One of the more distinct angles for Amazon’s purchase of Whole Foods has been how this move will help them accelerate their grocery efforts. It has been clear for some time that the fresh/grocery market was one that Amazon had been eyeing, but also one that would elude them without a broader physical retail strategy. Amazon needs prime real estate in the major areas where Prime customers may exist. Without question, they will acquire this exact thing if this deal is approved.
Whole Foods has strategically placed their nearly 450 stores in areas concentrated with people making over $100,000 a year. An interesting stat I found in a Morgan Stanley research note was 62% of Prime members are also regular Whole Foods shoppers.
The fact of the grocery business, is most consumers like and want to go the store and hand pick their fresh items. A recent report I came across provided overwhelming research concluding physical retail preference being a significant barrier to purchasing fresh groceries online. 67% of respondents stated “liking to select the fresh products myself” as the top reason they don’t buy groceries online. The second was “I enjoy shopping in stores” at 33%. The report shared the US market value of some consumer spending in the US. What is fascinating about this chart is how many categories Amazon is slowly dominating. The one they have been struggling in happens to the biggest one.
As you can see, groceries is just over 2x larger regarding absolute dollar value than the second largest category which is clothing. Groceries make up roughly 30% annual consumer spending in the US. On the value of the market alone, we can see why Amazon wants, and may even need, this category so badly as a mechanism for their growth. As I noted, most of these categories Amazon is well positioned to gain share with except the fresh/grocery category which also happens to be the largest by far.
A big question remains if this purchase has much to do with online commerce of groceries. It is easy to reason this can help because early estimates are that with the Whole Foods store locations, Amazon could deliver fresh items in 1-2 hours to the vast majority of Prime customers and thus dramatically expand their Amazon Fresh service. While this seems reasonable, we are still faced with overwhelming data on the barriers to online commerce, and we have to keep that factor in mind.
Ben Thompson wrote an interesting article yesterday, suggesting the actual customer Amazon is looking to acquire is the grocery retail outlets themselves in which Whole Foods becomes the first customer of Amazon’s broader logistics and technology service.\. This is a compelling viewpoint given Amazon’s expertise in logistics, and rather than take a percentage of the ~780 billion dollar grocery market Amazon could move to take a cut of every dollar spent on groceries. Ambitious efforts for Amazon, no doubt, to take this route given a deeper need for localization and specialization, in some cases that don’t have the same scale as generic items. Given Amazon’s expertise in analytics and logistics, I don’t see this as a major barrier.
Ben’s viewpoint is compelling and lines up with a similar theory I had for Amazon’s Go grocery retail outlets. A point I made in that analysis was how Amazon’s true play with the Amazon Go stores was to showcase the technology and then sell that technology to other retailers. If you put mine and Ben’s angles together, it means Amazon wants to sell technology and logistics behind products into the massive US grocery market.
Perhaps, of course, it is a mix of both and Amazon wants to sell fresh online, and goods and technology to other retailers as well. An interesting angle mentioned to be in a conversation on Twitter was perhaps Whole Foods with a Blue Apron model is the key to unlocking fresh delivery online. This would allow just the right fresh proportions for a meal and full recipe could be more compelling than a grocery list and a fridge full of inventory that may not get used. Certainly another angle to think about.
The fascinating fact facing many retailers is that Amazon is driving them to be technology companies whether they like it or not. Technology will become the only basis in which many retailers can compete with Amazon, and many will fail to try and perhaps have to have Amazon help get them out of a hole.
What About Pharmaceuticals?
Another bit of analysis being thrown into the Amazon/Whole Foods deal is the pharma angle. Should Amazon be interesting in the healthcare market then this is another segment where physical retail is relevant. In a US consumer market study from Morgan Stanely, they found less than 20% of consumers have ever purchased pharmaceutical products online. Of that 20%, only 4% stated they always buy their medicines this way. Here again, we can conclude we either have a behavioral barrier or a massive upside. The survey went on to state that only 26% of consumers across all age groups, young and old, express an interest to purchase their pharmaceuticals online. Even diving down into the answers from each age group, the average was still roughly 25%.
It will certainly be interesting to see how Amazon uses the space they acquire with Whole Foods. However, a potential culture clash of Whole Foods employees and shoppers could come into play if Amazon changes too much of the instore experience at Whole Foods. A delicate balance for sure Amazon will need to balance.
Whether more acquisitions of brick and mortar retailers are in store for Amazon will have to wait to be seen. I do, however, predict tough times still for many retailers and expect further consolidation to happen over the next ten years.
Great post Thank you. I look forward to the continuation.