Putting Amazon Go in Context

Amazon on Monday announced its latest initiative: Amazon Go. This model will see Amazon open a grocery store, in Seattle early next year, with a unique purchasing model – customers scan a barcode in the Amazon Go app as they enter, collect the items they want to buy from throughout the store, and walk out. The store tracks what they pick up and automatically bills their Amazon account when they’re done. Reactions to the announcement seem to have ranged from the skeptical to the overblown, so it’s worth putting all this in context.

The US grocery market

The first context we need is the scale of the US grocery market. The US Census Bureau provides regular statistics on US retail. Total retail sales in the US in 2014 were $5.2 trillion but that includes both car and parts sales and food service (i.e. restaurants). If we exclude those two categories, we end up with a total of $3.6 trillion (cars and parts account for a trillion dollars alone, while food service is another $575 billion annually).

In that $3.6 trillion is a category the Census Bureau calls Food and Beverage Stores, which includes supermarkets and other grocery stores, convenience stores, specialty food stores, and beer, wine, and liquor stores. This entire category generated revenue of around $670 billion in 2014, with traditional supermarkets and grocery stores accounting for the vast majority of that at $600 billion and convenience stores another $26 billion. The chart below shows the percentage of total retail in the several sub-categories of the Food and Beverage Stores category and also two other categories in which at least some basic groceries are purchased: pharmacies/drug stores, and gas stations:

US Retail Breakdown

Of these various categories, it’s likely Amazon Go will only target a small subset – the convenience store category is the most likely fit, while there will be small subsets of the gas station and drug store categories for which Amazon Go might substitute. I would guess that across these various categories, the addressable market amounts to around $50 billion in the US. Of course, that is the total addressable market for all firms with stores across the United States.

There are a total of 38,000 grocery stores with sales over $2 million annually in the US today and the average square footage of those stores is around 46,000 sq ft. By contrast, Amazon intends to have a single 1800 square foot store in Seattle to start. So, any breathless evaluation of Amazon’s entry into the physical grocery store market needs to be tempered by that context. However, based on reporting from the Wall Street Journal over recent months, Amazon apparently intends to open as many as 2000 of these stores over time, which would make a much more meaningful dent in the grocery space. We have no timeframe, however, for that broader ambition.

The context of Amazon’s existing business

The other interesting context to look at here is Amazon’s existing business in the US. I’ve no doubt it’s a major strategic priority at Amazon to look at all the retail categories on a regular basis and gauge Amazon’s position in them with a view to understanding how to increase Amazon’s share. It already has a presence in many of the biggest categories and recently began experimenting with that trillion-dollar car sales opportunity, albeit overseas (in Italy). Also, it participates in the grocery market through Amazon Fresh but that really only targets the planned segment, not so much the “grab something on the way home from work” segment.

Amazon’s North American business (excluding AWS) generated $75 billion in revenue in the past twelve months. So the convenience store business, in its entirety in the US, is only a fraction of Amazon’s existing US business. That may still be worth pursuing but it’s not going to multiply the scale of Amazon’s existing US business as it’s currently constituted. However, the same model applied to larger stores that go beyond mere grocery staples could be significantly larger. That model appears to be part of Amazon’s longer-term plans here too, according to those WSJ reports.

Beyond all of this is the potential for Amazon to license the underlying technology to third party retailers, something Ben suggested in his piece yesterday. He cited AWS and the Alexa developer tools as precedents but, given what the Journal has reported, it’s clear that at least a big part of this strategy for Amazon is about first-party retail. There’s also the broader question of whether competing retailers would want to license technology from a company they generally see as a threat. General purpose developers licensing AWS don’t usually compete directly with Amazon in the same way retailers do. Were Amazon and retailers to come to an agreement on such a structure, Amazon would only take a cut but it would then potentially be tapping into the over 90% of the current retail market that’s still tied to brick and mortar sales.

An interesting start

Whether it’s drone-based delivery or automatic checkout at the grocery store, Amazon is fond of releasing concept videos for ideas most of its customers have no chance of seeing in action anytime soon, especially around the end of the year, which is the company’s biggest time for sales. These publicity stunts often get lots of positive attention in the press, often fairly unquestioningly so. This concept is a little closer to becoming reality than some of Amazon’s other recent announcements, with employees already participating in a beta program and a store scheduled to open in early 2017 for other customers. But it’s still important not to get too carried away by the hype – with one 1800 square foot store in a single city, Amazon is dipping its toes in the water in a decent-sized market but, until it expands significantly beyond that footprint, this is a novelty rather than an earth-shaking announcement and that’s assuming the technology works as advertised.

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Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

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