Amazon grocery strategy could shake up food retail industry

Amazon is a small player in the grocery store industry but one with increasing influence. It already has considerable technical innovations under its belt that have forced competitors to respond.

Prior to 2017, Paul Scorza, the executive vice president and CIO of Ahold Delhaize USA, struggled to interest managers at many of its approximately 2,000 East Coast supermarkets in technology. That changed when Amazon entered the food retail industry.

"It happened in June 2017 when Amazon announced they were buying Whole Foods," Scorza recounted. Suddenly, store managers couldn't get enough technology. "When people saw Amazon Go, my stores wanted it," Scorza said.

Spurred by Amazon's entry as a competitor in the food retail industry, Scorza has spearheaded a host of technology initiatives, from checkout-free stores, to smartphone apps and same-day food delivery. Ahold Delhaize USA is the fourth-largest food retailer in the U.S., with stores under the Stop & Shop, Giant/Martin's, Giant Food, Hannaford and Food Lion banners, as well as online grocer Peapod.

While Ahold Delhaize USA seeks to add technology to stores that serve generations of loyal customers, Amazon's approach is different. Still a small player in the multitrillion-dollar global food retail industry, Amazon is implementing a multipronged grocery strategy that is either head-scratching or brilliant, depending on your point of view.

Amazon grocery strategy has many moving parts

One prong of Amazon's grocery strategy is its acquisition of Whole Foods, for which Amazon paid $13.7 billion. Another is Amazon Go, some two dozen grocery stores, either open or announced, that rely on customer smartphone apps to eliminate checkout lines. Amazon also offers multiple delivery services, which include Amazon Fresh, Amazon Pantry and Amazon Subscribe & Save. Meanwhile, an entirely new Amazon-branded grocery store chain will launch in 2020 that analysts say will offer mainstream products, in contrast to the high-end and organic offerings of Whole Foods.

Amazon's multifaceted approach to food retail leaves questions about where the strategy is headed.

Is the strategy to simply try everything and see what works? Will these various stores and services somehow combine in the future to make Amazon a grocery giant at the level of Walmart, Costco and Kroger?

As far as Robin Hodgskin is concerned, Amazon is getting it right. "I work in Portland [Maine] and use Whole Foods, which I love. I go about two times per month and always leave with ten times what I intended," said Hodgskin, a financial services executive. Hodgskin added that she enjoys Amazon Prime discounts, Amazon Meal Kit packaged dinners for two, and what she perceives to be lower prices overall. She also appreciates that the store offers local items, such as craft beer.

But the Whole Foods acquisition is just one piece of a larger mosaic of Amazon's grocery strategy, the final shape of which is still unclear. "It's disjointed because Amazon has not yet determined the optimal go-forward strategy," said Brittain Ladd, founder and CEO of Six-Page Consulting and former Amazon executive in charge of worldwide e-commerce and cross-border expansion for Amazon Fresh and Pantry operations. "Amazon is putting in foundations. Then it will determine whether to tear them down or build more. They will expand Whole Foods and build their own stores. Then they will look at the last mile [of delivery]," Ladd said.

Food retail competition grows online and in-store

While Amazon's grocery strategy is complex, its quest is, quite simply, the biggest prize in retail. "The size of the grocery market is massive," said Satish Meena, an analyst at Forrester Research. Forrester estimates the size of annual grocery sales to be more than $5.6 trillion globally. According to Meena, the food retail war takes place along two fronts: online and in-store. While the value of brick-and-mortar grocery stores is firmly established, online shopping is poised for a major jump.

"As consumers begin to embrace buying groceries online, we expect the global online grocery market to grow at a compound annual growth rate of 23.4% from 2018 to 2023," Meena wrote in the report, "Forrester Analytics: Online Grocery Retail Forecast, 2018 to 2023 (Global)," a five-year forecast for online grocery buyers and online grocery sales for 41 countries. According to Meena, Amazon's biggest edge is that many households are Prime members who have grown to trust Amazon's ability to offer and deliver a wide range of products, promptly, and at low prices.

