A report from Bloomberg has speculated that Amazon plans to open as many as 3,000 brick and mortar AmazonGo stores across the US by 2021, potentially disrupting both the convenience store and quick service restaurant markets.
- AmazonGo stores are small, cashierless, checkout-free convenience stores that primarily offer on-the-go food options in metropolitan areas.
- Amazon may be able to take advantage of growing consumer preferences for fast on-the-go healthy food options, but will also have to contend with increasing rents and high startup costs for new stores.
- The launch of AmazonGo stores coincided with the acquisition of Whole Foods, the withdrawal of its AmazonFresh pure-play operation from some US regions and the merging of its Prime Now and AmazonFresh operations. These moves appear to support our long-standing view that it is much more difficult to make pure-play Internet retailing work in the grocery category than in nonfood categories.
The Reported AmazonGo Plan
Amazon may be planning to open as many as 3,000 new AmazonGo convenience stores across the US by 2021, according to an unconfirmed Bloomberg report. As of mid-November 2018, Amazon operates six AmazonGo stores: one in San Francisco, two in Chicago and three in its hometown of Seattle.
The stores typically occupy no more than 1,800 square feet. The stores sell on-the-go food options in high foot-traffic urban locations, are cashierless, and staffed only by customer service representatives, personnel to replenish stock and, in some locations, cooks to prepare food. Customers use a smartphone app to shop in an AmazonGo and leave without scanning any items. A comprehensive network of in-store cameras and sensors detects the items chosen and automatically charges the customer when they exit the store with the items. As it opens more AmazonGo locations, Amazon has shifted its product selection away from grocery and towards on-the-go food options.
According to a Wall Street Journal report on December 2, 2018, Amazon is testing its cashierless checkout technology for larger stores, meaning that the impact of AmazonGo may, in time, extend beyond convenience stores
Why It Matters
Amazon held a dominant 45.8% share of US Internet retail sales in 2017, according to Euromonitor International. Yet it remains a nascent player in brick-and-mortar retail. Moving into the convenience store market challenges convenience chains such as 7-Eleven, local mom-and-pop stores and even food-service chains from Burger King to Prêt à Manger.
Coresight Research believes Amazon will focus on urban locations should it pursue a convenience store strategy. This would lessen the impact on gas station and other convenience stores, but create challenges for urban convenience stores and fast-food providers. Even large grocers and mass merchants could be impacted by Amazon’s plans: Shares of Target and Walmart both fell sharply soon after Amazon’s expansion plan was reported.
Disrupting Convenience Stores
AmazonGo’s potential disruption of convenience stores could also impact mass merchandisers, grocery stores and casual restaurants by chipping away at their shares of distress grocery purchases and food to go. The rollout of AmazonGo is just one of Amazon’s recent forays into new markets. Other disruptive Amazon ventures include:
- Amazon’s purchase of online pharmacy PillPack for about $1 billion in June 2018.
- Amazon’s launch of a store format called 4-star, which sells nongrocery products rated four or more stars by customers.
Amazon already created shock waves with its August 2017 announcement of its Whole Foods acquisition, establishing a foothold in the US grocery industry. Our long-standing view is that making pure-play Internet retailing work in the grocery category will be more difficult than in nonfood categories, and Amazon’s recent history appears to support this view. The Whole Foods acquisition and the launch of AmazonGo stores coincided with Amazon’s withdrawal of AmazonFresh from some US regions and the merging of its Prime Now and AmazonFresh operations.
Amazon is expanding its still-nascent AmazonGo concept to disrupt the convenience-store sector. In the US, convenience stores are a $156 billion sector, excluding gasoline and cigarette sales, according to the National Association of Convenience Stores (NACS).
Opening 3,000 AmazonGo stores by 2021 would be a huge challenge, even for a company as ambitious as Amazon. 7-Eleven is by far the US’s most ubiquitous convenience store chain, operating over 7,000 stores in the US, and it has taken many years and a franchise model to establish the network. For Amazon to open nearly half as many AmazonGo stores across the country in just three years presents a daunting challenge. Last year, the US convenience store sector added only 423 stores (net), according to the NACS.
First, Amazon may face challenges finding suitable, affordable locations. So far, the company has targeted urban locations with exposure to heavy foot traffic by opening stores in downtown areas of Seattle, San Francisco and Chicago. This means Amazon will not enjoy the benefit of increasing mall vacancy rates, which were up 5% between the second and third quarters of 2018, and lower rents, which were down 0.3% in the same period, according to real estate research firm Reis. Instead, the company could be challenged by rising rents in open-air retail space—i.e., retail space that is not in an enclosed mall setting—which were up almost 2% between the third quarter of 2017 and the third quarter of 2018, according to Reis. Such rising rates could make it more difficult for Amazon to find affordable store locations.
A further barrier to a mass rollout of AmazonGo is the cost of the technology. The four initial AmazonGo stores reportedly cost over $1 million each in hardware alone—that would be more than $3 billion for the 3,000 new stores Amazon plans. And, that estimate assumes upfront spend is the only technology cost: Ongoing technology costs such as infrastructure maintenance and upgrades could add to that price tag. The caveat is that the estimate assumes cost per store remains the same, but we expect increased scale and falling technology prices may lower that cost.
Amazon has shown repeatedly that it is willing to take short term losses in the interest of exploiting a long-term opportunity. Some commentators speculate that Amazon’s interest in brick-and-mortar convenience stores is not in profitability, but in learning. The company may be interested in using the data collection systems in AmazonGo stores to monitor consumer behavior and understand how customers react to a cashierless shopping experience, helping the company better its online shopping experience and prepare future brick and mortar retail ventures.
Amazon is not alone in its endeavor to pioneer the high-tech convenience market. Choice Market, a Denver food market focused on locally sourced quick food options, plans to open an AmazonGo-style convenience store in the second half of 2019, according to the International Council of Shopping Centers. Customers who shop at Choice Market’s new 2,700 square foot store will have the option to check out with a smart phone, similar to AmazonGo.
A number of high-tech, unstaffed store formats are also being rolled out in Asia.
Disrupting Quick Service Restaurants
AmazonGo may impact the fast-food sector, due to its focus on fast, freshly prepared, on-the go food options. Quick service restaurants (QSRs), ranging from McDonald’s to Prêt à Manger, could suffer from a mass rollout-and the stakes are high.
US consumers spent $290.2 billion at QSRs in 2017, a 2.9% increase from 2016. Between 2012 and 2017, US QSR spending increased at an annual rate of 3.2%, while food spending as a whole grew at a pace of just 3.0% per year. However, changing consumer preferences mean that not all fast-food segments are growing at the same pace. Coresight Research data show that younger consumers tend to value healthy, fresh, organic and artisanal food options more than their older peers do. But younger shoppers demand convenience, too. If AmazonGo can position itself as healthier alternative to traditional fast-food options, it could capture speed- and health-conscious millennial shoppers.
AmazonGo could also learn from its sister grocery store chain, Whole Foods Market. Whole Foods already sells prepared foods, and many locations include a food court within the store where customers can purchase food to eat there or on the go. The knowledge of consumer habits gleaned in these stores may enable Amazon to better and more efficiently select and sell products at its new AmazonGo locations.
- Amazon’s reported plan to open as many as 3,000 AmazonGo stores by 2021 could disrupt the convenience store industry and have significant effects on quick service restaurants.
- Rising open-air retail space rents and high technology startup costs may mean Amazon will pay a high price to break into brick and mortar retail.
- Coresight Research believes that should Amazon pursue a convenience store strategy, the company will focus on high-traffic urban locations that attract speed- and health- conscious millennial shoppers.