishable items and keeping delivery costs down.

Most grocery-delivery companies in the UK charge less than £5 per order, making it hard to turn a profit.

Amazon has a history of shrugging off losses if it translates to luring customers away from competitors. Already, prices at Amazon Pantry are on average 15% cheaper than the next closest competitor, Asda, according to a price analysis of 4,800 products in May by the research firm Profitero.

Amazon is able to swallow the losses because its other profitable businesses.

"For any other company other than Amazon going into the grocery space would be deadly because the economics aren’t there," said Forrester’s Mulpuru-Kodali.

Bloomberg

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