Amazon's algorithms are in control of UK grocery's margins
Three years ago I wrote that we were witnessing the biggest shift in retail in a lifetime. The discounters were stealing share from supermarkets and the shifting sands saw CEOs fall by the wayside for failing to navigate a way through. But while we went about the business of managing the shelves chasing minute shifts in share, the future masters were studying us and drawing up plans. Panic over the discounters will be insignificant in five years.
It’s not the discounters who are bleeding the industry of margin, it’s Amazon. Spare a thought for the buyers. You have years of experience managing your range and display to a set of shelves but your competition has no shelves. Eighty per cent of your management time is spent managing prices and promotions but your competition has no gondola ends. You rack your brains on how to compete, but your competition has no brains. Your competition is a computer and it’s all done by algorithms. The Amazon pricing algorithms in the UK are set to match the lowest price on base or promotion anywhere across retail. Bang, it just happens. Oh, and Amazon has never made a profit, yet its shares just fly off the shelves (so to speak). Investors don’t need it to make a profit. Contrast that to the City’s view of Tesco, Morrisons and Sainsbury’s, who get dumped when they have a weak quarter.
Now spare a thought for the suppliers who get called in by the multiples, lambasted because they can’t fill the profit-hole created by Amazon’s pricing algorithms dragging down rsps. And while consumers enjoy the prices being locked down, they too will lose out when jobs, product specifications and innovation are dragged down by this situation.
The tiny shares in digital grocery sales belie the strength of the movement. It is growing at 20% a year. And of course Amazon execs do have brains, and they set the rules that govern the algorithms. I am told in markets such as Germany and France they have chosen to relax the algorithms so as not to be so brutally deflationary. With a similar tweak of its algorithms in the UK, this could be fixed. So let’s see it, Amazon. This isn’t shifting sands, it’s mobile mountains and grocery’s upheaval has a long way to go.
David Sables is CEO of Sentinel Management Consultants