Brad Rubin, Wells Fargo Food and Agribusiness Sector Analyst, Specialty Crops
May 15, 2018
In just 24 years, Amazon has become the largest internet retailer in the world measured by revenue1, and three years ago, it surpassed Walmart to become the largest retailer in the world by market capitalization. Amazon has transformed itself from an online bookstore into a retail giant. In addition to its retail business, Amazon’s cloud infrastructure, commonly known as Amazon Web Services (AWS), controls about 40% of the cloud computing market2. Based on its track record, it appears that Amazon finds a way to win in whatever space it chooses to enter.
In August 2017, Amazon announced its $13.7 billion acquisition of Whole Foods Market, signaling that it was ready to enter brick-and-mortar grocery. As a result of that announcement and the commitment to lower prices, shares of Kroger, Walmart, Target, Costco, Supervalu, and Sprouts Farmers Market collapsed, and the decline in these six stocks wiped out nearly $12 billion in market value in a single day3.
There has been a lot of speculation and interpretation as to why Amazon bought Whole Foods Market. While no one can predict what will happen down the road, this article will focus on what could happen based on Amazon’s performance history, and the strategies and steps it has taken to disrupt the grocery business. The retail landscape is clearly undergoing transformation, and it appears that Amazon will be central to the next chapter.
Amazon’s passion for the customer experience is what enables convenience shopping, competitive pricing, reliable delivery of goods, and high quality products. When one looks at the brands Amazon has acquired over the years, and products or services they have introduced, Amazon consistently delivers an unmatched experience for its customers. With this model for success, Amazon’s entry into brick-and-mortar grocery is a big deal.
To deliver competitive grocery prices, which has already begun in Whole Foods Market, economies of scale must be leveraged to improve margins on fresh, perishable products. This may have impact on smaller farmers or smaller food companies in the supply chain that don’t have the capability to deliver product for national distribution. More than a dozen executives and senior managers have left Whole Foods Market since the Amazon acquisition4. Most notably, executives from bakery, produce, sustainability, and local food divisions of Whole Foods Market have left, and this exodus signals that Amazon’s plans for procuring fresh products may be changing.
Amazon has signaled that more competitive prices will be necessary for the stocking of organic products. Amazon expects to procure organic products at lower prices. And, in order to remain a supplier, vendors will need to meet new requirements. Amazon may look at longer-term contracts for its suppliers, and suppliers would need to be large enough to provide fresh product, accept yield risk, and have a distribution model that could reduce freight cost. Pricing, contractual volumes, and/or delivery seasons are expected to favor consolidated, larger, multinational, corporations that can provide guarantees. The need for traceability and certifications will also favor suppliers that already have or can rapidly adapt to the changing retail environment. Another alternative for Amazon would be backwards integration into farming. We have seen Costco employ a poultry processing strategy in Nebraska. Walmart employed a dairy strategy in Indiana. Once Amazon identifies what is best for its business, it is quite possible it will look to integrate back into the supply chain as well.
In an online world, presentation of product is critical for sales conversion. If you look at the websites of AmazonFresh or Whole Foods Market, product pictures align to e-commerce best practices, and fresh produce and other fresh foods have never looked better. With a focus on customer experience, Amazon will likely look to its suppliers to grow product that meets rising consumer quality expectations, and utilize this as a key differentiator. Coupling low price with high quality is no easy task, especially for organic growers. But, look for Amazon to expect these requirements in its supplier contracts.
Since the Whole Foods Market acquisition, some nomenclature on the Whole Foods Market website has changed. The word “local” is used less. The words “savings” and “lower prices” are used more. Further, e-commerce techniques like strikethrough pricing (for example $8.99 $4.99) and banners calling out savings are being incorporated in local store ads. This plays into Amazon’s culture, but it may also be a signal to smaller farmers and food companies that Amazon may not put as much emphasis on locally sourced products if it can’t obtain them at a reasonable price. By making smaller food companies compete against industry leaders, Amazon could squeeze the smaller vendors, and deemphasize “local” as a key value proposition. That said, local, organic, fresh, and healthy are synonymous with the Whole Foods Market brand, so it might be difficult for a brand that touts itself as “America’s Healthiest Grocery Store”5 to stray from key value propositions.