"I like that I already had Amazon and I was familiar with them. I didn't have to open a separate account and foster another online relationship. It was already in place," said Becki Maisch, a shopper from Brooklyn, N.Y. "I like that it tracks my grocery order and I can see where it is and estimate how quickly it will get here. I like that it links to my Amazon messages and I can respond immediately to substitutions," she added.

Another customer had mixed feelings. While praising Whole Foods' specials on organic produce, she complained that Whole Foods has substituted "natural flavors" for honey in one 365-brand product. Such eagle-eyed label readers might be a key demographic in Whole Foods' customer base, but nationwide, natural foods shoppers are in the minority for mainstream supermarkets.

Neil Stern, a senior partner at McMillanDoolittle, said Amazon will need to succeed with mainstream food stores to attain a strong market position. The Amazon grocery store chain set to launch in 2020 will play a pivotal role in attracting more mainstream food shoppers.

"From a big picture standpoint, the biggest opportunity lies in the intersection of the "new store" combined with omni-channel fulfillment. This gets them [Amazon] into the mainstream food business which is exponentially larger than natural, organic and positions them for future e-com growth." He added, "In the two years they have had Whole Foods, we have yet to see how that fundamentally drives greater growth."

Amazon will need to make more acquisitions to generate growth, according to Ladd. "The big disadvantage that Amazon faces is not enough stores. They need 2,150 grocery stores to be competitive. They have 700 stores now," Ladd said.

In contrast, he added, Kroger has 3,000 stores and Walmart has 5,000. Walmart generates more than 50% of its revenue from groceries, he added. Ladd said a smart strategy would be for Amazon to acquire Target Corporation and put Whole Foods stores within Target stores. "Target shoppers overwhelmingly shop at Whole Foods," he said.

Amazon drives technology developments in food retail

Amazon's $1.08 trillion market cap gives it plenty of muscle for acquisitions. But competitors are not standing still, particularly when it comes to fulfillment technology. Walmart, for example, unveiled a grocery-picking robot, called Alphabot, that selects items from warehouse shelves and delivers them to a human who checks, bags and delivers the final order to a customer.

Meanwhile, Takeoff Technologies has developed eGrocery, an automated grocery fulfillment service. The company is also building micro-fulfillment centers, which are small-scale warehouses near population centers, in partnership with grocery chains such as Albertsons and Ahold Delhaize USA.

Delivery services, in particular, are a hotbed of innovation. For example:

  • Instacart has made a splash as an independent service that can deliver groceries from a number of different stores. The company was founded in 2012 by Apoorva Mehta, a former supply chain engineer at Amazon.
  • UK-based Ocado claims to be the world's largest dedicated online supermarket with 250,000 customers and 15% of the UK online grocery market. Ocado Zoom offers one-hour grocery delivery service.
  • Walmart offers Delivery Unlimited, a subscription-based delivery service with no ceiling on the number of orders that can be placed.

Ahold Delhaize USA, has launched a small pilot store called Lunchbox in Quincy, Mass. that offers what it calls "frictionless checkout," in a similar model to an Amazon Go outlet. The company has also experimented with checkout-free cafeterias for office buildings. The approach will enable employees to get a bite to eat at any hour of the day or night.

Stop & Shop stores had long offered its SCAN IT! service, which enables shoppers to use handheld scanners to record their own purchases prior to checkout. According to Scorza, it was a relatively small step from handheld scanner technology to develop a smartphone scanning app, and from there to a checkout-free experience, which Ahold Delhaize USA makes available in several dozen stores. Scorza added that Ahold Delhaize USA now seeks to commercialize its checkout-free technology by selling it to other stores of any kind.

Although cashless, checkout-free stores are attractive to many, they have also received criticism in some cities where lawmakers see discrimination against those who cannot afford a smartphone. Political winds in an election year could inhibit Amazon's progress, according to Forrester's Meena. "A lot will depend on [2020] election results, and regulation could be an issue," the analyst said, explaining that Amazon's ability to acquire might be seen as a threat to smaller competitors.

Amazon has disrupted the grocery business for Scorza and others in the food retail industry. But for shoppers, life is different too. With more brick-and-mortar, online and delivery options than ever, one of life's fundamental necessities, obtaining food, will never be the same.

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