Author(s): Raghu Gopal
In October 2016, we wrote that "For Amazon, the multitrillion-dollar grocery business beckons". We pointed out that despite its huge size, the company still had retail revenue below that of Kroger, the largest supermarket chain in the US (see An Amazon on Every Corner). Amazon knows that selling food and household supplies will allow it to raise revenue, exploit and grow customer data, add to its already massive scale and keep itself at the front of people's minds. Supermarket aisles are a great place to build and maintain a relationship with consumers.
Amazon's planned acquisition of Whole Foods Market for $13.7 billion announced last week is the e-commerce company's boldest expansion move yet. There's some irony in that its largest inorganic growth tactic to date will be through a retailer it calls the first "certified organic" grocer in the US.
Whole Foods has more than 460 stores in the US, Canada and the UK. Kroger has about 2,800 stores, but Whole Foods' mood music is different. Known to cater to upscale markets, it offers specialty items with a consistent sentiment of health and well-being. The prices are higher, but Whole Foods provides an experience: a hint of exclusivity.
Amazon is unlikely to disrupt this experience. It's buying the Whole Foods brand, not just the stores. The overlap between Whole Foods' and Amazon's customers is very high, and a large percentage of them are likely to be Amazon Prime subscribers. These are Echo and Dash users and app-engaged shoppers.
Amazon has established a modern-era shopping ecosystem during the past two decades, and this won't be easy for other grocery chains to replicate. From smart speakers to big data, Amazon can offer convenience and customisation, which it will certainly continue to scale using in-home hardware and in-store beacons. Shopping for food is still a hands-on experience, but Amazon can now trial ways to create a frictionless digital-to-physical buying experience.
Grocery rivals such as Costco, Kroger and Walmart have long expected transformation in their industry, and all have been tweaking their services with delivery options and "click and collect" services. But the fact that Amazon could now disrupt the grocery industry in several countries has certainly led to some sudden executive meetings: a trillion-dollar business with millions of employees is changing and the status quo won't work.
Competing retailers will need to build pervasive shopping ecosystems. More than ever, they will need to build a persistent relationship with consumers. We believe this will lead to a growing number of cross-industry partnerships as companies such as Apple, Google and Microsoft work with retailers to maintain a nearly omnipresent connection with their customers. Phones, tablets and smart speakers from these companies could be used to build out a rival shopping ecosystem. Furthermore, retailers could work with telecom service providers such as AT&T, Charter and Comcast, exploiting their presence in people's homes with products such as set-top boxes and cellular devices, to offer a new level of convenience and tailored promotions.
The most immediate change Amazon will make is to the binary thinking of commerce: online and offline shopping are no longer mutually exclusive. There's a continuum now with shopping carts partially filled in one place and completed in another. Amazon knows logistics and will test new means of merging digital and physical commerce, tweaking the experience for different generations and mind-sets. In Whole Foods, Amazon is buying a nationwide lab in which to experiment, and an internal customer with which it can scale up its grocery delivery logistics.