Want an insight into how Amazon founder Jeff Bezos thinks? The Everything Store by Brad Stone is a good read. To summarise, very long term and big picture. He actively seeks out opportunities that promise years of losses followed by a lifetime of slim margins—as long as the eventual potential is big enough—because he knows he can endure that pain better than anyone else. There are few areas that offer such grand potential, or such promise of medium term pain, as the online grocery business.
The topic at hand is Bezos’s growth plans for AmazonFresh, a full range home delivery grocery service. The service started beta-testing in a few Seattle suburbs almost a decade ago. It had a bigger roll out to a handful of large US cities 3 years ago. There has been plenty of teething problems and the company doesn’t seem to have nailed down the right model yet (when that happens, the roll out across the rest of the US will be rapid).
Across the pond
Leaving Amazon and the US behind for the moment, the United Kingdom has one of the most developed (over-developed?) and competitive grocery markets globally, both offline and online. It has far higher online grocery penetration than any other large western market, almost triple US levels. All the major retailers embraced home delivery and ‘click and collect’ as a way to (try) and distinguish their offers, from each other and from German interlopers Aldi and Lidl.
And then there’s Ocado, an online-only player who’s the closest company globally to cracking the code of profitable grocery delivery. It has a head start and a few unique edges in the race to develop scale, although the operation is still largely centred on London. Fresh food delivery in particular is very difficult to get right, especially with highly automated systems. Nobody has made progress on the problems as well as Ocado.
In short, with fierce competition and lots of investment in new technologies and systems, the UK grocery industry is unlikely to return to the land of 5% operating profit margins for a long time yet, if ever again.
Ask any ‘rational’ industry insider or McKinsey consultant where AmazonFresh should open next, and the answer is likely to be ‘anywhere but the UK’. Try Holland. Or Sweden? Australia? Anywhere that offers at least a remote chance of earning decent profit margins in the medium term.
But Bezos isn’t short term rational, he’s long term rational. And so, of course, AmazonFresh is rolling out in the UK, in east and central London initially, right where both Ocado and Tesco are strongest. I posit there are two reasons why Bezos chose to expand in the UK next:
- It makes Ocado’s life tougher. Ocado wants to perfect its model running an online-only grocery business in the UK, and then licence that operating model and systems to other retailers around the world. The UK is the capital-intensive proving ground, the rest of the world the hoped for payday. Amazon wants to make that progression difficult for Ocado, so it has time to catch up. Hey, if it softens Ocado up enough Bezos might be able to buy it and combine Ocado’s hard-won knowledge with Amazon’s deeper pool of resources.
- Less obvious but important—Bezos wants to rule the grocery delivery business globally. And if you want to win the globe, you’ve got to win the UK. He’s running headlong at the competition specifically to test and improve AmazonFresh’s inventiveness and mettle. London is to aspiring online grocers what New York was to Frank Sinatra. He can win Atlanta or Brisbane or Paris by being first. But he can only win London by being the best. What he learns there will pay off everywhere else.
Bezos has a mind that thinks uniquely long term. As importantly, to borrow a term from investor Tom Russo, he has a profound ‘capacity to suffer’ in the meantime. It’s pain today, more pain tomorrow, gain 15 years from now. It’s an interesting model for everyone’s investing toolkit.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.