In June 2017, Amazon sent shockwaves through the global grocery industry when it acquired Whole Foods Market for $13.7B. The combined power of Amazon’s technology, digital and logistics expertise and Whole Foods’ distinctive product offering and real estate footprint inspired the collective imagination of the industry and presented an existential threat to traditional grocers.
News of the transaction immediately sent grocery stocks plummeting with Target dropping by 12 percent, Kroger by 14 percent, and Walmart by almost 6 percent. Analysts were quick to speculate that Amazon would rapidly dominate grocery in a similar fashion to other category roll-ups.
Nearly 4 years later, the seismic shifts that were predicted have yet to materialize. In actuality, the acquisition that was supposed to rock the industry has landed with a bit of a thud. Stepping back, Amazon and Whole Foods have only launched 5 initiatives that have likely had a material impact on the business thus far:
- Amazon has offered 2 hour delivery in 60 markets via Amazon Prime
- Prime membership benefits have been extended to all Prime members via Whole Foods promotions
- Amazon pickup lockers have been deployed across most Whole Foods locations
- Whole Foods took early steps to change its pricing perception, especially in fresh categories
- Collective media buzz around the acquisition captured the public’s attention
The traditional grocery incumbents respond
Separately, an unintended consequence of the acquisition is that grocers across the country immediately took the strategic threat seriously and aggressively responded.
Walmart strategically assessed its assets and focused on how to best build out grocery pick-up (BOPIS) across 3,600 Walmart locations. Target strategically responded in a different but equally transformative way by re-thinking their 1,900 stores as mini-fulfillment centers (for both BOPIS and delivery) and by acquiring Shipt to give them an in-house last-mile delivery asset. Kroger launched the “Restock Kroger” program that dramatically expanded their digital grocery offering, partnered with Ocado to launch automated warehousing and fulfillment, and doubled down on personalization efforts. Finally, smaller, regional and independent grocers across the spectrum also rapidly formed strategic partnerships with Instacart and DoorDash to bring them immediate last-mile capabilities.
The Whole Foods acquisition was clearly an accelerant and a catalyst for change across the full grocery industry. That said, however, the Amazon/Whole Foods combination has also not resulted in a significant windfall for Whole Foods, even in a pandemic-inspired explosion of eCommerce.
The results have been so underwhelming, that Amazon has begun to launch a completely separate grocery format – the Amazon Fresh Grocery Store – and perhaps, just maybe, that was all part of Amazon’s master plan from the start?
Act 2 – what next?
With 12 stores in California and Illinois, Amazon’s newest concept Amazon Fresh looks much more like a new traditional supermarket than a Whole Foods. National brands, like Tide and Cheerios, and regional brand favorites, like Dukes, line the dry aisles and look very different than Whole Foods. The fresh departments clearly leverage 365 Whole Foods Produce, but offer a much more value-focused, approachable assortment – high quality food for every budget.
Finally, Fresh also offers a few tech highlights – the Amazon Dash Cart and an Order Ahead mobile app for prepared foods — but does not yet fully leverage the entirety of its “store of the future” capabilities a la Amazon Go and its “Just Walk Tech” that could one day be on display. Regardless, Amazon Fresh is clearly a grocery store format for the mass market that understands that value matters, that fresh differentiates, and that technology could one day be an even large convenience game changer.
The 800-Pound Gorilla – Amazon Fresh
Amazon’s latest move into grocery appears poised for a very different outcome. Leveraging their lessons from its Whole Foods experiment and building on its deep heritage in customer centricity, data, and technology, Amazon appears on the cusp of transforming grocery with the Fresh concept.
There are 6 key capabilities and areas of differentiation that appear to set the foundation for a very different outcome with Amazon Fresh:
Consumers love Amazon in grocery
- The 2021 dunnhumby Retailer Preference Index (RPI) identified Amazon as the best overall grocery retailer (https://customerfirst.dunnhumby.com/rpi-introduction/particle-16)
- Surveys by Ipsos and Magid in 2020 found customers felt Amazon had the best response to the COVID-19 crisis (https://www.supermarketnews.com/issues-trends/amazon-costco-have-most-favorable-covid-19-response-shoppers-say)
- In the Verint Experience Index report from December 2020, based on a benchmark survey of consumer satisfaction (CSAT score) with leading retailers, and that includes a Net Promoter Score (NPS) ranking, Amazon received the highest satisfaction score for online purchases – 87.7 (https://www.verint.com/press-room/2021-press-releases/costco-amazon-and-apple-take-top-spots-in-retail-customer-satisfaction-study/)
Personalization at an unprecedented scale
- Amazon has 142M Amazon Prime members in the US
- Personalization in grocery is not about customization. It’s about promotions and is a much better fit in a more value oriented grocer than at Whole Foods
- Data from Amazon Prime and in-store core grocery shopping could be a whole new unlock
Proprietary technology that can reshape the grocery P&L
- Amazon Go could dramatically reduce the need for cashiers and could impact upwards of 30% of overall labor spend
- Computer vision AI could also transform, not just shopping, but also inventory management and in-store operations and thereby reduce the time spent on low-value added activities
- Deep pricing data, algorithms, and expertise could enable the deepest, most informed value driven pricing models in modern grocery history
E-commerce logistics scale and expertise
- Amazon’s deep experience at running and building automated DCs (following their acquisition of Kiva Systems) provides the platform potentially to build in-house macro or micro fulfillment centers to enable profitable grocery eCommerce
- Amazon’s delivery network already has national scale and provides one of two (Target/Shipt is the other one) retailer-owned delivery networks with the density to make e-commerce delivery profitable – especially given increasing on-demand customer expectations
Unburdened by legacy grocery
- Amazon is currently taking a de-novo strategy to Amazon Fresh Grocery and will be able to choose productive store sizes and locations that will not be encumbered by massive, over-spaced, and poorly located legacy footprints
- By starting from an empty box, Amazon can invest early in smart shelving, smart coolers, etc. and therefore avoid the classic retrofit dilemma that many grocers face with innovation
Ruthless, relentless focus on execution
- Amazon has proven that it can execute large, complex operations at scale – grocery is simply the next domino to fall
- Amazon’s strong balance sheet will enable Amazon to test and learn to build a truly optimized grocery operating model
While the impact of the Whole Foods acquisition on the grocery industry is still to be determined, what is clear is that Amazon is now taking a different approach armed with what are likely hundreds if not thousands of lessons learned since the acquisition four years ago.
Ultimately, over the next 5 to 10 years, the grocery landscape will continue to evolve, and traditional grocers must act now to stay ahead of (or equal to) Amazon Fresh Grocery.
There are a set of no regrets actions that grocers should undertake immediately:
- Go visit Amazon Fresh and do a deep competitive assessment
- Pull together a strategy anchored on a set of 5-10 bold strategic actions to counter the threat
- Aggressively pursue last-mile profitability by capturing efficiencies and embracing new micro-fulfillment technologies
- Rethink their CAPEX plan, as grocers will need to invest in computer vision, sharp pricing, and omni-channel fulfillment capabilities
Fortune favors the bold, and grocers must keep their pedal on the gas coming out of the pandemic and continue to make the necessary investments to defend their core markets or they could run the risk of having Amazon define the next wave of in-store grocery shopping expectations without them.