Amazon and Whole Foods: Three Years Later, Is Amazon Any Closer To Being A Leader In Groceries? — Brittain Ladd
On June 16, 2017, Amazon announced that they had acquired Whole Foods for $13.4B. I was not surprised at the announcement as I had made such a recommendation in this 2013 research paper.
Amazon has owned Whole Foods for three years. Was the acquisition worth it? Has Amazon achieved its goals in grocery retail or is there more to do? What will Amazon do next?
‘Amazon Just Went Nuclear’
According to Statista, grocery retailers generated $682B in sales 2019. Groceries are a low-margin business (between 1% to 3%) but technology like robotics, cashierless stores and robotics will allow Amazon to increase their margines as they grow their grocery business.
A question that is often asked is why does Amazon even want to be in the grocery business? The answer is simple — by leading in groceries, Amazon will delight millions of customers on a daily basis. These same customers will be incentivized to become Prime Members (if they aren’t already) leading to more sales on Amazon.Com. Amazon isn’t a retailer, they’re an ecosystem that exists to meet the needs of consumers on a grand scale. Groceries must be part of the ecosystem via online sales, retail stores and third-party sellers.
A truism in business is that consumers make more purchases of groceries and food than anything else. Amazon couldn’t ignore this fact hence the reason why in 2007, Amazon launched AmazonFresh as a way to provide consumers with groceries.
AmazonFresh never lived up to expectations controlling less than 1/2 of 1% of the grocery market.
From 2007 until 2017, Amazon implemented different strategies for increasing its percentage of the grocery business but nothing worked. Discussions began in earnest in the Fall of 2016 related to the need for Amazon to apply one of its own leadership principles, Think Big, to its grocery ambitions. (I know this to be fact as I was part of the discussions and I argued loudly for Amazon to acquire a retailer, and build a multi-format store with a micro-fulfillment center installed on a top floor. I also argued that the center store aisle items should be removed from the store and placed inside the micro-fulfillment center).
Discussions continued into the Spring of 2017 leading to the conclusion that Amazon, one of the world’s largest online retailers, had to have physical grocery stores.
Whole Foods was acquired soon thereafter.
The announcement by Amazon sent shockwaves throughout the retail industry. I wrote and posted this article on LinkedIn on the day Amazon announced its acquisition of Whole Foods, and in the article, I wrote this sentence: “Under no circumstances can Walmart or Kroger lose the grocery war to Amazon, and Amazon just went nuclear by acquiring Whole Foods. … By 2027, Amazon will pass Kroger. Between 2027 and 2035, Amazon will pass Walmart to become the largest grocery retailer by revenue.”
Amazon made it clear with the purchase of Whole Foods that the grocery industry would never be the same.
Whole Foods Isn’t Enough
Amazon is viewed as being an unstoppable force by retail analysts. These same analysts were certain that Amazon would quickly impact the grocery industry. I disagreed for this reason — Amazon has too few stores to be a threat in groceries. Amazon can’t scale Whole Foods as the market for organic food is small. Whole Foods founder, John Mackey, grew the company as large as possible only to see sales decline leading Mackey to sell the company to Amazon.
According to the latest numbers, Whole Foods only operates 472 stores. Compare this to the top-five leaders in the grocery industry:
- Walmart operates 3,569 Supercenters and generates over 50% of its annual revenue from groceries
- Kroger operates 2,650 stores and is the largest pure play grocery retailer
- Aldi operates 2,386 stores and will operate over 2,500 by 2024
- Albertsons operates 2,249 stores
- Ahold-Delhaize operates 1,958 stores
Although Amazon is outgunned when it comes to the number of stores they operate, they have proved to be the most innovative company operating in grocery retail. Amazon Go, for example, is just one of several innovations by Amazon even though Amazon has only been selling groceries since 2007. Kroger has been in the grocery business for over 100 hundred years.
Based on analysis I conducted at Deloitte and Amazon on this topic, I estimate that Amazon must operate a minimum of 2,150 grocery stores to have a chance at dethroning Kroger as the largest grocery retailer. Amazon can build, lease or buy the number of stores they require. I believe it’s possible that Amazon may acquire another retailer to meets its goal.
