The big news on Friday was that Amazon has agreed to buy grocery chain Whole Foods for $13.4 billion.
Some people – such as Bruce Berkowitz, who manages the $2.3 billion Fairholme Fund and who is the second largest shareholder of Sears Holdings Corp. – believe that this says to the market that “there is a need for physical space in retailing.” Everything can’t be online.
I obviously agree that there’s value in real estate / physical locations, but I don’t see this as Amazon capitulating in any way. This is not Amazon saying to itself: “Well, AmazonFresh hasn’t grown as quickly as we’d like, so let’s forget this ecommerce thing.” No, Amazon is determined to win.
Indeed, the fact that shares of supermarket operators tumbled across the U.S., Canada, and Europe, probably signals that the market is expecting something other than the status quo following this acquisition.
All of this is a big deal because grocery is a big deal.
There’s a reason Wal-Mart ramped up grocery (and now derives over half of its revenue from it). There’s a reason why drug stores are proliferating across our cities (and expanding their grocery offerings). In Toronto it’s Shoppers Drug Mart and Rexall. In New York it’s Duane Reade.
We buy groceries frequently and we overwhelmingly still buy them in person. So online grocery is the holy grail of ecommerce of right now. Everyone wants to nail it first.
How does this acquisition help Amazon do that? Here are two thoughts.
1) The real estate still matters.
Even in a world where most groceries are purchased online, you need still need physical distribution centers in close proximity to lots of customers. Whole Foods has more than 460 stores across the U.S., Canada, and Britain. Their formatting would obviously evolve, but the bones are there for Amazon to leverage.
Startups such as Instacart have tried to circumvent this requirement by fulfilling only the delivery portion. And arguably their pitch to other grocers may now be stronger: “You need to offer this to compete with Amazon/Whole Foods.” (Instacart currently provides this service Whole Foods.) But you can bet Amazon will want to squeeze/control this part of the supply chain.
2) The data.
Many analysts are already assuming that Amazon will work to automate away cashiers, similar to what it’s trying to do with its Amazon Go concept store. If you combine this with other offerings such as 15 minute pickup (Amazon Fresh PIckup), you can easily imagine a world where us customers get weaned off of in-person shopping.
For example, if my regular grocery store made better use of its data, it would probably come to the conclusion that I generally buy things like orange juice, milk, and avocados (I’m a Millennial) every X days. I’m sure if you look at my shopping habits, I’m pretty predictable. Whenever I go to a new store it always takes me 100% longer to shop because I don’t generally wander. I target my stuff.
Now if I could get somehow prompted to re-order my regular items every X - 1 days, chances are I would gladly tap order. And now I’m shopping for groceries online. Get ready for the grocery wars.
Today I was surprised to learn from Charlie Gardner’s blog that groceries now represent 56% of Walmart’s sales. This is a huge number that I frankly wouldn’t have expected.
Groceries have relatively low online penetration, which makes them great for brick-and-mortar retailers. I’ve written about this topic before in the context of big box stores and online shopping. But I clearly didn’t realize that it had become such a big segment for Walmart.
What’s also noteworthy about grocery shopping though, is that customers appear to be less likely to travel far distances for it, even for lower prices. This means that the radial impact of Walmart the supermarket is less significant and far tighter (~2 miles) than Walmart the discount store. Click here for that study.
This is important because a big catchment area has been central to the Walmart model. They consume cheap land on the outskirts of cities and then offload the transportation costs (indirect costs) to consumers in exchange for everyday low prices (direct costs). Studies show that we, consumers, typically undervalue indirect costs.
Charlie argues in his post that this does not mean that we should write off big box retailing. And I would agree. The Walmart Express concept may have failed, but they are clearly looking for ways to rethink their model. Urban stores will need to form part of that.
Venture capitalist Benedict Evans recently published a post on his blog called, Ten Year Futures. If you haven’t already noticed, I really enjoy this sort of curiosity and line of thinking. Here is an excerpt where he talks about retail being at a tipping point:
“First, ecommerce, having grown more or less in a straight line for the past twenty years, is starting to reach the point that broad classes of retailer have real trouble. It’s useful to compare physical retail with newspapers, which face many of the same problems: a fixed cost base with falling revenues, the near-disappearance of a physical distribution advantage, and above all, unbundling and disaggregation. Everything bad that the internet did to media is probably going to happen to retailers. The tipping point might now be approaching, particularly in the US, where the situation is worsened by the fact that there is far more retail square footage per capita than in any other developed market. And when the store closes and you turn to shopping online (or are simply forced to, if enough physical retail goes away), you don’t buy all the same things, any more than you read all the same things when you took your media consumption online. When we went from a corner store to a department store, and then from a department store to big box retail, we didn’t all buy exactly the same things but in different places - we bought different things. If you go from buying soap powder in Wal-Mart based on brand and eye-level placement to telling Alexa ‘I need more soap’, some of your buying will look different.”
I’ve said this many times before, but the way the above excerpt ends is yet another remind that one has to look deeper beyond the obvious change(s). Yes, ecommerce is growing and impacting physical retail. But what other changes might ensue because of this shift?
