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Amazon And Its Continuing Assault On Food Retail

There were two significant stories in the past few weeks involving Amazon’s incursion into the world of food retail. The first was the announcement of changes to pricing for the Amazon Fresh delivery service and the second was the recognition of what has been an oft rumored launch of a new grocery brand. I wrote about these rumors back in March 2019. While these are two separate stories, they really build off one another and offer clues to their future plans to dominate the grocery world.

First, Amazon announced that they will no longer charge for their Amazon Fresh service for Prime members. Amazon Fresh, launched back in 2007, offers proof that not everything Amazon touches turns to gold. This service has slowly expanded without much fanfare, and is now offered in twenty-one metro markets in the U.S. It has been slow to take off and shows the immense challenges associated with delivering fresh groceries to U.S. households. When launched, this service was priced at $299/year. They later changed to $14.99/month in addition to the cost of a Prime membership. Now, it’s free (with a $35 minimum purchase) with Prime but the pricing strategy changes illustrate a core problem of grocery delivery—it is expensive to execute, with the costs of warehouses, trucks and drivers and the trickiness of getting fresh and frozen products into consumers’ homes. In addition to Fresh, Amazon has also been focused on growing their Prime Now program, which delivers from Whole Foods. In fact, there has been so much focus on growing this “instant” delivery service that many Whole Foods stores are becoming overrun with Prime pickers, interfering with the retail customer’s shopping experience. And, of course, you can still order directly from Amazon with Pantry and Subscribe & Save. Confused? It’s a good bet that consumers are as well.  Nevertheless, this relentless pressure on growing delivery has implications for others who are trying to compete (and trying to make money) in this space.

The second story is Amazon’s confirmation of their first “Amazon branded” (name unknown) grocery store that will open early next year in Southern California. The 35,000 sq. ft. store is in a former Toys R Us (irony is not dead) and will offer a glimpse at Amazon’s latest attempt to penetrate the grocery world. The obvious question is why do they need this, given that they already own Whole Foods and have launched Amazon Go?

I’ve had a chance to look at the floor plans and here’s what I suspect we will see:

  • It will be “omni” from the start. Rather than convert Whole Foods space into efficient picking and distribution points, these stores can be optimized for an omnichannel experience from day one. The store’s plan indicates that it will have significant space to accommodate in-store picking and substantial holding facilities.
  • It will be focused more on mainstream grocery products rather than the natural and organics offer of Whole Foods. This will be aimed at slightly lower income customers and for those looking for Coca Cola, Oreos, Tide or any of the mainstream CPG products Whole Foods doesn’t offer. This is where the larger market share is available.
  • It will likely be more price competitive. While they have tried to mitigate Whole Foods’ high price reputation through reduced prices and Amazon Prime promotions, it is an uphill battle. An Amazon branded store can be more price driven out of the gate.
  • It can be more private label driven. Amazon has continued to grow its private brand presence and while new technology will likely be employed in the store, don’t expect Amazon Go checkout free technology….yet. There are plenty of traditional checkouts (likely self-service) planned. I suspect that the technology is not scalable at this point.

This will likely be the most anticipated new grocery store since Tesco opened Fresh & Easy and Lidl debuted a few years back. It’s worth noting that Fresh & Easy is a footnote in grocery history and that Lidl has yet to gain serious traction. While it would be foolish to discount Amazon’s potential impact on the industry, gaining success in grocery is a lot harder than it looks.

Neil Stern

Neil Stern

nstern@mdretail.com

Neil Z. Stern specializes in strategic planning and the development of new retail concepts. He prides himself on long-standing relationships and repeat engagements with valued clients, many extending over ten years. Neil leads the company’s food retail and due diligence sectors.

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