It’s challenging attimes to understand how Amazon’s moves with Whole Foods will impact groceryretail.

To explore this topic, we identified several of the most relevant movesmade by Amazon and looked at what grocers could learn from each – basedon proprietary insights gained from ongoing Brick Meets Click research into how technology is impacting the wayshoppers buy groceries, extensive market research into Amazon’s business, andBrick Meets Click’s market forecasting model.

One caveat: Thisis a look at Amazon’s strategy, as opposed to assessing their ability toexecute it, which is important as we’ve already seen some early barriers thatmay block the degree to which they can implement certain moves.

What motivatesmany of Amazon’s moves?

When we examinehow Amazon operates its consumer products business, we see that nearlyeverything revolves around Prime.

Even though Primetakes the form of a membership model, it functions and is marketed as a rewardsprogram, encouraging customers to spend more.

So, Amazon’soverall customer-facing strategy, at least related to consumer products, is tofind more ways to reinforce the value of becoming and remaining a Prime member.In doing so, it creates a stronger connection with customers, one that’s harderto attack because it’s a multi-faceted approach.

Why is Amazonmoving into physical retail?

One key reasonfor Amazon’s move into physical retail is to defend its base consumer productsbusiness. For the moment let’s focus exclusively on the grocery-relatedsegment.

Based on ourshopper insights, we believe that Amazon’s performance continues to face muchstronger headwinds. This year we’reshowing that household penetration and purchase growth rates for Amazon’s largestgrocery segment are down dramatically versus last year around the same time,based on consumer reports of past 30-day purchase activity related to its ship-to-homemodel.

So, even thoughits grocery business is still growing, Amazon’s growth trails the market, whichis leading to share erosion. This isn’tunexpected, given the increased competition from brick-and-mortar retailers whoare moving online and expanding their presence across the various tradechannels.

Moving intophysical can help strengthen Amazon’s grocery business, but that’s not the only– or biggest – reason to do so.

How does physical help in other ways?

Amazon alsoprotects its broader consumer product sales in two ways by moving into physicalretail.

First it improvesthe shopping experience by providing more choices to customers relative toreceiving orders and making product returns, which is currently done viathird-party partnerships.

Second it createsopportunities for Amazon to optimize other strategic initiatives by reducing inefficienciesin their existing value chain. Physicalstore locations can supplement its growing network of fulfillment centers andhelp further reduce delivery times.

Improvingshopper outcomes, like these, gives the customer fewer reasons to considershopping somewhere else.

What can welearn from Amazon’s early initiatives?

To begin with,Amazon has implemented initiatives that help them sell more by strengtheningthe linkages back to Prime.Cross-selling its products in or on other assets is consistent with thatvision, although in different ways.

Selling 365Everyday Value across Amazon.com, Fresh, and Pantry builds incremental salesfor the 365 brand at the same time it reinforces Prime by offering 365 productson member-only services or offering free delivery only to its members. Building distribution of devices like Alexaand Echo helps trigger not just more device sales, it also supports thelonger-term strategy of becoming an essential element of our everyday lives.

Second, theseinterrelationships are designed, at least in theory, to accelerate Amazon’sflywheel. For instance, having AmazonLocker at a Whole Foods store not only makes Locker more accessible andconvenient, but it also creates a natural opportunity to drive incrementalsales for Whole Foods. At the same time,a Whole Foods customer concerned about package theft but not attracted toAmazon Key may find Locker a more enticing offer.

The cumulativeeffect of these and other interrelationships is more likely to attract non-members to join Prime than any individual activity could do.

How about the tworecent initiatives?

Amazon continuesits effort to shift consumers’ perception away from “whole paycheck” bypromoting a more value-driven message.

The latestexample is Prime Rewards, where Prime members can save 5% at a Whole Foodsstore or when they buy 365 brands on Amazon.com and pay with an Amazon Visacard. (Customers who use the card but don’t belong to Prime receive a 3%savings.) This will likely be mostattractive to existing Whole Foods shoppers initially, but it’s yet another wayfor Amazon to demonstrate the benefits of Prime membership.

Similarly, itreminds consumers about this value by now offering free, two-hour delivery oneligible orders from Whole Foods through its Prime Now service. However, this initiative is also intended totake back control of its value chain so that Amazon can leverage much bigger opportunitiesto optimize across its many activities.

Does all thismake Amazon a larger threat to competitors?

Eventually Amazoncould be a larger threat, but in the meantime conventional grocers are more ofa threat to Amazon/Whole Foods, than the other way around.

Amazon wants toserve the largest market possible, but Whole Foods is positioned against asmall segment of the US grocery market. Even though natural foods is a growing segment that penetrates around80% of all U.S. households, the amount of dollars going to to it is stillrelatively small and conventional grocers have the largest market share.

It’s worth notingthat Amazon already serves the mainstream market via its Amazon Fresh and PrimeNow services. Unfortunately, Prime Nowsupports only a few grocers and most of those are in the same space as WholeFoods. Fresh is much more capital intensive and requires certain densities tosustain that model.

So, Amazon hasthe pieces already, but it needs time to reconfigure them to more effectivelypenetrate the physical market and expand its reach into the broader grocery industry.

What's thebiggest take away for brick-and-mortar retailers?

The store is themost important asset going forward.

US grocery saleswill continue to grow much faster online than in-store sales over the next fiveyears as consumers receive even more options as to where they spend money, butwe anticipate that much of this growth will flow to grocery providers operatingin closer proximity to consumers.

Having a storesimply provides more ways to serve the broadest market possible relative toonline sales. Prime Now will likelyfill in Amazon’s delivery capabilities where the Fresh model is not a good afit. Beyond that, we’re likely to see elements of Fresh Pickup surface in ornear stores, which helps serve another portion of the market and creates additionalopportunities to improve efficiencies and reinforce Prime.

Amazon’saspirations extend beyond winning the battle for online grocery sales – afterall, 95% of those sales still originate from the physical shelf. So the key to winning the war is creatingbetter shopping experience both online – and more importantly, in the store – whether that’s finding products, saving money, or checking out, to name a few opportunities.

This will givecustomers greater control and choice over how they shop for groceries as wellas encourage retailers to strengthen their value chain, especially where doingso creates competitive advantage and/or better aligns with over-archingstrategy.

If you want to learn more about theproprietary insights gained from ongoing Brick Meets Click research into our extensive marketresearch into Amazon’s business, Brick Meets Click’s market forecasting model,or how we can help ensure that your company is positioned to win, pleasecontact me at david.bishop@brickmeetsclick.com .

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