The following scenarios are plauisible ways for Amazon to grow their store count and delight more customers:
1. Acquire Target’s 1,868 stores and open Whole Foods Markets and Amazon-branded grocery stores inside Target’s stores.
2. Acquire Kohl’s 1,162 stores and open Amazon-branded grocery stores inside each location.
3. Acquire JC Penney. I wrote in this 2018 article that Amazon may acquire JCP. Why? Because malls are dying and COVID-19 has accelerated their demise. Amazon has the opportunity to acquire JC Penney stores in the best mall locations in the U.S. This will provide Amazon with an opportunity to reimagine the mall experience with groceries, gaming, stores for retailers powered by Amazon tech, and collaborative fulfillment. Acquiring JCP allows Amazon to leverage mall space for their own private label furnitiure and apparel. JCP has valuable private label apparel. Acquiring mall locations gives Amazon the ability to create a physycal version of Shopify.
I am often asked why I didn’t recommend to Amazon to acquire Kroger, Albertson’s or Ahold-Delhaize? The reason is this — Amazon (like many companies) — prefers to avoid acquiring companies with a union workforce. The majority of nationwide grocery retailers are union. Whole Foods is not. There are a myriad of other reasons why acquiring one of the leading grocery retailers doesn’t make sense for Amazon. Is it beyond the realm of possibility that Amazon could acquire Kroger? No.
However, there are additional acquisition targets Amazon can and should consider. Austin, TX-based H.E.B, arguably the best grocery retailer in the United States; Lakeland, FL-based Publix; and Phoenix, AZ-based Sprouts Farmers Market, all offer interesting possibilities for Amazon.
Costco is also a company that I believe Amazon should assess for an acquisition. With 782 locations worldwide at the end of 2019, a combined Amazon Costco provides exceptional opportunities for Amazon as it relates to its grocery business.
Louis Borders’ new online grocery company, Home Delivery Service, is something that may attract Amazon. Based on what I have learned about Mr. Borders’ new venture, I believe Amazon will be the first to kick the tires for a possible investment or acquisition. Note to Walmart — you need to kick the tires too.
I want to reinforce this point — acquiring a traditional grocery retailer adds little value to Amazon. Amazon needs real estate where they can sell groceries and general merchandise like their private label furniture, apparel, shoes, electronics and so on, hence the reason why acquiring Target or JC Penney would be so beneficial to Amazon.
Reimagining the Grocery Experience vs. Being a Grocery Retailer
Amazon has no desire to be a grocery retailer. Instead, Amazon wants to reimagine the grocery experience. Big difference.
Another option that Amazon can explore to grow its grocery market share is by doing what the company does best — innovate.
Instead of making an acquisition, Amazon can signifantly increase the efficiency of each Whole Food Market (WFM) it operates by installing micro-fulfillment centers (MFC) to automate the process of fulfilling online and pickup orders. MFCs can be installed inside select Whole Foods stores or placed in offsite locations. 90% of the fulfillment process can be automated using an MFC like AutoStore.
Amazon can create hundreds, if not thousands, of small format stores that operate like a vending machine dispensing groceries to a Pickup window using micro-fulfillment as the core of the store.
Amazon can also acquire real estate in locations that best fit its needs for placing a store. Amazon plans in terms of a decade which means over the next seven years, the company can surgically build a large number of stores with different formats — supermarket, Amazon Go Grocery, multi-format store with groceries and restaurants.
Amazon can easily acquire regional grocery chains that have gone out of business and convert their stores to the Amazon brand. Due to COVID-19, there will be many empty retail stores for sale.
Amazon has options. Lot’s of them.
(Amazon hasn’t always appreciated my opinion. Jeff Bezos Tweeted a nasty comment after reading my opinion in this 2017 New York Post article. A reporter from the Post contacted me after reading my research paper, A Beautiful way to Save Woolworths, which I wrote before I joined Amazon, and he asked if he could use comments from the paper for an article about Amazon. I stated that he could. I never asked to be an anonymous source.
