What will Amazon do with a conventional grocery banner?

Discussion
Whole Foods 365, a low-priced format soon to be retired by Amazon - Photo: RetailWire
Mar 04, 2019
Tom Ryan

Amazon plans to open “dozens” of grocery stores in a new lower-priced concept distinct from its upscale Whole Foods format, according to The Wall Street Journal.

The new stores, expected to average about 35,000 square feet and opening across U.S. cities, appear to address the challenges Amazon faces in bringing prices down at Whole Foods. That chain’s organics focus and strict guidelines — such as not selling products containing high-fructose corn syrup, MSG or artificial colors — tend to require higher pricing. The new banner would also enable Amazon to significantly expand selections of popular CPG brands.

Sources told the Journal that Amazon is open to acquiring regional grocers and has been signing leases. The first location could possibly open by year end in Los Angeles.

The reporting indicated that, like others, Amazon has had “mixed results” with grocery delivery and the new concept is expected to further its reach.

Whole Foods is expected to remain a growth vehicle for Amazon. Reports at the start of the year said Amazon is planning to ramp up Whole Foods’ expansion in large part to support its two-hour Prime Now grocery delivery service. In an interview last week with the Texas Tribune, Whole Foods CEO John Mackey inferred that the chain’s “marriage” with Amazon was going well and hinted at the new formats coming.

Amazon is also expected to ramp up expansion of cashier-less Amazon Go in coming years.

In an interview with CNBC, Loop Capital Markets analyst Andrew Wolf said Amazon likely learned some lessons owning Whole Foods for just over a year and is ready to reach for a broader audience. “They’re the everything store. So if you want to sell the people food, you have to go where people go, which is conventional grocery stores,” he said.

Brian Yarbrough, an analyst with Edward Jones, told The Washington Post, “The main thing is driving that Prime membership and giving [customers] a ton of selection at a good value.”

Shares of food retailers all fell Friday on the Amazon news, with Kroger Co., the nation’s biggest traditional grocery chain, sliding 4.5 percent.

DISCUSSION QUESTIONS: What would Amazon’s launch of a conventional grocery concept mean for the company and the grocery industry? Would the new chain be good or bad news for Whole Foods?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Is it good for Amazon? I don’t think it’s as easy as they think — it will be fun to watch."
"Amazon does not seem overly concerned with profit margins, which is a great attitude to have if you’re getting into the grocery store business."
"By building these large scale grocery stores, it’ll give Amazon additional opportunities to test their Go technology at scale."

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22 Comments on "What will Amazon do with a conventional grocery banner?"


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Mark Ryski
BrainTrust

Amazon is a growth and expansion juggernaut and expanding beyond Whole Foods was probably an inevitable move. What I find mildly surprising is the speed at which Amazon is planning to expand given the still relatively recent acquisition on Whole Foods. Moving into a new segment of the food market will not be bad news for Whole Foods, since it sounds as though the new grocery concept would be targeted to shoppers who are not already Whole Foods customers.

Dr. Stephen Needel
BrainTrust

Amazon does not seem overly concerned with profit margins, which is a great attitude to have if you’re getting into the grocery store business. They bet a lot that Prime memberships will drive their business – at some point, they must think that will stop or slow down enough to make operations that only exist to support Prime members unaffordable.

Shep Hyken
BrainTrust

Does it surprise you that Amazon is expanding its retail brick-and-mortar footprint? Be it grocery or other retail areas, you will see Amazon expanding. The goal is not only more grocery sales. It’s also more Prime members using Amazon for their everyday needs.

Tom Dougherty
BrainTrust

Amazon means BUSINESS. Their model is not in creating categories but in stealing share from others. Amazon improves category access. I’m betting on Amazon. If I had Kroger stock, I would sell it too.

Neil Saunders
BrainTrust
The decision to launch a new grocery banner underscores Amazon’s ambitions in the grocery sector. It is also a tacit admission that Amazon cannot achieve these through Whole Foods. That doesn’t mean the acquisition of Whole Foods was wrong or that it has failed, but only that it’s just one piece of the jigsaw in terms of what Amazon wants to achieve. Why is Amazon so desperate to grow in grocery? Several reasons: the amount of detailed customer data it can gather, the frequency of purchase which offers great economies of scale with other parts of the business, the high sales values, the potential to disrupt the biggest part of the retail market, and an opportunity to create a retail footprint that can be used to support the fulfillment ecosystem. Will disruption be easy? Yes and no! Grocery is a very tough business to crack. It is low margin, habitual and requires real economies of scale and efficiency to work. However, most mainstream U.S. grocers don’t do a great job and the market is ripe… Read more »
Brandon Rael
BrainTrust

The consensus is that the grocery industry is ripe for disruption. Amazon sent shockwaves though the grocery sector when they acquired Whole Foods. However, the organic holistic living sector represents such a small sector of the industry.