Amazon has several channels for delivering groceries. In addition to its Whole Foods Market footprint throughout the country:
- AmazonFresh caters to the online grocery shopper that wants groceries delivered to their door. Additionally, AmazonFresh Pickup locations are being piloted in Seattle, allowing a consumer to order online and pick up their order when ready.\
- Amazon Go caters to the shopper that values convenience and wants healthy, quick eats. A scan of a smartphone on entry will enable a consumer to grab and go. When merchandise is scanned during store departure, the consumer’s account is automatically charged.
- Amazon Dash buttons are for household goods and packaged foods. A consumer obtains a button for a specific product which is selected through the Amazon app accessed through a smartphone. When more product is desired, the consumer presses the button and additional product arrives at their door in a few days.
With so many new capabilities via the large footprint of Whole Foods Market, it should be no surprise if Amazon starts releasing Dash buttons for milk, proteins, or other perishable goods. Providing consumers with multiple options for purchase and delivery will contribute to exceeding customer expectations.
But, don’t expect Amazon to rest easy given the options it has already rolled out to customers, as that would not be in keeping with Amazon’s strategy of continued evolution.
Supply chain optimization through acquisition
Amazon has already optimized the pick and pack process in Amazon warehouses across the globe. Robots that bring products to pick stations have enabled Amazon to reduce its workforce by approximately 20 people per robot. Amazon Robotics, formerly known as KIVA Systems, was purchased by Amazon for $775 million in 2012. Following acquisition, Amazon let all of KIVA’s customer contracts expire, and then brought the technology in-house and made it proprietary6. Interestingly, the founders of KIVA Systems were former executives of Webvan, the company that pioneered online grocery delivery. Webvan raised capital in an IPO in the late 1990s, but eventually dissolved, and then Webvan executives went on to found KIVA Systems because they believed that removing the supply chain cost from online grocery delivery would make the business model work7. With Amazon now owning this technology, and having deployed it across their supply chain, look for it to further optimize the way fresh groceries are delivered to customers.
Last month, Amazon announced the acquisition of RING for $1 billion. RING developed a web-based video camera system that replaces the traditional doorbell, and through mobile device or computer notifies a user that a person is at their front door, showing them a video.
In addition, Amazon has launched Amazon Key for Prime members. Amazon Key is a specialized locking mechanism installed on the home door and contains a unique code. With a quick scan from a courier, the door lock opens and Amazon deliveries can be placed inside the house.
The video doorbell recently acquired from RING plays nicely into the Amazon Key service, and could eventually enable Amazon to provide “in-fridge delivery” of fresh and perishable groceries. This opens up a new opportunity for delivery of produce, dairy, deli meats, frozen foods, and other fresh and perishable proteins for Amazon, and yet more ways for it to service its customers. It might not be too far down the road that one can order a gallon of rocky road ice cream from their couch via Amazon Dash and the next day watch the delivery person arrive at their home through Amazon’s RING doorbell, and open and enter their house to place the ice cream in their freezer though Amazon Key.
Increasing sales through leveraging of data
Amazon is one of the most recognized companies for utilizing consumer data to grow its business. Amazon understands consumer preference, purchase volume, and frequency of purchase for almost every customer it serves. Further, it leverages this data to enhance algorithms that automatically present information to consumers in an effort to increase their average order value. In other words, Amazon has developed a methodology to maximize the sales conversion rate and the size of a shopping cart.
