Amazon acquired Whole Foods to become a major player in the grocery industry. Many analysts are beginning to think that Amazon made a mistake. Photo Credit: Getty  GETTY

Read original article on Forbes.

A report by Bloomberg makes the argument that Amazon continues to struggle in the $840 billion grocery industry. According to the report, recent consumer survey data released by UBS analysts indicates a decrease in the number of Prime members who shopped at Whole Foods in 2018 versus 2017.

A separate report from Bricks Meets Clicks, a research firm focused on the grocery industry, was referenced in the report by BloombergBricks Meets Clicks identified that consumers that order groceries online from physical grocery retailers order $200 of groceries per month, far above Amazon grocery shoppers that order less frequently and only spend $74 monthly on groceries.

The tone of the report is that Amazon, even after acquiring Whole Foods for $13.7 billion in 2017 and offering two-hour grocery delivery service, is finding little success in the grocery business. Walmart, Kroger, and Target have increased investment in technology, stores and last-mile delivery, and each has an advantage over Amazon because they have more stores according to the report by Bloomberg.

A Bridge Too Far?

In June 2017, I wrote an article where I outlined the impact of Amazon acquiring Whole Foods on the grocery industry. In the article, I outlined several key points:

  1. Amazon plans in terms of a decade. The press may believe that Amazon will have an immediate impact on the grocery industry but I warned that it will be 2020/2021 at the earliest before Whole Foods will be in a position to take market share. It could even take longer.
  2. Amazon should terminate John Mackey, Whole Foods CEO and founder, sooner rather than later. Mackey should remain CEO for no more than six months to one year. (I like and respect Mackey but transforming a company with a founder still in the role of CEO is challenging.)
  3. Amazon will have to drastically modify the product assortment inside Whole Foods to increase customer traffic. Specifically, Amazon will have to introduce CPG-branded products (Coca Cola, Pepsi, Oreos, Tide) on shelves and online, introduce its own private label brands, and remove many of the products currently stocked and sold at Whole Foods; the items should be made available online only. (Read this article to gain a better understanding of Amazon’s private label and CPG ambitions.)
  4. Amazon must improve product pricing and value to increase customer traffic.
  5. Amazon cannot maintain the status quo as doing so would mean certain failure. Whole Foods was faltering when acquired by Amazon.
  6. If Amazon executes, the company can become the leader in grocery sales between 2030 to 2035. (Read this article to gain a better understanding of how Amazon can become the leader in groceries.)

I also made the following comment in the article, and during speaking engagements on the topic of Amazon and the grocery industry:

Acquiring a grocery retailer is strategic to the future of groceries and food at Amazon. However, physical grocery retailing is hard. Without a laser focus on transforming Whole Foods and accelerating investments in the business, Whole Foods and groceries could turn out to be Amazon’s bridge too far.

I purposely used the phrase “a bridge too far” to indicate that Amazon acquiring Whole Foods, although strategic, was also full of risk. Online retail is one thing. Running a successful brick-and-mortar grocery business is something entirely different. It is entirely possible that Amazon could “overreach” and discover it’s unable to be successful at selling groceries.

Will Amazon fail at groceries? It’s possible, certainly. However, I believe Amazon will succeed. Here’s why:

  1. Amazon has owned Whole Foods for less than two years. It is simply too early to judge Amazon’s grocery business. (How many analysts wrote off Amazon early in its history?)
  2. Amazon has no intention of being a “grocery retailer.” Amazon wants to reimagine the grocery experience. Big difference. It will take time for Amazon’s plan to be implemented. Also, and this is critical to understand: Amazon is playing an Infinite Game where the goal is to outlast competitors, not beat them.
  3. Amazon attracts and hires the best talent giving Amazon a competitive and strategic advantage. Talent matters.

At any time, Amazon can make another acquisition and once again completely disrupt the grocery industry. If Amazon’s grocery strategy fails to achieve the desired results, an acquisition may be necessary to jumpstart the program.

For example, Amazon can acquire Target and open a version of Whole Foods Markets inside Target’s 1,850 stores. Target is an excellent choice for an acquisition in addition to just groceries. Amazon can acquire Costco, something that would rock the grocery and retail industry to its core. Amazon can acquire Dollar General. Amazon and Kohl’s can partner on a multi-use retail/Whole Foods concept. Amazon can simply build and open more Whole Foods stores.

See where I’m going with this? Amazon has options, lots of them.

