Member Exclusive   //   November 18, 2021

Amazon Briefing: Why the U.K. has become fertile ground for Amazon’s hybrid retail concepts

This is the latest installment of the Amazon Briefing, a weekly Modern Retail+ column about the ever-changing Amazon ecosystem. More from the series →

This is the latest installment of the Amazon Briefing, a weekly Modern Retail column about the ever-changing Amazon ecosystem. To receive it in your inbox every week, sign up here

After steadily increasing its physical footprint in the U.K., Amazon is reportedly plotting an aggressive expansion.

Rumors have been swirling for over a year about its plans to enlarge its footprint of convenience stores across the pond. A recent report suggests it is eyeing opening 260 new cashierless locations before the end of 2024. With the new stores, Amazon would considerably bolster its local presence as it invades the turf of Britain’s biggest supermarkets Tesco and Sainsbury’s.

Amazon ostensibly set the wheels in motion on its U.K. expansion this year after witnessing strong sales during the pandemic. The country provides a hospitable market for Amazon’s retail concepts — aimed at bridging the worlds of physical and online commerce — due to strong e-commerce penetration and a logistically-friendly operating environment, according to experts. 

The U.K. has become a major hub of Amazon’s international brick and mortar expansion. The e-commerce giant currently operates 17 brick and mortar locations in the U.K. including seven Amazon Fresh stores with cashierless technology, the first of its kind Amazon Salon and its sole 4-Star stores outside of the U.S., located in shopping malls in London and Kent, about 18 miles south-east of the capital. Before this year, its local presence was limited to the eight Whole Foods stores in London that pre-dated its acquisition of the upmarket grocery chain in 2017.

Why England has become such an important testing ground for Amazon is likely thanks to local shopping patterns. “20% of the U.K. exclusively shops online,” Mark James, head of Europe at e-commerce ad platform Perpetua, said. “Still, a further 80% are hybrid shoppers that also frequent supermarkets. This mix makes the U.K. a great testing ground for Amazon’s retail strategy.”

Over the past several months, Amazon has effectively doubled its U.K. retail footprint after a banner year for local sales in which its revenue jumped by 51% to a record $26.5 billion. The new locations further beef up its sprawling logistics infrastructure.

Amazon U.K. by the numbers:

  • $26.5 billion in sales in 2020
  • 55,000 employees
  • 82% sales growth between 2018 to 2020
  • 21 fulfillment centers, of a total of 41 in the EU
  • 17 brick and mortar locations

Experts I spoke with believe that Amazon has big plans in store for the U.K. after witnessing tremendous local growth that has outpaced most of its other markets. Amazon’s sales in the country grew by 82% in the two years from 2018 to 2020, compared to 64.5% in the U.S., 48.7% in Germany and 87.7% in the rest of the world. According to analysis firm Kantar, 55% of U.K. households were signed up to Amazon Prime at the end of last year.

“I wouldn’t be surprised if Amazon launches physical department stores in the U.K. as it’s reportedly planning to do in the U.S.,” said Elaine Kwon, a partner at Kwontified, an e-commerce management and software company. The bigger stores will represent a culmination of its hybrid strategy on a grander scale, she added. 

Amazon’s goal has been to bring elements of the online shopping experience into its physical stores in an effort to turn more customers into e-commerce converts, explained Kwon — who spent two years working in the e-commerce giant’s fashion division. She pointed to its use of QR codes at its book stores, review-oriented product curation at its 4-star concept, walk out tech at its Go stores and augmented reality-infused salon. Kwon expects much of that tech to combine in its biggest locations.

“The U.K. department stores may still be a few years out, but it’s snapping up real estate in the country as we speak,” Kwon said. 

Indeed, Amazon has been on a property buying spree of late in preparation for an uptick in demand ahead of Christmas. The company had signed leases on 18 warehouse letting deals by the summer, accounting for 17% of total lettings in the U.K., according to Property Week.

