What grocers can learn from a market basket analysis of Amazon Fresh

David Bishop

David Bishop currently leads Brick Meets Click’s consumer research, retailer benchmarking and sales forecasting programs while working closely with grocers to improve the results of their omnichannel strategies. Brick Meets Click is a renowned analytics and strategic insight firm that leverages its industry expertise, clear thinking and practical solutions to help clients solve the challenge of finding new routes to success in the changing U.S. grocery market.

Most of the news coverage in retail these days is about Amazon versus Walmart, but in grocery, there is a different story that conventional supermarket operators need to know. 

When Amazon Fresh opened in Schaumburg, Ill., on Jan. 28, 2021, Brick Meets Click launched a market basket analysis that monitored its pricing in relation to that of the nearest Walmart, Aldi and Jewel store locations. The market basket consisted of 30 commonly purchased grocery products that ranged across each department of the store and included many known value items.

The market basket analyzed online pricing as this is the predominant sales channel for the Amazon Fresh store locations today. Each month, everyday and promoted prices were captured for the items in the market basket.

Now, after collecting the first six months of data and watching them operate, we have a better idea of Amazon’s pricing strategy and which operators in the market are more likely vulnerable to the new retail concept from a price-position perspective.

Although there are many other insights we can learn from this ongoing work, here are the three top takeaways from the analysis.

1. Amazon Fresh is not interested in being the low-price leader.

When it first opened, Amazon Fresh offered pricing comparable to Aldi. Over its first three months of operation, it executed a well-known, store-opening strategy: penetration-pricing designed to build market share, supported by deal-back offers to incent future store trips and establish new shopping routines, followed by walking back many of the opening offers over the subsequent months.

After six months, we see that the Amazon Fresh prices fall squarely between Jewel, the conventional supermarket proxy in the analysis, and Walmart (Figure A below). This isn’t to suggest that all Fresh locations will be positioned exactly alike. For instance, when we selectively examined Amazon’s Irvine location, we found that its price gap versus Walmart was nearly twice as great as Schaumburg’s after being open for 6 months.

This pricing movement is a clear indication that Amazon Fresh doesn’t intend to compete with hard and/or mass discounters for the most price-conscious shoppers, and a big signal that it understands price isn’t the only — or even the most important criteria — for the customers Amazon is targeting.

2. Amazon Fresh is positioning itself to steal customers and sales mainly from conventional high/low grocers.

Now that Amazon Fresh has positioned itself between Walmart and Jewel, the logical place for it to win customers from is the conventional high/low retailers, like Jewel, that operate in close physical proximity to the Amazon Fresh store locations.

We’ve learned from secondary sources that an Amazon Fresh customer is much more likely to also shop at nearby conventional grocers like Jewel than with either mass discounters like Walmart or hard discounters like Aldi — even though the latter is less than one mile away.

The key is understanding the customer and what they want. If the customer is looking for a fast experience for a small basket of everyday grocery essentials, they may choose Amazon Fresh — but if they want a special or local item or a custom half-inch cut on their flank steak, they are more likely to go to Jewel or another conventional grocer that has full-service fresh departments.

High/low retailers like Jewel are not going to win against Amazon Fresh on price or convenience, but the good news is that Amazon Fresh stores are not designed to offer the same level of service in key areas like bakery, deli and meat and seafood.

This means that high/low grocers need to strengthen their competitive differentiation in the fresh and service departments to mitigate the threats posed by the Fresh retail concept.

Amazon Fresh is pricing bananas at 15 cents each and using a billboard truck to advertise this aggressive deal, but this is simply a different take on the hybrid-EDLP strategy that Aldi employs already, says Brick Meets Click's David Bishop.

3. Amazon Fresh is adopting a hybrid-EDLP strategy.

Even today Amazon Fresh is pricing bananas at 15 cents each and using a billboard truck to advertise this aggressive deal, but we now understand that this tactic is simply a different take on the hybrid-EDLP (everyday low pricing) strategy that Aldi employs already.

Both the Aldi and Amazon Fresh baskets included two to three price-promoted items during each monthly price check, showcasing a limited range of strong price-driven deals. In contrast, at Jewel between 45% to 65% of the items in the basket were discounted during each price audit, which is relatively common for a high/low grocer. Meanwhile, none of the 30 items in Walmart’s basket ever had a temporary price reduction or other special price discount.

As a result of its gradual pricing shifts, Amazon Fresh’s price gap with Walmart has increased from 3% to approximately 11% over the first six months, while its price advantage versus Jewel has decreased from 20% to approximately 11% (Figure B).

Price may not be the most important selection criteria to some shoppers, but it does matter when convenience and quality are muted by physical proximity to rivals as Jewel is located just one-half mile from the Fresh store. 

Time to challenge the assumptions

So, even though the media likes to focus on the big battle between Amazon and Walmart, the data from this analysis suggests that the real competition to watch — at least in grocery — is between Amazon Fresh and conventional grocers.

Amazon’s pricing actions are most likely to attract the conventional grocers’ customers who don’t need/want the fresh service departments and appreciate the ease of shopping from Amazon Fresh online or in the store.

Ultimately, it’s important to remember that Amazon is still learning how to compete in the physical space, and it has demonstrated a willingness to invest in growing market share in ways that few can come close to in the U.S.

Like other technology firms, Amazon has approached physical retailing differently than the established incumbents, which means we should challenge our own assumptions about what and why Amazon is doing what they’re doing.