Shopping at Whole Foods certainly has it’s advantages. For example, being able to purchase the freshest of the fresh organic fruits and vegetables, and finding unusual items not carried by most grocery retailers. Whole Foods has developed a loyal cult following of customers who love to shop at the stores.
Whole Foods has the highest customer turnover of any major brand with less than 70% of its 2021 shoppers returning in 2022. At the same time, Whole Foods added a higher percentage of new customers than any other grocery retailer. This means Whole Foods is growing in popularity.
However, an interesting fact about Whole Foods is that 70% of the customers who shop at Whole Foods have to leave the store and go shop at another grocery retailer. Walmart, for example. Why? Because Whole Foods doesn’t stock the best-selling CPG products like Coke, Pepsi, Frito Lay salty snacks, Tide detergent, and other products with unnatural ingredients.
Most people who read this article will think to themselves, “Interesting. I didn’t realize that so many Whole Foods customers have to leave the store to finish their grocery shopping elsewhere.” However, there is much more to the story.
When I learned from multiple sources at Whole Foods and Amazon that 70% of Whole Foods customers completed their shopping at another retailer, my reaction was to identify a solution for how to keep those customers shopping within the Amazon ecosystem.
Think about this – every time a Whole Foods customer leaves the store to complete their grocery shopping elsewhere, Amazon and Whole Foods lose the sale. On an average day, over 35 million Americans head to a grocery store to shop. One out of every ten Americans shop at Whole Foods. This means that Whole Foods and Amazon are losing billions of dollars annually.
My solution for solving the problem is by working from the customer backwards. Let’s take a look.
- Customer chooses to shop at Whole Foods due to the quality of the products, a focus on organics, and the ability to find Whole Foods-only products.
- Customers have to leave Whole Foods because they can’t buy the additional products they need to meet the needs of themselves or their family.
- Customers are forced to drive and shop at one or more additional grocery retailers. This inconveniences the customer.
So what’s the solution? Well obviously, the solution is for Whole Foods to stock and sell all of the leading CPG products, correct? Not so fast. Although Whole Foods can stock and sell the leading CPG products, it would force Whole Foods to have to remove nearly 40% of the products they currently stock and sell in their stores. Stated another way, Whole Foods stores don’t have a bunch of empty shelves in the store where CPG products can be stored. Whole Foods can’t just add more products.
There is also the issue of Whole Foods customers being extremely protective of Whole Foods – they like it just the way it is. Although most Whole Foods customers would continue to shop at Whole Foods if the leading CPG products were sold in the stores, doing so would disrupt the equilibrium of the stores and the company.
To solve the problem, I designed a strategy whereby the Whole Foods brands can be leveraged without making ANY changes inside Whole Foods stores. The solution? Open ‘Whole Foods+’ stores. The best organics plus the leading CPG products consumers love. Whole Foods+ stores will allow the 70% of customers who leave Whole Foods to shop elsewhere to remain within the Amazon ecosystem and complete their shopping.
I like the idea of opening Whole Foods+ stores because customer acquisition costs are nearly zero. The stores are designed to provide a solution to the 70% of consumers who already shop at Whole Foods to purchase the CPG products they love to eat.
An added benefit of opening Whole Foods+ stores is that they will attract millions of new customers who avoid shopping at Whole Foods, but they will shop at Whole Foods+ stores. True story. Kroger and Walmart made a strategic decision to lure Whole Foods shoppers to their stores. How did they do it? By increasing the number of organic products sold in their stores. The result? 16,000,000 Whole Foods customers defected to Kroger and Walmart because they can complete ALL of their shopping. The impact on Whole Foods was devastating.
I’ve also stated in articles, in LinkedIn posts, and at conferences, that Amazon should greatly simplify the shopping experience by allowing Whole Foods customers who shop online to easily purchase CPG products not sold in Whole Foods stores. However, under no circumstances is simplifying the process for purchasing CPG products a substitute for opening Whole Foods+ stores. The strategies are complementary but neither cancels out the other.
Tony Hoggett, SVP Worldwide Grocery Stores, is living in Austin, TX, and working diligently with the team from Whole Foods to identify the best strategy for simplifying the process for Whole Foods customers to purchase CPG products. In addition, Tony is working hard to try and get consumers to fall in love with Amazon Fresh stores. Tony is making progress on the former but not the latter.
In my opinion, the biggest mistake Amazon made related to groceries is opening Amazon Fresh stores. Whole Foods is supposed to be all about fresh fruits, vegetables, awesome cuts of meat, incredible dairy products, and so on. Why the need for Amazon Fresh stores? Answer – they aren’t needed. Amazon made a poor strategic decision in opening the stores.
According to a senior executive at Amazon, and confirmed by multiple Amazon associates, “The team is doing everything they can to keep the Amazon Fresh stores open and not support opening Whole Food+ stores, as that would mean they’d have to admit that you were right, Brittain, and some don’t like you because you publicly share your ideas about Amazon.” I’m not interested in being proven right. What I want is for Amazon to make a choice that delights their customers and also prevents Amazon from having to spend a fortune in customer acquisition costs.
I have a unique relationship with many individuals inside Amazon’s grocery organization. I know this based on the number of individuals who reach out to me for my opinion on strategy related to stores and automation. Amazon associates walk me through internal strategy discussions and then they ask me what I would do. I’m happy to share my opinion.
