Would Waitrose’s fortunes improve with an Amazon deal and what could it mean for customers?

When Waitrose and Ocado severed their relationship in 2020, the battle between the grocers stepped up another notch.

Since then, increasing demand for online delivery during the pandemic and then for budget retailers during the cost of living crisis has meant supermarkets have to work even harder.

Waitrose is standing strong against all this, but experts believe it is still struggling to grow as its online delivery capabilities have stumbled.

Waitrose is now reported to be in talks to strike a deal with US online retail giant Amazon in a bid to increase volume and market share.

We look at what Amazon could offer Waitrose and the potential implications of the deal for customers…

Kantar figures show Waitrose currently has a 4.6% share of the UK grocery market, dwarfed by Tesco, which holds over a quarter, and the growing dominance of budget retailers.

Higher prices in the cost of living crisis have undoubtedly helped Lidl and Aldi significantly increase their market share, which together have more than 15 per cent of the market, as Waitrose has retreated.

But appetite for Waitrose’s online delivery continues to grow. The supermarket said demand was up 40% on the previous year and its latest results showed online sales this year accounted for just over 14% of Waitrose’s sales.

This is higher than the average share of online sales of 10.7 per cent in the market in the 12 weeks to 1 October 2023.

It also remains competitive with larger retailers, with a minimum order of £40 and most customers charging £3 per delivery, similar to Morrison’s and Tesco.

Yet Waitrose has been unable to cope with growing competition in the grocery market, falling behind both the big four supermarkets and discount retailers.

This is largely due to its size. Waitrose has just 329 stores in the UK, while Tesco has over 4,000 and Sainsbury’s has over 1,000.

However, Neil Saunders, managing director of GlobalData Retail, says the problems go further than that.

“Waitrose has a problem with its trade line and it is not growing as it should. It’s a loss of customers, a loss of share. In terms of volume, less is being sold, which is hurting profits.

“It’s also detrimental to efficiency because grocery is basically a high-volume business – it’s low margin, you have to shift huge volume to make profits. So what Waitrose wants to do is really increase sales and product volume.

Online delivery is an important tool in grocery stores’ arsenals to increase sales and volume, often attracting new customers with deals.

This has been more difficult for Waitrose since the end of its 20-year partnership with Ocado, which ended in September 2020. It has since worked to persuade shoppers to use its own website instead.

Saunders says: “Waitrose had a funny story online. It was with Ocado, then it did its own thing, now potentially partnering with Amazon.

“It’s moving between a lot of different operating models, and I think that’s to their detriment.”

Last month, Waitrose had to apologize to customers after an IT error caused thousands of online orders to be canceled minutes before they were due to arrive.

It comes just months after the stock data system led to store shortages on the shelves, suggesting Waitrose is a long way from seriously competing with larger retailers when it comes to infrastructure.

What can Amazon offer Waitrose?

If Waitrose wants to increase its market share, improving its online capabilities is a sure way to do so.

This explains why it has announced partnerships with delivery services such as Deliveroo. In July, the company announced it was also partnering with Uber Eats to provide customers with grocery deliveries in just 20 minutes.

Although it provides a new opportunity to increase its market share, it is unlikely to form the core of a loyal customer base. So recent reports that Waitrose is considering a partnership with Amazon suggest the retailer is taking online delivery more seriously.

Sunday Telegraph reported that the two retailers were discussing a “third-party deal” similar to the one struck by Iceland in recent weeks.

Amazon, which entered the UK fresh food market in 2016, now stocks the full range of Icelandic produce and offers free same-day grocery delivery for its Prime subscribers.

Saunders sees this as a logical next step for the retailer: “This happens a lot to retailers who want to increase volumes – he turns to Amazon. Amazon is a volume driver, it has a huge reach in retail.

Given Waitrose’s problems with its own expensive infrastructure, retail expert Jonathan De Mello, founder of JDM Retail, says: “Linking up with Amazon gives them the opportunity to use Amazon’s very strong distribution network and hopefully deliver more seamless deliveries to customers.”

But the deal also presents opportunities for Amazon.

“Amazon is best in class for online delivery … (but) I think Amazon Food is struggling. The jury is out on whether Amazon Fresh will survive in the UK,” says De Mello.

“Amazon will want a decent amount of money from Waitrose to provide their infrastructure. It makes sense because Amazon invested massively in their infrastructure during Covid, and when people started coming back to stores, they were left with expensive infrastructure that was underutilized.

“Linking up with Waitrose is a way to make more use of the capacity they have for warehousing and logistics.

“Amazon hasn’t really succeeded with grocery in terms of physical stores. Waitrose has not been successful online, so the merger provides the best of both. It’s a good partnership depending on the price.

Waitrose declined to comment on the reports and an Amazon spokesman said: “We do not comment on rumors and speculation.”

What will Waitrose-Amazon deal mean for customers?

For Waitrose customers, a deal with Amazon will make the whole delivery process much easier. But with multi-customer costs in mind, could the partnership help reduce product and shipping costs?

Retail experts don’t think so.

“I don’t see why it would be cheaper, I don’t think they’re going to lower the prices,” says De Mello.

“I think the prices will be comparable to competitors on delivery, but I think it’s more about efficiency, using a far better distribution network.

“They should be able to provide more slots and deliver more often and faster to consumers… It will be a better experience from order to delivery.”

Saunders also thinks it could mean better product availability for delivery, which will be music to the ears of customers who have been left without due to IT issues.

Offering more slots will be essential for Waitrose in terms of growing volume and therefore market share without investing too much in its own infrastructure.

A potential deal between the two companies is unlikely to lead to more supermarkets partnering with Amazon, despite existing deals with Iceland, the Co-op and Morrisons.

Saunders says this “happens when you have a retailer that’s not as strong as it should be. Bigger retailers like Tesco and Asda don’t need Amazon because they have huge reach in their own stores. They don’t need Amazon’s expertise.