Amazon recently confirmed that the ‘Robot Store’ is indeed a reality. Amazon’s new stores will utilize robots to shuttle inventory from back rooms to store shelves, and the stores will contain micro-fulfillment centers, as I predicted. I still admire, respect and like Jeff Bezos. However, instead of a Tweet next time, Jeff, please call).
Amazon’s largest grocery competitors are all working overtime to prevent Amazon form decimating their businesses and market share.
Kroger has entered into an agreement with the British retail and technology company, Ocado (I recommended this while a consultant for Kroger). Kroger plans on leveraging technology to keep Amazon at bay. Keep an eye on what Kroger is doing. I continue to believe that Kroger should have acquired Ocado, as I recommended, but nevertheless, Ocado and Kroger should be able to do great things together. Word of advice to Kroger, make Tim Steiner, CEO of Ocado, Kroger’s next CEO.
Walmart continues to invest heavily in its grocery business and it shows. Walmart generates over 55% of its annual revenues from selling groceries, and the company controls 27% of the grocery market. (Walmart was saved from being a mediocre retailer because of one decision made by Sam Walton — opening Walmart Supercenters that combined general merchandise and a full-scale supermarket to provide one-stop shopping convenience. Without the Supercenter, Amazon’s impact on Walmart would be much worse).
Sam Walton was truly one of a kind, and I wish I could have met him and learned from him.
Walmart likes to make the argument that their stores are an insurmountable advantage over anything Amazon can do. I disagree. I believe Walmart’s stores are retails version of the Maginot Line.
(Speaking of Walmart, you read it here first — I believe Walmart CEO Doug McMillon, will be a candidate for President as a Democrat in 2024 or 2028. It’s possible Doug may choose to run for the Senate first).
What’s certain is this, Amazon isn’t about to reveal too much of what it plans to do with its grocery business.
This quote from Sun Tzu applies perfectly to Amazon:
“All warfare is based on deception. Hence, when we are able to attack, we must seem unable; when using our forces, we must appear inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near. If your enemy is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is temperamental, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. If sovereign and subject are in accord, put division between them. Attack him where he is unprepared, appear where you are not expected.”
Amazon thus far has been an unstoppable force in every industry it enters. Will groceries be any different?
I have shared my opinion with senior executives at Amazon and what I recommended is this — Amazon must become more aggressive. Amazon’s advantages are eroding and few if any industries are as difficult as grocery retail.
Amazon rocked the grocery industry when they acquired Whole Foods, but Whole Foods isn’t enough.
Amazon needs to make a big move.
Amazon needs their version of a Pearl Harbor attack. Amazon should acquire Target, Costco or JC Penney.
Target and Costco make sense, no doubt. However, Amazon has been presented with an opportunity to acquire JC Penney for pennies on the dollar, and even acquire entire malls. If I am correct when I state that Amazon doesn’t want to be a grocery retailer, Amazon wants to reimagine the grocery and retail experience, acquiring JC Penney and the best mall locations provides Amazon with a playground to do exactly as I suggest. The possibilities are endless for Amazon when it comes to their ability to reimagine retail.
Frankly, I’m surprised that Walmart hasn’t already acquired JC Penney. Walmart was blindsided by Amazon when they acquired Whole Foods. Walmart acquiring JC Penney and the best mall locations, puts a stick in the eye of Jeff Bezos, and provides Walmart with an ability to leverage the real estate to their advantage. Google, Microsoft, Facebook, Kroger and especially Shopify, should all assess the value of acquiring JC Penney.
(Google has an incredibile opportunity to do more in retail but their Achilles Heel is a lack of presence in groceries. Google should assess acquiring Instacart; opening micro-fulfillment centers around the U.S.; launching Instacart private-label products, stores and distribution; and creating a retail ecosystem integrated with Olo for restaurant and retail delivery).
Will Amazon eventually sell more groceries than Kroger and Walmart? Yes, I believe they will. It’s inconceivable to me that Jeff Bezos and the talented team of executives and associates at Amazon will lose the grocery war.
It’s also inconceivable to me that Amazon won’t continue to reimagine healthcare, banking, education and entertainment.
Amazon is still an infant in terms of the growth potential of its ecosystem.
Originally published at https://brittainladd.com on June 17, 2020.