Amazon is truly living up to its nickname these days. As recently reported, the “everything store”, is now looking to seriously expand into the grocery and food business with a $13.7b acquisition of Whole Foods. This is a big move for the retail powerhouse, and one of their largest acquisitions to date.
So, why did Amazon do it, and more importantly, how will this affect consumers?
Amazon is the Digital Transformation that the Grocery Industry Needs
This acquisition shouldn’t come as a surprise to those following Amazon’s current business model. First off, the US grocery business is worth a whopping $675 billion per year. Amazon cannot ignore those numbers as a “everything” retailer. Second, Amazon has been experimenting in the grocery business for years. A few years back, they launched their Amazon Fresh initiative ($14.99 a month for Prime members), a grocery delivery service to challenge the likes of Blue Apron, Hello Fresh, Peapod, and more. While not nationwide, numerous cities, from Los Angeles to Baltimore, are currently participating in the program. However, much to Amazon’s disappointment, the rollout never really took off, due in large part to the complexities of shipping perishable food items that spoil.
“That explains why Amazon has shifted from figuring out how to deliver fresh food to remaking the grocery store,” writes Davey Alba of Wired. “Take Amazon Fresh Pickup, which launched in March. Customers order groceries online, then drive to an Amazon-run store, where employees bring the bags right to their car. Walmart and Kroger offer similar services, but need two to four hours to get an order together. Amazon does it in 15 minutes.”
In 2016, Amazon Go, a prototype grocery store in Seattle, Washington, was also unleashed to the world, which the retail giant dubbed as “the world’s most advance shopping technology.”
After downloading the app, shoppers scan their mobile phones upon entering the Go store. Detection technology then identifies when products are taken off the shelves and tracks customers' virtual shopping carts. Customers can simply walk out of the store and their Amazon account will be charged.
In 2014, Amazon filed a patent that revealed that Amazon Go store technology is a mixture of machine learning, AI, and camera systems similar to drive-less cars by Tesla—all used to identify shoppers and their items.
By investing in Whole Food’s physical locations, Amazon is creating a digital transformation that hasn’t seamlessly happened yet within the grocery store industry. Recognizing that online delivery simply isn’t enough, Amazon has taken the leap towards including physical stores in their portfolio. Given that the grocery industry is likely to grow five-fold over the next decade, Amazon needs to start positioning themselves to keep competing with the likes of Walmart. It’s no coincidence that when the acquisition was announced that Amazon’s shares went up 2.4% (enough to pay the cost for the entire acquisition), and Walmart’s shares fell 4.7%.
So, what will Amazon’s Whole Foods merger mean for consumers, for better or worse?
The Impact on Customer Experience
The digital transformation of the grocery industry will have benefits for consumers as well. Not only will customers be able to have access to the food they want, but they’ll get it at a competitive price. However, there are some important caveats, such as the long-term effects that monopolizing the industry will have on jobs. Here’s just a few of the changes Amazon’s acquisition could bring to the average consumer:
Competitive pricing (at a price?)
Let’s talk about the obvious advantage first. Amazon has the capabilities to price their products aggressively, and are known to bring prices down. Just look at the effect they had on the publishing industry (Amazon has a more than a 65% share of all eBooks sold; and owns 50% of book sales for major publishers). From a shopper’s perspective, this is good.
This is also music to the ears of Whole Foods’ declining business model. Much of Whole Foods’ issues lay in their niche business, which offered cost disadvantages compared to traditional grocery stores. Amazon offers a better strategic way forward, which is “we want to sell everything to EVERYONE,” not just the privileged few.
The question is: will Amazon be able to dominate the grocery store market as they have the publishing industry? And, will the monopoly-like nature of Amazon’s business model (aka: beat competitors into submission with price cuts) be good, in the long run, for consumers? As senior economic Mark Hamrick states:
“Disruption isn't without some pain. For every rival that loses market share, jobs are at risk or being lost. As we've seen over the evolution of the Internet, the benefits provided to consumers do come at a cost.”
Bringing true value to Amazon Prime members
In the same vein as pricing, current Amazon Prime customers will most likely benefit from discounts to groceries and other items in Amazon’s new brick-and-mortar stores. Considering that most prime members tend to spend more than non-members ($1,500 a year vs. $625), it’s a no brainer that Amazon would extend their benefits to these physical stores. Whether these discounts are similar to a “Stop & Shop” card, or a 10-20% discount on products, only time will tell.
Regardless, this adds to the long list of other benefits that Amazon Prime already offers—the strangest of which is called Outfit Compare, which I discovered while writing this to my utter disbelief. (The words “IS THIS REAL?!” were shouted multiple times to colleagues in the office. No joke.)
Changing the way we shop: doing omni-channel right
Many retailers (including Amazon, up to now) struggled with how to give consumers a truly omni-channel experience. Amazon will be able to streamline the online and physical location experience with total knowledge of customer buying habits.
Simply peruse and add items to your shopping list online and then pick them up at the store. Or, better yet, going online to build recipes, cheaply, and then picking up the ingredients at the store.
“Retailers understand that consumers think about online and stores being two instruments that work together the way music is played in a two-instrument ensemble. Online and physical stores create one message and service by being together, not two separate things apart.” – Forbes
Similar to the Amazon Go experience, Amazon will soon streamline the checkout process as well. Stop and Shop first did it with their “SCAN IT!” device that allowed you to scan products prior to the checkout line.
However, Amazon will go beyond this. Using the same smart sensor technology as their Amazon Go stores, soon Whole Foods across the country could have a “grab and go” method. No checkout, no waiting lines. This would be a costly endeavor for Amazon to transform the thousands of stores nationwide, however if this acquisition has proved anything, it’s that Amazon is willing to invest in great customer experience. And, why wouldn’t they? So far the customer-first strategy hasn’t failed them.
Data-driven consumer choice
Amazon’s a data intelligence giant. Data informs every decision they make, and their new endeavor into physical stores will be no different. With the data they collect, they will be able to know what customers are buying, anticipate trends (i.e., the organic revolution), and introduce their own “Amazon Basic” cheap alternative.This means not only will consumers get the products they want, but better and cheaper.
Furthermore, Amazon could also bankroll non-mainstream products as well, diversifying store shelves and introducing new products to the marketplace. However, Amazon could also do the opposite with their data, cutting down frivolous spending on unpopular products. Here’s hoping they go the other way.
Amazon’s acquisitions of Whole Foods won’t let the company compete within the rural communities so dominated by Walmart (at least right away), but it does poise them to dominate those populated city areas that they have worked in thus far. It also offers a good experiment in providing a physical location for not only food, but their own popular electronics (i.e., Google Home will still rely on Best Buy and Amazon can cozy up Alexa near your favorite food).
Regardless, one thing is certain: the grocery industry is about to change as we know it.
Just like other Fortune 500 companies, Amazon uses the Net Promoter System® to gauge their customer experience. If you'd like to learn more about how you can monetize customer experience as well as Amazon, check out the eBook below.