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Amazon's new grocery chain: Get ready - its impact will go beyond just increased competition



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Amazon's new grocery chain: Get ready - its impact will go beyond just increased competition

On March 1, Amazon announced it will launch a new grocery chain in an undisclosed location in LA by the end of 2019 – another strong signal of Amazon’s growing threat to the current generation of supermarkets and way of selling.

This development represents more than just increased competition in an already hypercompetitive market. It reveals Amazon’s ambition to be a major grocery player in the years to come by executing a multi-format strategy to cover the market.

Build vs Buy - the point is more locations, more consumers, more relationships

According to the Wall Street Journal, Amazon may buy smaller grocery chains to speed up their growth, but we think this is unlikely for two reasons.

  • There’s plenty of retail space available at low rents.
  • Today’s grocery stores don’t lend themselves to an easy retrofit for the new retail model Amazon is likely to deploy in the chain.

So, whether they build (or buy – we could be wrong, but don’t think they will repeat history), the the point of the expansion is more locations, more consumers, and more relationships: They plan to build strong, broad-based commercial relationships with a large percentage of US households, which will enable them to advertise directly to these households and serve a larger share of their spending.

Why this new format is both important and revealing 

This disruption is important because it will speed up changes to the current generation of supermarkets.

  1. It will mean further margin compression and lower prices ahead for the grocery industry.
  2. It could challenge the traditional grocery assortment, and not just because the stores will be smaller (35,000 SF). It’s also been reported that in lease talks, Amazon has discussed assortments that lean heavily on health and beauty products, blurring the line between grocery and drug stores.

Amazon’s plans also reveal that it won’t be satisfied with the high end of the food retail market (e.g., Whole Foods).  

  • They want to serve the middle market with stores that will have broader appeal including, we expect, much lower prices. 

By operating several different types of physical stores – Whole Foods, Amazon Go, and this new generation of grocery stores – Amazon is looking to target different market segments with tailored retail offerings that will be hard to beat.

BMC POV

While it is too early to walk the aisles of this new store, this development is clearly another strong signal that Amazon’s threat to the current generation of supermarkets is growing. 

To respond, operators need to reduce their costs in anticipation of Amazon driving down profit margins, and at the same time, continue to build more and stronger digital connections with their shoppers so they’re in the best possible position to retain that business. 

What can we expect as Amazon executes its multi-format grocery strategy? 

For retailers: Amazon’s new store format will likely enable high-efficiency in-store and online shopping that:

  • Features store-specific product assortments with inventories determined by purchase demand, not case pack. This will produce inventory turns and cash flow that are four to five times better than most of today’s supermarkets.
  • Use on-site robot driven storage and retrieval systems to minimize the fulfillment costs for online orders.
  • Offer exceptionally low prices to attract high traffic, which will lead to exceptional profitability of individual stores.

For brand manufacturers: Amazon will leverage the power of CPG brands to ensure the broad appeal of their stores, but with a twist. 

  • Many powerful, big brands, will be included, but so will regional or locally produced brands with unique features.
  • Amazon will likely lean heavily on high-value, innovative private label products to provide at least half of their SKUs. 
  • This combination will put them in a position to optimize profit from both national brand and private label products.

Amazon is a real threat (maybe not tomorrow, but that’s a gift that will soon disappear). There will be a dog fight for customers, profits, and partners.

Related Posts

> Understanding why Amazon must win in food and grocery & how it could reach that goal (blog)

> Amazon's profitability dilemma creates a ripple effect across the grocery industry

> Redefining the self-service retail model: GH Lab store & "new retail"

 

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Shawn Tuckett said:
This article does a great job of summarizing key points that grocery retailers need to consider. While thinking thru all this can be quite stressful for grocers who have had a set way of doing things for years, the grocers who respond proactively and adapt will be stronger for it.

From the consumer side, shoppers should be excited because Amazon is shaking up the grocery industry and forcing grocers to modernize and adapt much faster than they would have otherwise. For an industry that is often characterized as behind the times and set in their ways, this shot in the arm is needed. While some stores will ultimately close down because they were unable or unwilling to adapt, many will take up the challenge and become even better options for today and tomorrow’s shopper.
BlackBeltRobert Wheatley said:
The rapid emergence of omni-channel shopping behaviors, the impact of digital transformation on the food business and now entrance of Amazon into grocery retail's front yard, means one thing: Every retailer whether they wish to admit it or not is now selling sand in the desert.
It is highly likely that Amazon, the grand wizard of try-and-fail and try again, will upend the traditional model. There has never been a more compelling moment in the evolution of food retail for leaders and strategists to drive hard (and fast) for uniqueness and differentiation. Evidence points to consumers being less than enamored with the food shopping experience.
If the business is avoid falling victim to disintermediation, the goal must be to elevate and separate the food shopping environment beyond navigating an aisle maze.
How can you make food shopping more of a food adventure? The unique specialists will ultimately prevail over the middle-of-the-road generalists.
BlackBeltRobin Michel said:
After reading this article, I think Aldi!!!!
Bill Bishop said:
Robin - As usual you’ve picked up on the important parallel. Both the players will impact the market in a similar way in our opinion.
BlackBeltPJ Stafford said:
Bill, I totally agree with you that they are likely to "use on-site robot driven storage and retrieval systems to minimize the fulfillment costs for online orders." That would let them put a full supermarket in a 17,000 sqf two story footprint and significantly drive down the cost of Click and Collect and local delivery orders.
BlackBeltAriel Candelier said:
Excellent article! I think Amazon as the American juggernaut that it is has forced everyone to compete at a higher level. Ocado, in its own world has controlled the grocery delivery space in their part of the world for the last 18+ year. It took a company of our own to force us to challenge ourselves. Shout out to the fellow black belts and Bill!

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