While most of the deals were for smaller facilities, it was also in talks to open a 737,000s square-foot temporary distribution center at a site formerly owned by defunct department store Debenhams. In all, Amazon operates 21 fulfillment centers in the U.K. and was on track to employ a total of 55,000 workers by the end of the year. 

The country also provides a more hospitable environment from a logistical perspective versus larger European markets, according to James. Compared to the likes of France and Germany, the U.K. has a denser population in a smaller geographic area. This makes its easier to set up a delivery infrastructure that can reach its biggest commercial cities, from London to Birmingham to Manchester to Liverpool, James noted. 

“The U.K. allows Amazon to test out its retail concepts in a way that is easy to execute,” James said. 

Is Amazon’s gaming flywheel finally starting to turn?

Like every other big tech company, Amazon is trying to crack gaming. But, the major difference between Amazon and the likes of Facebook and Apple is that Amazon already has a massive window into the industry courtesy of Twitch. The livestreaming platform has 30 million daily active viewers who watch roughly 1.86 billion hours of content per month.

What’s more, every Prime member has access to Prime Gaming perks such as a Twitch channel subscription, free in-game content and PC games. As a result, brands are increasingly advertising on Twitch in an effort to reach its younger user base of highly-engaged gamers. Pizza Hut recently told me that it is shifting more ad dollars away from TV and out-of-home to esports and Twitch in an attempt to court gen Z and millennial customers. More on that later this week on Modern Retail. 

But, Twitch isn’t the only facet of Amazon’s gaming ambitions. The company has made recent investments in its ecosystem as it looks to bring more gamers as well as advertisers — and is even recruiting developers to design games for its Amazon Game studio.

To make Twitch ads less disruptive than pre-roll or mid-roll ads, Amazon in August announced a new type of ad that shows up under or around somebody’s live video. The “stream display ads” last for 10 seconds and can’t be minimized or closed. Twitch said that it won’t show more than eight of the ads per hour. 

Amazon’s own game development arm is also making headway after a rocky start plagued by delays and abandoned projects. A quick glance at Twitch’s most viewed games chart last month revealed that New World, a massive multiplayer online fantasy title developed by Amazon Games, was sitting in fourth position with about 87 million views. 

But, the company has its work cut out for it if it wants to maintain that initial interest. Since the game’s launch in late September, Amazon has rolled out multiple updates, shut down its in-game economy and banned thousands of cheaters. In the most part, its actions are par for the course for any open-world online game.

Meanwhile, Amazon is using Amazon Web Services to power Luna, its cloud game streaming service that competes with Microsoft’s Xbox Game Pass and Google Stadia. All of the above products are part of Amazon’s gaming flywheel, Dave Fildes, director of investor relations, said on the company’s third quarter earnings call in late October. Amazon is investing an additional $1 billion on games, music and video in its fourth quarter. It’s clearly trying to grease up the wheel to get it to spin even faster.

Amazon news to know:

  • Amazon will stop accepting Visa credit cards issued in the U.K. starting 19 January, 2022. It said it took the decision as the high cost of Visa’s payments were hurting businesses’ ability “to provide the best prices for customers.”
  • A former Amazon Web Services executive, Cindy Warner, who is suing the company for workplace discrimination, claims she faced pay discrimination and an underlying culture of sexism and homophobia. Amazon said it had conducted a thorough investigation and “found her allegations to be unsubstantiated.”
  • Amazon has launched an investigation into a seller in India after police arrested two men accused of smuggling marijuana through the e-commerce platform. Reuters reports that local law enforcement allege that the Amazon marketplace was used for 1,000 kilograms of marijuana sales worth $148,000.

What we covered:

    • Multiple DTC brands are kicking off their Black Friday deals earlier this year, taking a page out of the books of big box retailers who got things started months in advance of the shopping event in 2020.
    • While many businesses may have been caught off-guard by Apple’s iOS privacy changes, they’re making sure not to repeat that mistake by shoring up first-party data well ahead of Google’s deathblow to third-party cookies.
    • Walmart believes low to mid-single digit inflation gave its business a boost during its third fiscal quarter, with grocery and total sales up nearly 10% and 4.3% year-over-year, respectively.