I’ve read reports from analysts who argue Amazon can even acquire Walmart. I’m not sure that will ever happen or if it would even be possible for Amazon to fund such a massive acquisition without additional investors. Regardless, my advice is to crush all assumptions when it comes to the retail industry and Amazon. Amazon only controls 4% of retail in the U.S. and 5% of retail globally. Amazon can make additional retail acquisitions and avoid being labeled a monopoly. (Walmart may soon experience its own “bridge too far” in India.)

In addition to groceries, home improvement is a category where Amazon may need to have physical stores to maximize its ability to delight customers. Menards would make a strategic acquisition for Amazon. Amazon enters categories and makes acquisitions of companies it can scale. Amazon can reimagine the home improvement category; integrate Amazon’s furniture, home furnishings and appliance business; and scale Menards to offer a better business model and experience than Home Depot or Lowe’s.

Conclusion

2019 will be the year that Amazon’s grocery strategy becomes more clear to analysts and the public. Amazon will announce that it’s going to open more Whole Foods stores and I anticipate that Amazon will assign a current Amazon executive to replace Mackey as CEO. This is a must-have in order to accelerate change and allow Amazon to take full command control of the Whole Foods brand. I believe Amazon must make the change at CEO immediately based on discussions with multiple sources.

I also recommend that Amazon change the name of Whole Foods to Amazon Whole Foods, Amazon Prime Grocery or Prime Grocery by Amazon to better connect the brand to Amazon. Whole Foods continues to have a mixed reputation with consumers so changing the name is worth assessing.

2019 and beyond will see Amazon introduce new technology, new store formats, a new distribution and supply chain model, increased product assortment, and unveil several interesting strategic partnerships. I believe Amazon will tweak the Prime program as it relates to Whole Foods to increase the number of Prime members to shop at Whole Foods.

Amazon will find a way to eliminate cashiers inside Whole Foods using technology similar to the technology in Amazon Go. Eliminating cashiers will not increase store traffic, it will simply reduce the cost of operating each store. Consumers will not defect to Whole Foods because there aren’t cashiers. Consumers will only shop at Whole Foods based on product assortment, cost, quality and convenience.

The idea of Whole Foods adding branded CPG products like Oreo cookies and Doritos to its product assortment angers many die hard Whole Foods shoppers. Some analysts claim that there is no way that Amazon can make drastic changes to the assortment as doing so will drive away customers. The facts tell a different story: Whole Foods was losing market share to Kroger and Walmart prior to the acquisition by Amazon.

Many consumers want organic products but they also want well-known brand items like Cheetos, Doritos, Oreos and Tide, and they want to buy those items from the same grocery retailer.

Walmart and Kroger wisely increased its assortment of organic products but they sold its products at much lower prices than Whole Foods. The result? Millions of customers abandoned Whole Foods and instead started shopping at Kroger and Walmart. (Research reports verify that over 14 million Whole Foods customers defected to Kroger).

Whole Foods customers that switched to shopping at Kroger and Walmart bought more than just organic products, they also bought branded FMCG and CPG products. Only a small percentage of Whole Foods shoppers can be labeled as “health nuts” that exclusively eat nutritious whole foods.

Amazon cannot keep the same product assortment at Whole Foods as doing so will result in increased numbers of customers going elsewhere for groceries. Amazon understands this fact which is why the company is actively reviewing its product assortment and pricing. It’s also the reason why many analysts believe that as soon as Mackey is replaced as CEO, Amazon will announce Whole Foods is going to carry branded CPG and FMCG products.

Whole Foods was a neat idea, it wasn’t a sustainable business. If it was, Whole Foods wouldn’t have lost millions of customers and Mackey would not have sold the company to Amazon.

Amazon isn’t struggling with its grocery business, Amazon is just getting started. Have there been issues? Yes. Is Amazon at a disadvantage due to the fact it has so few stores compared to Walmart and other grocery retailers? On the surface, yes. Amazon does not have to match Walmart, Kroger or any other grocery retailer in store count to introduce a grocery model that delights and attracts the most customers.

Amazon should not enter into an arms race where it attempts to own and operate more stores than any other grocery retailer. Based on my research, the ideal number of Whole Foods stores Amazon should operate is 2,150.

Transformation takes time. Amazon will introduce many different ideas and test many new concepts: some will be more successful than others. Amazon is creating a new ecosystem for food and groceries integrated with leading-edge technology, store format and logistics. Amazon doesn’t want to copy, Amazon wants to innovate and lead.

The potential for Amazon to reimagine and influence the grocery industry over the next eight to ten years is staggering.

Keep the arrows in the quiver for it is far too early to be taking shots at Whole Foods and Amazon.