How Amazon wasted a decade on supermarkets

The retailer’s plans to revolutionise food shopping through tech are floundering, write James Titcomb and Hannah Boland

Jeff Bezos had a golden rule for deciding whether Amazon should take the great leap from the internet to the high street. “We would love to [open physical stores] but only if we can have a truly differentiated idea,” he told an interviewer in 2012. “We want to do something that is uniquely Amazon.”

In the years since, the company has repeatedly tried to reinvent the supermarket. In 2016, it opened a till-free convenience store on the ground floor of its Seattle headquarters, using cameras and artificial intelligence to monitor what customers picked off shelves.

The following year, it paid $13.7bn (£11bn) for the upmarket grocer Whole Foods. And in 2020, it opened its own range of high-tech Amazon Fresh supermarkets in the United States before later expanding to Britain.

Despite the company becoming the world’s dominant internet retailer, however, Amazon’s near-decade of trying to reinvent the supermarket has stubbornly remained an ambition.

In the past five years, the company’s total revenues have more than doubled as next-day delivery and a near-infinite selection has meant online shopping surged. In contrast, sales from physical stores have risen by only 16pc. They made up just 3.5pc of Amazon’s total sales, compared to 7.4pc in 2018. Meanwhile, its number of physical stores has fallen from 679 to 628 in the past two years.

Earlier this month, Amazon’s shopping ambitions were further curtailed as the company said it would stop using its till-free “Just Walk Out” technology in its US supermarkets.

The technology was supposed to automate away cashiers by using cameras and sensors to track what people were taking off shelves. But as it turned out, the company was still relying heavily on human labour: according to the tech news website The Information, Amazon still required an army of more than 1,000 remote workers in India to verify purchases, falling back to human judgment in the majority of cases.

Amazon will still use the technology in its smaller Go convenience stores – many of which it has closed – and in its UK Fresh stores, as well as selling it to retailers such as Sainsbury’s, which has tested the system in one store.

But phasing it out of its own supermarkets is the latest sign that its attempts to shake up the grocery industry are floundering.

“Amazon is learning the hard way that they can’t reinvent the supermarket using only the technology they invent,” says Brittain Ladd, a former Amazon executive and consultant to the US supermarket chain Kroger. “Just Walk Out failed to improve the customer experience, and

‘Its progress in the grocery market has not been a straight-line success … has much progress been made at all?’

‘They’re not established as a brand, they don’t have the same backing as the biggest supermarkets’

I believe Amazon’s Dash Carts [smart trolleys that scan items as they are added] will also fail to reinvent supermarkets.”

Paul Foley, the former UK chief of Aldi and the chief executive of Foley Retail Consulting, says Amazon simply failed to make the technology cheaper than a conventional supermarket.

“Amazon and all operators who have copied the concept find the idea just is not financially viable,” he says.

“The tech can only support the identity of very recognisable product purchases like pre-packed canned drinks or packets of cake. This means the tech cannot identify the 5,000 different items that make up a typical convenience store. The tech is still much more expensive than a conventionally run convenience store. The whole concept in my opinion was an advert or marketing tool for the innovation that the Amazon brand stands for. And that worked.”

One source involved in the launch of Amazon’s Fresh stores in the UK says that technology allowing shoppers to avoid cashiers is simply not much of a draw. They said: “From my perspective, I just think it doesn’t work. They offered the Just Walk Out technology as a point of convenience and a quick shop and it’s a bit of a quirk… but is that what people want?”

The source says Amazon should have paid more attention to the traditional rules of retail. “They’re not established as a brand, they don’t have the supply chain, they don’t have the same backing as the biggest supermarkets. They’re a disrupter in a market that isn’t really disruptable.”

In the UK, Amazon has expanded to open 20 Fresh stores, all in London, although it closed three last year. The stores rely on the same Just Walk Out technology Amazon is winding down in the US but they also have physical tills, in a sign of the difficulty faced in changing consumer habits.

Clive Black, an analyst at Shore Capital, says it would need to make a Whole Foods-esque acquisition to really make a dent. “Its progress in the grocery market has not been a straightline success,” he says. “One can question, despite much huffing and puffing and the acquisition of Whole Foods, as to whether much progress has been made at all.”

Other bricks and mortar offerings from Amazon have also fallen away. In 2018, it opened a chain of 4-Star stores, named because it would only sell items with Amazon review scores of four or higher. Shelves had electronic price tags that updated real-time review information and allowed the company to offer discounts to Prime subscribers.

Jon Reily, a former Amazon executive who worked on the 4-Star stores and is now an executive at the digital consultancy Bounteous, says that the stores were introduced to gather data that could improve Amazon’s own website. “They wanted to learn how people acted in the real world. And whether that was different from how they act in the digital world.” In 2022, the company closed all of its 4-Star stores. It came less than a year after Bezos stepped down as chief executive and was replaced by Amazon executive Andy Jassy. The new chief has cut back unprofitable parts of the business including ambitious projects once pursued by Bezos, such as video doctors and Alexa devices.

Jassy has suggested he still has big plans in supermarkets. Last year, he said the company was ready to “go big on the physical side”. Instead, the company’s closures continued with several Fresh and Go stores, as well as two clothing shops it had opened.

Last week, Jassy published his annual letter to shareholders. The letter was less than fulsome on the future of the company’s physical stores, instead suggesting that shoppers would be able to order milk and eggs online to arrive at their door the same day instead of having to travel to their local supermarket.

It is a potentially enticing proposition for shoppers, but suggests that the company’s own physical stores are hardly a priority. Amazon has spent almost a decade trying to reinvent the supermarket; it may now have decided that is one thing it can’t change.