April 15, 2018

Does what Amazon's doing with Whole Foods make it a larger threat to grocer competitors?

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It’s challenging at times to understand how Amazon’s moves with Whole Foods will impact grocery retail.

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

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

What motivates many of Amazon’s moves?

When we examine how Amazon operates its consumer products business, we see that nearly everything revolves around Prime.

Even though Prime takes the form of a membership model, it functions and is marketed as a rewards program, encouraging customers to spend more.

So, Amazon’s overall customer-facing strategy, at least related to consumer products, is to find 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 harder to attack because it’s a multi-faceted approach.

Why is Amazon moving into physical retail?

One key reason for Amazon’s move into physical retail is to defend its base consumer products business. For the moment let’s focus exclusively on the grocery-related segment.

Based on our shopper insights, we believe that Amazon’s performance continues to face much stronger headwinds.  This year we’re showing that household penetration and purchase growth rates for Amazon’s largest grocery 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-home model.

So, even though its grocery business is still growing, Amazon’s growth trails the market, which is leading to share erosion.  This isn’t unexpected, given the increased competition from brick-and-mortar retailers who are moving online and expanding their presence across the various trade channels.

Moving into physical 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 also protects its broader consumer product sales in two ways by moving into physical retail.

First it improves the shopping experience by providing more choices to customers relative to receiving orders and making product returns, which is currently done via third-party partnerships.

Second it creates opportunities for Amazon to optimize other strategic initiatives by reducing in efficiencies in their existing value chain.  Physical store locations can supplement its growing network of fulfillment centers and help further reduce delivery times.

Improving shopper outcomes, like these, gives the customer fewer reasons to consider shopping somewhere else.

What can we learn from Amazon’s early initiatives?

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

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

Second, these interrelationships are designed, at least in theory, to accelerate Amazon’s flywheel.  For instance, having Amazon Locker at a Whole Foods store not only makes Locker more accessible and convenient, but it also creates a natural opportunity to drive incremental sales for Whole Foods.  At the same time,a Whole Foods customer concerned about package theft but not attracted to Amazon Key may find Locker a more enticing offer.

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

How about the two recent initiatives?

Amazon continues its effort to shift consumers’ perception away from “whole paycheck” by promoting a more value-driven message.

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

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

Does all this make Amazon a larger threat to competitors?

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

Amazon wants to serve the largest market possible, but Whole Foods is positioned against a small 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 still relatively small and conventional grocers have the largest market share.

It’s worth noting that Amazon already serves the mainstream market via its Amazon Fresh and Prime Now services. Unfortunately, Prime Now supports only a few grocers and most of those are in the same space as Whole Foods. Fresh is much more capital intensive and requires certain densities to sustain that model.

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

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

The store is the most important asset going forward.

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

Having a store simply provides more ways to serve the broadest market possible relative to online sales. Prime Now will likely fill in Amazon’s delivery capabilities where the Fresh model is not a good a fit. Beyond that, we’re likely to see elements of Fresh Pickup surface in or near stores, which helps serve another portion of the market and creates additional opportunities to improve efficiencies and reinforce Prime.

Amazon’s aspirations extend beyond winning the battle for online grocery sales – after all, 95% of those sales still originate from the physical shelf. So the key to winning the war is creating better 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 give customers greater control and choice over how they shop for groceries as well as encourage retailers to strengthen their value chain, especially where doing so creates competitive advantage and/or better aligns with over-arching strategy.

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