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What Does Amazon’s Acquisition of Whole Foods Mean for Grocers?

“How can we be more innovative?”

“How can we get online?"

“How can we provide a service that Amazon won’t be able to match?”

These are undoubtedly the questions at the top of grocery retailers’ minds in light of the recent news that Internet behemoth, Amazon, has added yet another revenue stream to its arsenal: online grocery. And it’s a very lucrative revenue stream at that. At $13.7 billion it’s Amazon’s biggest buy yet, and since news broke of the acquisition, it’s sent Whole Foods’ stock soaring.

But while consumers across the country look forward to seeing what the grocery shopping experience of the future may look like, the announcement has left many traditional grocers wondering what the shock acquisition means for them.

An industry primed for disruption

A report by the Food Marketing Institute and Nielsen found that the US grocery sector could grow five-fold in the next decade, with consumers spending upward of $100 billion by 2025.

And, while around a quarter of US households currently shop online for groceries—up from 20 percent just three years ago—more than 70 percent will do so within 10 years, according to the same report.

In light of these statistics, it comes as no surprise that Jeff Bezos views grocery eCommerce as the holy grail of retail.

Amazon has had its sights set on online grocery for years. It’s dipped its toe in the pool with initiatives like AmazonGo and AmazonFresh, and now it’s finally figured out a more effective means of cracking the grocery industry: buying a chain of supermarkets. A front entrance to Whole Foods Market, a grocery store chain whose acquisition by Amazon will usher in a new era of grocery, and could be tough on retailers. [Image Source: KBC TV]

With the purchase of Whole Foods, Amazon inherits a loyal customer base and, with its 440 stores, has essentially gained a fleet of ready-made distribution centers with a well-oiled supply chain.

So what does all this mean for traditional grocers?

Supermarket guru and industry expert, Phil Lempert, believes that the game-changing announcement is set to usher in a new era of grocery, and could prove to be tough on retailers—especially if Amazon lowers prices.

"[Retailers will] really have to look at what their stores look like today, and what they will need to look like tomorrow”, he said.

So can Amazon do to groceries what it did to other traditional retailers, like bookstores? And how will the eCommerce giant reconcile Whole Foods’ high-end, high-priced reputation with Amazon’s price-competitive image?

Amazon isn’t afraid to fail—and that’s the key to its success

Despite all the hype and talk of Amazon’s march toward online grocery domination, the acquisition won’t come without its challenges. For one, it’s no secret that Whole Foods has suffered its own business problems in recent years, including slow growth, diminishing profits, and increasing competition from traditional grocers branching out with their own organic product ranges and meal-kit services.

And there are still a number of questions that have yet to be answered. For example, does Amazon still plan to roll out a chain of its own physical stores, or will Whole Foods replace that initiative?

Amazon is famous for testing new ideas before deciding whether to scale them or shut them down. And while this approach can lead to huge successes, like Amazon Web Services or the Kindle, it can also result in failed projects—like the infamous Kindle Fire phone.

Jeff Bezos is showing off the Kindle Fire Phone, a product that Amazon discontinued after it demonstrated poor sales.

[Image Source: PCWorld.com]

“If you think that’s a big failure, we’re working on much bigger failures right now—and I am not kidding,” said Bezos during an interview that was part of the Transformers conference hosted by The Washington Post. “Some of them are going to make the Fire Phone look like a tiny little blip.”

Amazon’s logic is that a small number of winning ideas pay for dozens—even hundreds—of failures.

“Every single important thing we've done has taken a lot of risk, risk-taking, perseverance, guts, and some have worked out. Most of them have not. That has to happen at every scale level all the way down," he explained.

Bezos isn’t afraid of failure, and acknowledges that every new venture the company undertakes won’t necessarily be a guaranteed success. Its foray into the world of online grocery will be no different.

Differentiating factors for traditional grocers

The good news is that there are still a number of ways retailers are able to survive—and thrive—during the impending industry upheaval. Traditional grocers boast a number of competitive advantages that they can capitalize on in order to strengthen their position against the big guns:

  • Customer service: Traditional grocery retailers should be placing their focus on customer service in the years ahead. Value-adding shopping services—including loyalty programs, digital coupons, personalized eCirculars, online shopping lists and the like—can all help enhance the shopper experience, and in turn, increase customer satisfaction and brand affinity.
  • Speed and efficiency: Even the most progressive grocers in the country with thriving eCommerce programs in place aren’t able to fulfill online orders in less than two to four hours. Amazon, with its AmazonFresh Pickup, however, is able to fulfill orders in as little as 15 minutes. The idea behind this is to minimize any “friction” in the online shopping experience. Add to this the fact that with Amazon Fresh Pickup’s offering, shoppers need not even get out of that car, and you have the ultimate in stress-free shopping. The key for traditional grocers to compete with this will be to provide seamless shopping experiences, where customers can quickly get exactly what they want with easein some cases, without even having to reach for their wallet or phone.
  • Location: Regional grocers and supercenters like Walmart rule in suburbs and rural areas—and this is unlikely to change with Amazon’s purchase of Whole Foods. This offers a competitive advantage to competing independent retailers with locations in those areas.
  • Personal touch: With talk of Amazon cutting Whole Foods staff as a result of the merger—coupled with the fact that Amazon is already piloting stores where customers are able to walk away without the “hassle” of checking out—it seems like the logical next step would be to introduce this concept to the mainstream with their freshly-acquired grocery chain. However, there are still those that like a more personal affair. For many, grocery shopping remains a sensory experience. These consumers still want to walk into a store, see all the colorful fruit, smell the freshly baked bread, and chat to associates. They want to see, touch, and sniff their produce. And this is one area in particular in which Amazon’s model may fall short.

The bottom line is that, from today onward, the only viable strategy for traditional grocery retailers is to try to advance their shopping experience and place a greater focus on merging digital and physical capabilities.

Moving forward, the key to success will be agility, and the ability to innovate as fast, if not faster, than Amazon does.

For more inspiration on how traditional grocery retailers can compete with the likes of Amazon, download our eBook, “A Survival Guide to Digital Retail” by clicking the button below.


Stefanie Neyland
Stefanie Neyland is a Content Marketing Manager at Mercatus, specializing in all things grocery eCommerce.
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