We should expect Amazon to leverage their learnings from their Whole Foods experiences and very aggressively apply them to a conventional grocery store model. The “everything in one place” conventional grocery model works well with Amazon’s value proposition. Plus if and when they go full steam ahead, via acquisitions or aggresive store openings, these locations will serve as yet another place to mitigate the last mile challenges.

Paula Rosenblum
BrainTrust

Perhaps Amazon has noticed that grocery delivery isn’t terribly profitable, and the fact that you really can’t get sundries like paper towels (unless you are very specific in your tastes) at Whole Foods says they’ve decided to give it a full-blown go.

Is it bad for the industry? Well, Amazon is going to have to differentiate in a space that has been working hard to do that for a while. Is it good for Amazon? I don’t think it’s as easy as they think — it will be fun to watch.

Byron Kerr
BrainTrust

I can’t say I’m surprised Amazon continues to expand its brick-and-mortar footprint. By building these large scale grocery stores, it’ll give Amazon additional opportunities to test their Go technology at scale. Mixed with the consumer insights and additional fulfillment capabilities, the juggernaut keeps innovating.

Ed Rosenbaum
BrainTrust

The only and key differentiator is the Amazon name. I wonder how much of a committment they are willing to make and how long they are willing to stick with it. I can see shoppers trying it once. They are the new kid with the recognized name. But what are they going to do to entice us shoppers to return?

Evan Snively
BrainTrust

I don’t see a major impact for Whole Foods as the conventional grocery store is a different target market. Local chains will feel some impact, but the companies who should be worried the most are the value stores whose stigma was finally wearing off and have been growing in popularity recently with the younger generations — stores such as Aldi.

Doug Garnett
BrainTrust

We should prepare for an incredible irony:

Looking at both purchases of traditional operations made by Bezos and/or Amazon, the Washington Post and Whole Foods suggests it will be a grocery store. Sure, Amazon PR would tell us it’s “entirely different — re-invented.” There will be a few tech gizmos around as if to shout “really, we’re different — we really are!”. But at the core, it will be a grocery store and not so dramatically different. That’s what Amazon does – tells us it’ll be different then delivers the same.

So why would they go in this direction? They need profits from retail-like sales. Yes, I’ve seen all the arguments. But Amazon remains profit-less from over 50 percent of its revenue. It is under increasing pressure to change that and, given $28 billion spent on shipping last year, they can’t — without brick-and-mortar OR without shrinking by half. Since the second isn’t a viable option, the next step is grocery.

Carl Van Ostrand
Guest

There is an interesting “data” and brand play here too – more app users, more conventional brick-and-mortar shoppers, more members – it extends reach and pulls more people in to the marketing loop. With all of that behavioral data (mobile, desktop), they can market to and pull customers across channels. It’s a longer play — I don’t think they are doing this to sell more apples and watermelons, or even turn a profit per location.

Liz Adamson
BrainTrust

One thing Amazon is good at is disruption. They approach problems differently and find unique ways to solve them. After a year of learning from their While Foods acquisition, they may have some tricks up their sleeve that may position their grocery stores to be wildly successful. Or they may not, but if anything Amazon is not afraid to fail and profit margins have always been lower priority. It will be interesting to watch.

Balasubramanian Thiagarajan
Guest

Amazon already has a very well established supply chain and a delivery engine. These are the key to a successful grocer. I ‘m betting on Amazon.

Chuck Palmer
BrainTrust

If anything, Amazon is a learning organization. Whole Foods is a niche player Amazon purchased to learn as much as it could. While the addition of the Prime Now presence at WF seems clunky, I expect the data they are creating is more valuable than margin.

The advent of a full line traditional grocery makes perfect sense. It fits with Amazon’s scale, and there is a lot of real estate and operational opportunity out there with struggling regional chains.

