On June 16, 2017, Amazon announced (paywall) that it would acquire the specialty retailer Whole Foods for $13.4 billion. I heard people speculate that Amazon would have an immediate impact on the grocery industry and that within only a few years, Amazon could be a leading grocery retailer in the United States.
Retail reporters wrote articles like the above that gave the impression that Amazon would find immediate success in the grocery business. In addition to acquiring Whole Foods, Amazon designed and opened its first Amazon Fresh store in August 2020. The acquisition of Whole Foods and the continued opening of Amazon Fresh stores across the U.S. signifies to me that Amazon is intent on becoming a major player in what Mercatus (via Supermarket News) estimates is a $1 trillion-plus industry. However, as of 2021, Numerator data showed that Amazon.com and Whole Foods had a combined 2.6% share (paywall) of U.S. grocery spending. Walmart was the leader with over 22% share of spending.
Recently, Amazon appointed Tony Hoggett of Tesco to run its physical stores. Hoggett was with Tesco, the U.K.’s biggest retailer, for over 31 years. Most recently, he was the company’s chief strategy and innovation director. Hoggett joined Amazon as the senior vice president of physical stores; he reports to Dave Clark, who is the chief executive of the worldwide consumer business.
What are the lessons retailers can learn from the moves Amazon is making?
More Than Innovation
At over $1 trillion, the grocery industry in the U.S. is massive.
Within the industry, several retailers dominate. Kroger generated sales of $132.5 billion in 2020. Walmart generated 56.3% of its sales in 2021 from groceries. Kroger has been selling groceries since 1883, and Walmart began selling groceries in 1988.
Amazon began selling groceries in 2007 with the launch of Amazon Fresh, an online grocery option for consumers. Amazon trails other grocery companies in sales, but they are innovative. I consider Amazon Go stores (with their “Just Walk Out” technology) and full-sized Amazon Fresh supermarkets (which are capable of allowing customers to avoid the checkout process) to be the most technologically advanced stores in operation.
The grocery industry is one of the most challenging businesses to be in. Grocery retailers may only earn from 1% to 3% margins on every item they sell. Worse, grocery retailers may lose money on online orders.
As online sales increase, grocery retailers may be tempted to open dark stores to fulfill all online orders. This will result in grocery retailers having two supply chains: one for their physical stores and one for their dark stores. Costs may increase to meet online demand but remain fixed for operating networks of stores.
In addition to opening stores, companies hoping to move into the physical grocery industry may need to change their business models to adapt to the strategies of “rapid grocery delivery” companies like Buyk, Gorillas, Beelivery and Getir. Many of these companies claim that they’re able to fulfill online grocery orders and deliver the orders in 15 minutes or less.
Many companies find themselves in a position similar to Amazon whenever they enter a new industry, make an acquisition or enter a new channel. An online retailer opening physical stores will face significant challenges. Amazon, and any company looking to expand in the grocery industry, needs a leader that can ensure its store strategy delivers the desired results.
Online companies will have to evaluate every aspect of their physical store strategy, including answering tough questions about the current state of their operations. Among the questions that they will have to answer are:
- What is the optimal physical store strategy to accelerate growth?
- What will it take to grow our grocery retail market share?
- How many total grocery stores do we need?
I have provided consulting to retailers that have encountered similar issues. What I’ve learned is that retailers often become more focused on what their competitors are doing than on their own customers.
Retailers need to learn how to ignore the noise that surrounds them and avoid engaging in what I refer to as “we do too” moments. Walmart is using drones? We do too. Amazon is using electric vehicles? We do too.
In my experience, success in grocery retailing is based more on flawless execution than on introducing new technology. Customers want to see the “freshest of the fresh” fruits and vegetables, high-quality meats, store shelves that are consistently stocked and online orders that are delivered quickly and completely.
If they’re given the choice of investing capital in technology or increasing the quality of products like fruits and vegetables, retailers should invest in quality. The only exception to the rule is if a retailer invests in technology that improves and accelerates execution. For example, it might invest in micro-fulfillment centers to automate online grocery fulfillment.
Most of all, grocery retailers should focus on delighting their customers.