Whole Foods & Amazon? What’s Next?

 
Whole Foods & Amazon? What’s Next?

As published in Today’s Grocer, vol 59 #3 (link)

By: Rick Chavie, EnterWorks CEO

With Alexa now serving grocers as breakfast for Bezos, have we forgotten that Wal-mart has had their lunch as the #1 grocer since the turn of the century? What will it take for today’s grocers to keep a seat at the adult dinner table? And is this seat dependent on beating the titans or staying ahead of remaining, traditional competitors?

Battle of the Titans

The growth of Wal-mart in grocery occurred as the experimented with hypermarkets drawing from the European experience before they landed on the Supercenter model in the late ‘80’s. The higher shopper frequency for food that feeds scale for the combined store, their advanced hardgoods merchandising technology that they adapted for grocery, and their leading supply chain platform created a compelling, competitive advantages in grocery, an industry lagging far behind other retailers in their investment in technology and the web.

The complex nature of food (frozen, refrigerated, perishable fresh, bulk) retailing put grocery at the bottom of the digital cart as a priority market. But along comes Amazon in urban markets where Wal-mart isn’t, bringing their digital leadership in much the same way as Wal-mart: frequency, technology, and supply chain. Wal-mart saw the future and blinked, buying Jet.com in the hope of succeeding in e-commerce after repeated digital disappointments.

While Amazon’s tender for Whole Foods is indeed a pitched battle with Wal-mart, the digital and physical squeeze play will grab share primarily from the rest of the grocery landscape, if history is a guide. We have a model in the consolidation of the DIY industry, where Home Depot and Lowes rolled up the North American market, leaving specialty and smaller format players to battle for remaining market share.

Creating a Survivable Future

Grocers need to take a hard look at their strategies and assets. Most have been content to play the local game, believing that the traditional convenience of their local stores would offset the buzz of urban and other digital food concepts, that the complexity of the food supply chain would not succumb to digital advantage, and that customers would remain loyal (after all, they all have our loyalty card, right?). Can these grocer’s assets be converted into advantages to reverse the erosion of their market share? Are they capable of changing strategies and executing their own digital transformation? If both are true, do they have the sense of urgency after decades of delay in seeing their fate?

7 Key Assets in the Grocers’ Competitive Storehouse

  1. Data on customer shopping patterns. While they have not harvesting their loyalty data in the way that major ecommerce players have, they still own the data as well as 50 to 70% of the spend of loyalty supermarket customers.1
  2. Local, physical stores (that can also be hubs). Amazon is expected to spend $13.7 billion for access to physical retail, something grocers already have. Grocers are better set up for full range online grocery in suburbs even if Amazon leads in urban markets.
  3. Food and CPG brand partners. Amazon’s and Wal-mart’s buying clout threatens brands but retailer collaboration on product content and private label is mutually beneficial, even if the two titans try to disrupt with their own product data and brand plays.
  4. Digital threat as a motivator. Delay in digital is no longer an option (unless you sell retail real estate) but lack of prior investment in ecommerce limits a grocer’s write-offs. An advanced content & commerce platform preserves a seat at the omnichannel table.
  5. Low margins in grocery. The grocers’ challenge is a barrier for new entrants. Last year, overall retail margins fell 14.2% as ecommerce share reached 15.5% of sales.2 Grocers run with thin margins but the key is translating to food ecommerce as it grows.
  6. SMB market is open for business. A third of the grocery market is served by small and medium businesses that are slowest in adopting the digitization of grocery. Grocery chains have room to expand if they develop non-urban eCommerce models.
  7. Challenging Amazon. At 22%, US DIY retailer eCommerce growth exceeds Amazon’s 2017 rate; the 6% eCommerce share of grocery puts European Hypermarkets far ahead. Unique, digitally enabled services, recipes, and click and collect can create advantage.

Amazon’s goal is to become a Top 5 grocery retailer with $30 billion in the $800 billion grocery market by 2025.3 Over the past decade, Amazon has created many online concepts for grocery items: Amazon Fresh, Amazon Pantry, Prime Now, Subscribe & Save, Dash Buttons, Amazon Go and now the Whole Foods deal. Contrary to the “steamroller” narrative about Amazon, it tells you they are struggling to solve online grocery and have conceded that they need physical stores.

As grocers, you understand the challenge they face in mastering retail stores. And we know that it isn’t until online sales hit 20% all purchases in a given retail category that the Amazon growth surge occurs.4 Their 2025 goal gets them nowhere near that level. So despite the news headlines and #AmazonWins commentary, it’s not over.

Carpe commercium digitalis. Seize the digital store – before you lose the physical one.

1Bryan Pearson, President, Loyalty One at Alliance Data, on January 28, 2016, citing Precima report

2Wall Street Journal May 22, 2017

3As reported by insider discussing the goal in a feature with Bloomberg News March 20, 2017

4According to L2 Inc., a business intelligence firm, by Tonya Garcia, May 17, 2017 in MarketWatch