I Want it all

The title of this blog is not about a megalomaniac attempt to take over the world on my behalf or the consequence of a bad dream. Instead it might best describe the attitude and desire of that famous entrepreneur: Jeff Bezos – founder of Amazon when it came to is recent acquisition of Whole Foods the mid to high-end US grocer.

A little background to this acquisition.

In June 2017 Amazon acquired Whole Foods for around £10.6 billion. Although it had made some previous and tentative ventures into the world of grocery retailing about ten years ago (the purchase of WebVan being an example, albeit a failed on), this represent a serious and determined move to consolidate its presence in this sector. It is the biggest ever deal for Amazon and judging by the business press coverage is seen as a potential “game-change” for the future of this sector. Prior to this acquisition Amazon has registered a very small presence in the grocery business in the US: it is estimated to have around 0.6 per cent market share.

By acquiring over 440 stores in the USA and around 40 in the UK it clearly widens the footprint of Amazon in this area.

The reason why it has attracted such media coverage is because it has generated a range of different theories as to the rationale for this move. We will tease out a few of them in this blog.

Perhaps the simplest observation is that it represents a reversal of Amazon’s onward march towards domination in the online retail space and might signal that there I life still in the traditional “bricks and mortar” grocery retail arena. However in my view this is simplistic and naïve.

The reality is that for the past decade or so retailers have grappled with the challenge of provide a range of channel options for shoppers. More recently this has morphed into the concept of having an omni-channel presence – where shoppers should enjoy a seamless and integrated experience in their dealings with a retailer. The concept of remaining as a “pure-play” retailer in either bricks or mortar or online is reducing.

As we know Amazon is one of the most aggressive players in terms of innovation. This applies to all aspects of its business model: from big data management, the application of technology right through to the vision of Bezos which is most accurately captured in his desire to build an “everything store”.

Over the past decade this has evolved through buying parts of the supply chain it did not already own – for instance initially it relied on third party delivery companies such as UPS. Now it has its own delivery systems across shipping and air. In the latter case we are currently witnessing its testing of how drones could be profitably used to expedite delivery via a range of options such as click and collect, direct to a locker or storage or to a person’s home or office – all within a two-hour turnaround.

Therefore the acquisition of Whole Foods opens up the opportunity for Amazon not merely just to gain a physical presence but the leverage the strengths of this company across its existing operations. Let’s examine this in more detail.

Whole Foods has encountered a slowing of sales and profits in recent years. It is not a low-price, discount retailer however. Instead it is seen as a premium retailer which focus on a range of quality and healthy options for an affluent and young target market. This might be contradictory in terms of how many people see Amazon (a place where you can buy items at lower prices than the competition). It can be equally argued that it allows Amazon to expand it range of items in the grocery sector to include a more sophisticated range of fresh food items and therefore make itself even more appealing to this “affluent” shopper.

Let’s not forget that it has already innovated in this space with Amazon Prime and amazon Prime Fresh, where shoppers are willing to pay an annual subscription (£75 in the UK or $99 in the USA) for this delivery service.

Rather than being perceived as making a grab for simply a greater physical presence in the grocery space, it could in fact be argued that it could be seen as more of an opportunity to consolidate its stranglehold on the online shopping arena.

Let’s be careful about making the jump to the assumption that this acquisition signals a reverse in the inexorable move towards online shopping and instead marks some form of recognition that the bricks and mortar space is going to witness an upsurge or shift in popularity.

After all in the USA the last few years in particular has witnessed the decline in visits and usage of shopping malls (the term “ghost malls” has come into vogue to capture this phenomenon). For most retail categories the upcoming generation, weaned on online shopping, social media platforms and apps, are unlikely to switch away from this ingrained behaviour and jettison it in favour of a return to physical shopping to any significant extent.

A recent study by Alltech with young shoppers (20 year olds plus) captured a revealing comment. When asked if grocery stores and supermarkets are still important one person responded thus: “Yes they are very important – for old people”. This may give us an interesting insight into this segment’s perception of grocery stores!!

Consider this. Over 23 million US shoppers live more than a mile away from a grocery store. Fresh food and fruit is largely inaccessible to them. Amazon with its innovative approach to delivery is capitalising on this. Likewise the acquisition of Whole Foods store gives it a local dynamic and more importantly access to data on these shoppers. This can widen the reach of Amazon and increase its range of items – particularly in the premium (mid-to upmarket grocery category.

In the UK, with Whole Foods having approximately 40 stores, a similar strategy can also ensue.

I would argue that despite the relatively poor financial performance of Whole Foods in recent years) it still has a strong brand perception and presence with the affluent 20 – 30 year old shoppers, and older). Let’s look at the relative strengths of both parties.

Amazon demonstrates its capabilities in the following areas: innovation and its aggressive approach to implementation, a very strong delivery capability and its masterful management of big data.

As well as a strong brand profile Whole Foods brings it reputation for high quality items and a strong set of relationships with existing suppliers. The harnessing of these strengths is only likely to lead to further improvement.

Will Amazon retain the brand name and the brand values? In my view it should certainly retain the name and most of the stores. It may make a number of adjustments to the portfolio of items – still largely focusing on the premium image but with some adjustment to lower prices in some categories, although this could create problems if it moves too aggressively in this direction.

With aggressive technological developments in areas such as facial recognition likely to emerge in the next few years, Amazon will continue to improve its delivery mechanisms and speed up the convenience issue in its Amazon Go stores.

The competition in the form of established grocery retailers such as Wal-Mart, Tesco and so on will have to respond. Likewise online pure-play retailers such as Ocado will be nervously looking over their shoulders.

The only certainty is that a “do nothing” response is not an option.

 

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