I’ve had hundreds of discussions with current and former Amazon team members about automation and robotics. Specifically, what is the optimal micro-fulfillment center strategy for Amazon, and at what point should Amazon introduce large, fully automated Customer Fulfillment Centers? Let me be as clear as possible: Amazon is going to automate as much of their grocery operations as possible. Guaranteed.
I was recently told by a senior leader within Amazon, “We get most of our ideas from reading your posts and articles. Whenever you write something about groceries and automation, they’re shared with the team and we discuss how to do what you recommend. I want you to know how appreciated you are even if some people don’t like you at Amazon.”
There it is again, “even if some people don’t like you.” It doesn’t matter. I am going to continue sharing my ideas. I am going to continue sharing my opinion on strategy. And I am certainly going to keep writing posts and articles.
Are Stores Mandatory?
What I know for a fact is this – If Amazon doesn’t make the right decision regarding their physical store strategy, Amazon’s grocery ambitions will be severely constrained. Nearly 67% of consumers prefer to shop inside a grocery store. Stores matter. A lot.
However, allow me play Devil’s advocate. Does Amazon absolutely, positively, have to own and operate stores? No. Sort of. It all depends on how creative Amazon is willing to be.
Amazon has a grocery marketplace and they’ve partnered with 20% of grocers to sell their groceries on the marketplace. It’s Amazon’s version of Instacart and Dot.Com. An interesting option for Amazon to pursue is convincing the grocery retailers who join the marketplace to allow Amazon use of their stores in exchange for Amazon leveraging their massive purchasing power to negotiate the price of the groceries sold in the stores. Amazon can even fulfill groceries. Amazon can become the largest grocery wholesaler in the U.S. This strategy will erode the price advantage held by large grocers like Kroger and Walmart, and also discounters like Aldi; this will force these retailers to invest more in their pricing which will reduce their profits.
Amazon can get very creative. For example, Amazon may choose to create a franchise model for independent and regional grocery retailers. I don’t believe such a model has ever been used in groceries on a scale that I envision but the idea is worth considering. Amazon can white label a front end for the grocers and utilize AWS to run all software. Amazon can deliver groceries to customers and manage curbside pickup. Amazon can introduce in-store media, advertising, the Prime program, and onsite or digital pharmacies. Amazon can leverage it’s size to renegotiate loans and lease terms to reduce operating costs. In return, Amazon collects a percentage of the sale of all groceries sold, and Amazon will share the media and ad revenue with the grocers.
The best thing Amazon can do is enable an “endless aisle” of products for independents, regional grocery retailers, and wholesalers who provide groceries to their grocery partners.
The goal is this – identify a strategy and operating model that allows Amazon to have access to thousands of grocery stores without owning or leasing any of them. Is it possible for Amazon to orchestrate a new business model for groceries whereby they leverage their size and capabilities to maximize growth and sales for many grocery retailers (partner with them) and Amazon receives a portion of all sales? Should Amazon create a new stock investment plan whereby they invest in grocery retailers in exchange for a percentage of ownership in the companies? McDonald’s created a new model for restaurants: What model can Amazon create for grocery stores?
There are 63,207 supermarkets in the U.S. Imagine if Amazon collected a percentage of sales from just half of the stores? See where I’m going with this? Amazon could become one of the largest grocery retailers in the U.S. without having to build or own any new stores. (Amazon’s team of economists would be wise to explore this topic, and identify if there is a way to create a model for groceries that’s never existed. I don’t have all the answers.)
No One Said It Would Be Easy
Amazon entered an established market with entrenched players. Amazon is at a severe disadvantage in the grocery industry because they operate so few stores. I believe opening Whole Foods+ stores is the best option for Amazon. I believe the Amazon Fresh brand should be eliminated and the stores eventually rebranded as Whole Foods+. It’s a start but it’s not enough.
Amazon cannot allow the status quo to remain. Amazon must identify a way to keep Whole Foods customers shopping within the Amazon ecosystem. Figuring this out is worth billions. It’s not enough.
I don’t want Amazon to be a grocery retailer. I want Amazon to imagine a new way for meeting the grocery and food needs for the consumers within their ecosystem. Buying, ordering, and receiving groceries and food should be an experience similar to the infrastructure that provides electricity and water to every American. Water, plumbing, electricity – they surround us. Need a glass of water? Go to the sink and turn on a faucet. Need to turn on a light? Flip a switch. Need to take a shower? Go into the bathroom and take one.
Amazon is managing their grocery business as a separate entity. My recommendation is for Amazon to create infrastructure (stores, warehouses, fulfillment centers, micro-fulfillment centers, commissaries, strategic partnerships, last mile delivery) to address this overwhelming need for their customers – providing groceries and food 24/7 365 days per year. Amazon must do more than just solve their store problem.
I believe Amazon has an option to be very creative with their marketplace and other strategies that may eliminate the need for Amazon to own or lease stores. What Amazon must do is create a business model that doesn’t exist today that they can leverage to make entrenched grocery retailers, their biggest competitors, obsolete and irrelevant.
If Amazon can’t create a new model for groceries, Amazon will need a physical store strategy. As I stated earlier, stores matter. A lot. It will also mean that Amazon is a grocery retailer – just like their competitors who have 50 to 100 more years of experience than Amazon at selling groceries.
Think Big, Amazon. Think really BIG.