If there is customer loyalty in this category, it’s based on proximity and convenience. With the advent of Instacart, Kroger’s Click List, etc., the retailer is becoming increasingly less important than the products and brands that people know.

Can Amazon win that battlefront? Absolutely.

Craig Sundstrom
Guest

Just what the country needs: another supermarket. Amazon got where it is because of very patient investors and shoppers who like free, or at least low cost shipping (even if they don’t bother to check if the overall price is lowest). I’m unclear on how this fits into that model, and that uncertainty is enhanced by the recent announcement that they plan to scale back the 365 openings. What will this accomplish that that didn’t?

Lee Peterson
BrainTrust

I would be willing to bet that in the dark recesses of the Amazon Strategy Lair, there’s a huge target with a bullseye that says “Walmart Grocery” in the middle of it. Folks, that’s a $255+ billion nut that is predominately tied up in “old” retail; you know, the kind that makes the consumer do all the work. #crushable.

And don’t think for a second think that Walmart doesn’t know that bullseye exists either. Their moves with Jet and BOPIS and ship to home show the kind of sense of urgency that might (operative term) hold off the yellow smiley hordes for a bit.

Also, think of AMZN’s recent efforts: Whole Foods, Go, Fresh, their online grocery delivery service and now this news should ALL be signals that yes indeed, that bullseye does in fact exist.

Steve Dennis
Guest

Amazon making a bigger move in grocery through physical stores is inevitable to sustain their hyper-growth. Whether they do it organically and/or with acquisitions it will be transformative for the industry.

Whole Foods addresses a particular niche. This play is to take on the broader mass market so I doubt the impact on them would be significant.

Richard J. George, Ph.D.
BrainTrust

Good news for Amazon. A real threat to conventional supermarkets that play in the middle of the market. Amazon might be further enhanced by considering the inclusion of some value retailers in its expansion strategy. After all, Amazon positions itself as the convenient, customer centric, value retailer. I predict minimum impact on Whole Foods.

Cate Trotter
BrainTrust

I think after Whole Foods, Amazon Go and its moves into selling groceries online, it’s not a massive surprise that Amazon is expanding further into the grocery sector. Generally speaking grocery has been a category that online shopping had struggled to disrupt in the same way as others for a variety of reasons such as customers preferring to shop in stores to see and pick their food, frequency of shopping (regular top-ups every few days that don’t meet delivery thresholds), delivery costs/logistics etc. Like many others Amazon sees that a physical presence is important to getting real traction in the sector. Whole Foods caters for a certain type of customer and needs, so creating a different, more general, grocery concept is a sensible move rather than trying to dilute the brand by attempting to be one thing to all people.

Ken Morris
BrainTrust
Launching a new grocery concept or acquiring a chain, or multiple regional chains, is essential if Amazon wants to challenge the grocery leaders. Expanding Whole Foods locations, is not the answer, as the brand does not have broad enough consumer appeal because it has the reputation of being too expensive for middle and lower income groups. Beyond its perception of being too expensive, Whole foods only has approximately 500 stores, throughout Canada and in 42 U.S. states. To compete with the leaders, Amazon needs a lot more stores, as Kroger has approximately 2,800 stores and Walmart has around 5,300 stores in the U.S. The additional store locations will also provide Amazon more local distribution points for merchandise pick-up lockers and home delivery of grocery items. This is a smart move for Amazon and a bad day for the other big players. Amazon can bring more healthy choice options to traditional grocery shoppers, expand their Amazon Prime footprint and expand their point of presence to the majority of US households. They need the Walmart type point… Read more »
Oliver Guy
Guest

Fascinating. I have long held the belief that the geographic footprint of grocers makes them valuable in terms of being a pick-up point and local distribution center for omnichannel orders – be that food or non-food. Amazon creating a grocery chain would reinforce that belief.
Existing grocers would need to ramp up their efforts to be able to offer the same – employing marketplace options, intelligent fulfillment and other changes as appropriate to compete.

In terms of Whole Foods, they have a very clear target demographic – creating a grocery chain with a different demographic should have very little impact.

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Braintrust
"Is it good for Amazon? I don’t think it’s as easy as they think — it will be fun to watch."
"Amazon does not seem overly concerned with profit margins, which is a great attitude to have if you’re getting into the grocery store business."
"By building these large scale grocery stores, it’ll give Amazon additional opportunities to test their Go technology at scale."

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