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Probably anyone who checked out the internet today knows by now that Amazon.com Inc. is acquiring Whole Foods Market Inc. in a $13.7 billion agreement. This deal has sent shockwaves across both the online and brick-and-mortar retail sector, especially grocery retail. The shock is expected, but in reality we should have seen this coming, and not just because Amazon has been sniffing around Whole Foods since last fall. At In:fluence 2017, we predicted a big move like this by Amazon as being inevitable.
Amazon has been trying to break into the grocery retail sector for years, but it hasn’t been able to reach the success in this area as it has with other sectors. It launched its AmazonFresh delivery service in 2007 in its hometown of Seattle and even after it expanded in 2013, it hasn’t gained traction in the market. In part, because grocery retail has unique challenges that don’t carry over into other categories – refrigeration requirements, speed of spoilage, fragility of perishable produce, etc. Additionally, online shopping is still a relatively new concept for people to consider for their grocery needs.
Now Amazon will suddenly have hundreds of Whole Foods stores all across the U.S., expanding its brick-and-mortar footprint instantly and vastly reducing the impact of those challenges.
Meanwhile, Whole Foods has been struggling. In the past, Whole Foods was the place to go for organic and natural foods that conventional grocery stores didn’t carry. Now Kroger and practically every grocery store has organic and natural sections, while Costco, Walmart and Target have started selling a wide variety of these foods. Everyone has started to also compete on price, making Whole Foods perceived higher prices a considerable disadvantage.
Now Whole Foods will not only be able to drive down its prices with Amazon’s distribution model and logistics network, but also tap into its substantial e-commerce and marketplace sales channels.
I’ve said previously that Amazon is big and it has an outsized influence on retail (we don’t call it the Amazon effect for nothing), but it hasn’t been truly omnichannel and therefore has been limited in how much it can grow. Sure, it’s a runaway success for e-commerce, but online sales represent only 11 percent of retail sales as a whole. About 89 percent of retail purchases are still made in brick-and-mortar stores, and without stores, Amazon has been cut off from the majority of retail sales.
With this one great leap, Amazon is grabbing a piece of that 89 percent in-store sales pie, while more fully embracing omnichannel strategy. Yes, Amazon had that one store in Washington and has a few bookstores here and there, but that was just testing the waters. We knew that it was going to try to make greater inroads in its brick-and-mortar footprint, because it’s hard to keep growing at a 24 percent rate when you’ve already saturated the market that you’re in. Amazon has jumped from the online pond to the retail store ocean and with so many stores, its already bound to be a whale.
It’s also jumping right into the fray of one of the biggest shakeups in the retail sector: grocery and food retail. We’ve discussed previously that food and groceries haven’t been immune to changes in shopping habits. In particular, the younger generations are shopping for food in a way that’s very different from their parents. Instead of one to two grocery trips a month buying primarily packaged goods, they’re making one, two, three trips to the grocery store each week, buying fresher foods, produce and other perishables. They’re also ordering their groceries online at Walmart, driving up to the door and having their car loaded by store associates. They’re utilizing services like Instacart and Shipt to have groceries delivered right to their home.
With that in mind, Amazon acquiring Whole Foods is a perfect storm of disruption for grocery retail.
It’s going to be extremely interesting to see how this plays out. Whole Foods has a very specific in-store experience – will it retain that? And how will it transfer to the online experience once Amazon takes over? I’ll also be curious to see how the rest of the grocery and retail worlds react. Traditional grocery has already had issues keeping up with the new consumer behaviors, while also having to compete with the likes of Walmart and Target. Now Whole Foods is getting a second wind and Amazon is charging into the industry. It’s time to step up that omnichannel strategy and give consumers what they expect now that the Amazon effect has come into the grocery scene.