By moving into grocery, Amazon has the power to understand food consumption habits of their customers as well. This will likely open new opportunities every time a consumer goes to Amazon.com or enters a Whole Foods Market. Imagine walking into a store and your smartphone alerts you of products and their shelf locations. An alert might say, “You are passing a product on your left that may interest you because it complements X product in your cart.” With so many potential applications of data, Amazon has a wide range of opportunities to increase sales, while providing a great customer experience.
Amazon launched Amazon Basics a few years ago to provide simple electronics accessories, and private-label products are not new to Amazon. The Kindle e-reader is a perfect example. The Whole Foods Market acquisition creates opportunities for private label sales, and the size of the Amazon footprint enables sales across multiple channels, bolstering strength of both the Amazon and Whole Foods Market brands. In the first month after acquisition, Amazon recorded $1.6 million in private label sales of Whole Foods Market products on their website. Now, imagine Amazon Dash buttons for the entire group of 365 Everyday Value private label products. It is a very appealing thought for Amazon shareholders, and a very scary thought for the rest of the grocery world.
Competitive response to Amazon
The grocery industry is rapidly mobilizing to compete with the perceived threat by Amazon. Walmart announced a partnership with Postmates to expand their reach of grocery delivery to 100 U.S. metropolitan areas with a goal of reaching 40% of U.S. households. Upon receipt of a delivery order, a Walmart employee picks the order and then Walmart enlists Postmates, Uber, Deliv, or its own trucks to deliver the order. Last year, Target also bought Shipt to help offer same-day delivery for its customers. And, both Supervalu and Kroger recently strengthened their partnerships with Instacart in order to expand their e-commerce services and platforms. Supervalu is also including click-and-collect in-store pickup as part of their Instacart agreement. The race to provide online grocery shopping has heated-up in early 2018 as grocery brands are rapidly trying to adapt to Amazon’s entrance in the grocery space. Candidly, the grocery industry has never been so exciting, and whoever can win the customer experience race will surely have the upper hand.
Amazon is certainly poised to become a major player, and to further disrupt the grocery space. Amazon’s retail success and continued evolution should be a strong message for the traditional grocer. With its hyper-focus on customer experience, Amazon will innovate and identify new ways to please the customer. I can imagine a future where the ordering of fresh product for home delivery to accommodate tonight’s dinner is feasible. It may sound something like this, “Alexa, order 1lb. of 90/10 ground beef, one package of whole wheat buns, one head of romaine lettuce, two tomatoes, one red onion, and one jar of pickle slices for in-fridge delivery. Oh, and add one bottle of ketchup.”
Brad Rubin is a vice president and sector analyst within Wells Fargo’s Food and Agribusiness Industry Advisors group focused on fruit, vegetables, tree nuts, and wine.
Brad joined Wells Fargo in January 2018, and prior worked as chief marketing officer for iDTech. Formerly, he served as vice president of operations for Shopatron, an enterprise e-commerce provider. Before Shopatron, Brad held the role of director of global operations at TransUnion.
Brad holds a bachelor of science degree in industrial technology from California Polytechnic State University, San Luis Obispo. He lives with his wife and two kids in Templeton, CA, where he spends his free time coaching youth sports and cycling in wine country.
1. Wikipedia, https://en.wikipedia.org/wiki/Amazon (company)
2. Synergy Research Group, Microsoft, Google and IBM Public Cloud Surge is at Expense of Smaller Providers, February 2, 2017
3. Cheng, Evelyn. Amazon’s new Whole Foods discounts wipe out nearly $12 billion in market value from grocery sellers, CNBC, August 24, 2017
4. Whole Foods Is Losing Executives Under New Owner Amazon, The Wall Street Journal, March 22, 2018
5. America’s Healthiest Grocery Stores, Health Magazine, May 22, 2013
6. The Robot Report, The technology gap left by Amazon’s acquisition of Kiva Systems, April 13, 2016
7. Wikipedia, Amazon Robotics, https://en.wikipedia.org/wiki/Amazon_Robotics