Amazon buys 431 upper-income, prime-location distribution nodes for everything it does.
Amazon is about to buy Whole Foods for $13.7 billion. The main reason behind this acquisition is the fact that Amazon still needs to fix last mile delivery in the biggest retail category world-wide, and one of the few domains the world’s largest e-tailer has to conquer. When successfully integrated, and operated, Whole Foods can act as the perfect distribution network through which Amazon can physically service millions of customers. The acquisition of Whole Foods by Amazon is a potential game changer and marks a milestone in the transformation of on- and offline retailing.
The future of supermarkets
Grocery is one of the biggest, and probably the ripest, retail categories to be disrupted in the upcoming decade. It is the largest sector in the world and a 750-billion-dollar market alone in the U.S. The concept of a grocery store has been around for decades, but there has not been a lot of innovation going on if you compare it to other categories such as book and electronic stores.
As with ever major innovation, or transformation, supermarkets were made possible by some big changes that support the business model. Two things you could think of are large scale food production (which gave consumers more products to choose from, at a lower price) and the right infrastructure (which led to faster supply to centralize and cover the demand).
Although most retail categories have accepted, and adopted, major changes to their business models (due to the influence of the internet and social media) grocery stores still look and feel the same way and operate the same model. It is a sector that is known for tight margins where scale and location have long acted as ways to be competitive and grow the business.
Fast forward to 2017. Consumers want, and expect, to be able to search and buy whenever and wherever they want, and grocery chains have started to facilitate this by offering delivery models such as click and collect or click and deliver. The adoption of this 21st century way of shopping opened up new opportunities for e-tailers, and Amazon clearly wants to get a piece of the action.
The potential for online grocery shopping in the upcoming years is even bigger as it is right now. A recent report from the Food Marketing Institute and Nielsen found that the online share of the U.S. grocery sector could grow five-fold in the next decade, with consumers spending upward of $100 billion by 2025. While around a quarter of U.S. households currently shop online for groceries—up from 20 percent just three years ago—more than 70 percent will do so within 10 years, according to the report.
Amazon Fresh, Go and Fresh Pickup
Amazon has long wanted to figure out the online grocery game. It started testing delivery concepts in August 2007, when it unveiled Amazon Fresh—delivering produce and pantry staples through its fulfillment centers.
Amazon saw the potential here early on, but 10 years later Amazon Fresh still hasn’t caught on in any meaningful way. Selling fresh food requires a more hands-on experience and that is something they have tried to build on their own, until now. A lot of the stuff you buy in a grocery store spoils easily, which means you have to get them home quickly—plus, someone has to be there to receive the goods.
Another Amazon concept looks even further into the future. In December 2016, Amazon launched a beta of Amazon Go, a supermarket with no cashiers. Just grab and go; embedded sensors and other technology keep track of what you bought.
After introducing Amazon Fresh, and Go, a next step in the learning curve was launched in March 2017 Click and Collect known as: Amazon Fresh Pickup. Customers order groceries online, then drive to an Amazon-run store, where employees bring the bags right to their car. Walmart and Kroger offer similar services, but need two to four hours to get an order together. Amazon, does it in 15 minutes.
Both Go and AmazonFresh Pickup aim to minimize friction in the shopping experience and optimize margins by reduce labor costs. In this way, Amazon can maximize profits in a sector that traditionally is known for low margins.
Looking beyond delivery methods, Amazon has even more ways to add their expertise and get more out of this upcoming deal. They could even let you order your entire grocery list using Amazon Echo and its voice-activated assistant Alexa. Attracting even more customers, learning from their needs and offering them alternatives with better margins.
What we are seeing today is a logical next step in Amazon’s strategy to acquire locations that bring them closer to the consumer. The bid for Whole Foods is essentially a bid for their stores (distribution network), knowledge and consumer insights.
Reach and potential
Research tells that Whole Foods’ U.S. stores are well positioned, within 3 miles of 75 million Americans. With one acquisition, they have taken a massive step when it comes to their reach, but that is not all.
If you look at the demographics of the service area we can see that by buying stores in dense, desirable areas, Amazon has gained access to wealthy consumers. Fully one-third of American households with annual incomes over $100,000 live within 3 miles of a Whole Foods.
The integration of the Whole Foods locations will create an overlap with the service area of Amazon Fresh (and Amazons warehouses) since 49% of Whole Foods stores are operating in the same markets (including California, New York, and Washington, DC.), but it also means an entry in 32 new states. This means they can deliver quick to about every city that matters.
Amazon’s footprint and ambition
Amazon is big, they control the world of e-commerce, and have mastered the process of online shopping to the perfection. The company gets four out of every $10 spent online in the U.S. (43% market share) while eighty percent of online growth comes from Amazon sales. Currently, there are approximately 80 million Amazon Prime (their customer loyalty program) members – which stands for 64% of the U.S. households.
Under the reign of Jeff Bezos Amazon has stated they want to become one of the country’s top five grocers by 2025, and buying Whole Foods is a crucial step in that direction. Buying Whole Foods is a recognition that selling groceries requires a brick-and-mortar presence, either as a launching point for neighborhood deliveries, or as a pick-up location for commuters. Turning a network of 430 Whole Foods locations into outposts for Amazon’s empire should strike fear into the hearts of all retailers in the U.S.
If you run pretty much any other supermarket company, there’s now reason for concern. In the grocery business of late U.S. players have mainly focused on big foreign discount brands such as Lidl and Aldi, but their focus need to change quickly now.