Let me begin by thanking Thomas Lee for quoting me in this article. This article and this article are also related.
The question I am asked the most is this: Why does Amazon want to be in the grocery business? The answer is simple. The grocery industry in the U.S. is nearly $800B. Amazon wants a piece of the action and they want to offer their customers a better option for groceries.
Amazon acquired Whole Foods Market on June 16, 2017. I recommended to Amazon in a 2013 research paper to acquire either Whole Foods, Sprouts Farmers Market, or H-E-B.
Although viewed as being an aggressive move by Amazon, I knew acquiring Whole Foods wasn’t enough. I made the argument that Amazon had to be even more aggressive to have any chance of succeeding as a grocery retailer. Specifically, I argued that Amazon should also acquire Target and open Whole Foods Markets inside Target’s stores. In addition, I stated Amazon should create a new Whole Foods store called ‘Whole Foods+’ that will sell all of the foods found in a traditional supermarket.
Instead of leveraging the Whole Foods brand to open Whole Foods+ stores, Amazon created a separate brand called Amazon Fresh. I disagree with strategy as the brand will compete against Whole Foods. Whole Foods is all about fresh fruits and vegetables – why the need for Amazon Fresh?
To make things worse for Amazon’s grocery ambitions, the company has moved very slowly while competitors like Walmart and Kroger, have invested heavily to grow their business. Today, Walmart generates 57% of their revenue from the sale of groceries. Whereas Amazon has less than 600 grocery stores, Walmart and Kroger have thousands.
Should Amazon go big into physical grocery? It’s a dangerous strategy. My advice to Amazon is to assess following options:
1. Kill the Amazon Fresh brand and rename the stores Whole Foods+. Create a better Prime program for groceries.
2. Acquire Target or only acquire Target’s grocery business. Open Whole Foods+ inside Target’s stores. Create a combined Prime and Target rewards program. Target sold their pharmacy business to CVS for $1.9B. Assess an acquisition of Kohl’s if Target isn’t an option.
3. Open 500 to 1,000 micro-fulfillment centers to automate online grocery fulfillment and expand nationwide.
4. Assess StoreXapp and Qummy.
5. Aquire Dollar General, 7-Eleven, Circle K, Casey’s or Yesway. Kill the Amazon Go stores.
6. Acquire Kroger after they complete the acquisition of Albertsons. Kroger is a union company so I don’t anticipate this will happen.
If Amazon is unwilling to make a big move in groceries, than Amazon should assess divesting Whole Foods. Who should buy Whole Foods? Target.
Can Amazon succeed at groceries? Yes. However, the strategy must be well-defined and well-funded. Amazon only controls 2% market share. Amazon has a lot of work to do.
