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Is Amazon a viable threat to the Canadian grocery industry?

Why Amazon's entry into the grocery sector isn't something that's got me overly excited

On October 31, 2013, it was announced that Amazon is entering into the Canadian grocery market by offering 15,000 dry grocery and gourmet food items on its popular online store.  The products available include packaged beverages, breakfast foods, snack foods, natural and organic foods, candy and chocolate, and gourmet gifts.

I decided to go to the web site to see for myself and indeed there are plenty of dry grocery products for sale there.  We Canadians must have disposable incomes that are substantially higher than the rest of the world based on the prices that were online as of November 2, 2013.  By way of example:

*Nestle Pure Life Bottled Water 24 EA/CT sells for $598.40 on sale down from $807.12.  This rare liquid must be from the fountain of youth.  Hopefully this is a flaw with their dynamic pricing system.

*Bottled Spring Water, 1 Liter, 12 Bottles/Carton sells for a more reasonable $44.95 per carton for a much more affordable $3.75 per litre.  Ouch!

*Pepsi Mini Can (6 Pack of 237ml Cans) (Pack of 4) sells for $11.99 which is close to double the price of my local flier which sells the larger format Pepsi 24/355ml for $6.49

*Schweppes Indian Slimline Tonic Water 12 X 150ML sells for $24.99 or $2.08 per unit.  Now I like a good gin and tonic from time to time like the next guy but this is a tad expensive.

*Orville Redenbacher's Kernels Original (Pack of 12) sells for $51.48 which works out to $4.29 per unit.

*Kellogg's Crunchy Nut Golden Honey Nut Cereal 14.1 oz sells for $9.99

These are just a few random items that I picked while clicking through the site in order to write this article based on fact-based information.  Needless to say, after doing my homework I have come to several conclusions that I thought I would share with my fellow Canadian.

1.Canadians make up a small population of people who live across a vast terrain that is logistically expensive to service.  Shipping food products to end consumers by parcel courier across the nation is not viable or profitable which is why we have localized food distribution centres positioned closest to our major metropolitan population centres.

2.Canadians are a highly taxed population and we are forced to stretch our dollar much further than our neighbours in the United States.  In general, Canadians are very price sensitive when it comes to food spending which is why ours is a fiercely competitive grocery market.  There are very few Canadians who can afford to click and buy food items by the unit or by the case with little or no concern for the price being paid.

3.Many Canadians (not all) will gladly buy in bulk which is why Costco parking lots are packed every weekend across the country. We love to save money even if it means that we are forward buying inventory for the next 3 months.  But we will only do so if there is a price savings to be had (perceived or real).  Canadians will generally not buy dry goods by the case unless there is a significant price or convenience incentive to do so.

4.The grocery retailers in this country do not enjoy absolute loyalty from customers.  In many households, shoppers from all income levels scour through weekly flyers to determine where to spend their hard earned money.  It goes back to stretching their dollars so that they can raise their families or afford the odd luxury if they have extra disposable income.  Canadian grocery retailers have to work continuously to keep costs down so that they can remain competitively priced, especially as the market has become more crowded than ever.

All this to say that Amazon’s entry into the Canadian grocery market is not something that I am overly excited by.

Yes it is true that this company is on a tear and is putting up new distribution centres in the U.S. and around the world at an unprecedented pace.

Yes Amazon has completely disrupted other industries such as books and recorded media.

Yes Amazon is the darling of Wall Street with a stock price that continues to escalate despite its inability to generate sustainable profits.

Yes Amazon has the ability to cause significant damage to the Canadian retail scene, but I believe that this damage will not be in the grocery industry.

Canadians want fresh food at great prices and with our long winters it’s actually a pleasure to get out of the house for any reason, even if it means going to the supermarket.

Truth be told, the real challenge to the Canadian retail market coming out of Amazon’s announcement last week is that the company will add 200,000 automotive items such as seat covers, windshield wiper blades and automotive tools and equipment.

If Amazon can supply Canadians with competitive prices and good service levels for these product lines then this represents a very serious threat to Canadian Tire.

Amazon is a $71 billion juggernaut with ecommerce technology capabilities that are light years ahead of all other retailers combined and their dynamic pricing capabilities will create significant profit turmoil for Canadian Tire which is a $9 billion company that has served Canadians since 1922.

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