In what appears to be a completely unexpected turn of events, Amazon and Whole Foods just announced what may be the acquisition of the year, at least in the grocery industry. Within seconds of the announcement, grocery stock prices dropped, social media went bananas, and speculation of what this all means began. This is a momentous and industry-changing move within the U.S. grocery space.
Over the last few years, Amazon has struggled to figure out how to really play in U.S. grocery. It gained share in health and beauty care. It won critical baby categories. Product by product and category by category, Amazon slowly captured nonfood dollars, stealing share and momentum from grocery stores. Yet fresh food — particularly perimeter departments like produce, meat, seafood, and dairy — seemed slightly out of reach. In essence, fresh was the final frontier — the secret code it hadn’t figured out how to crack — until today.
This acquisition could have just given Amazon the ultimate edge in the highly competitive U.S. grocery games for a few simple reasons:
- Penetration: Amazon essentially just bought itself approximately 450 unique points of distribution in highly valuable geographic locations that reach high-income shoppers. Pair that with Amazon’s logistical prowess and scalability, and you quickly change Whole Foods’ ability to compete on price and convenience in grocery. Grocery retailers that have been gaining natural/organic share by offering the same products for less in a convenient shopping trip should be concerned.
- Credibility: For Amazon, building credibility in nonedible categories has been relatively easy. Fresh product gains have really been the great white whale. The acquisition of Whole Foods, whose entire brand value is based on the best fresh product offer, has essentially given Amazon the credibility it needs overnight. On the flip side, retailers like Walmart that sell only prepackaged meats and traditional grocery retailers that are still trying to convince shoppers of their high-quality perimeter departments find themselves once again on the defensive.
- Private label: Amazon has continued to explore private label consumable product offers, but has struggled to really break through as it has in other categories. The Whole Foods 365 brand could be one of the greatest short-term assets to benefit Amazon. By placing 365 products on its site immediately, Amazon opens up an instant national revenue stream with an established and loyal shopper base. When you look across the grocery landscape, Kroger, SuperValu, Albertsons, and others have used private brand organic lines to reach new shoppers. Kroger proudly announced at a recent quarterly call that its Simple Truth line had reached about $1.7 billion in annual sales, and it had begun to sell direct to consumers via Vitacost.com. Amazon can use that same strategy for the 365 brand, but on a significantly larger scale.
- Technology: Clearly, the increased technological expertise that Amazon brings to a Whole Foods in the future can also drastically change the role of technology in-store and out. From Amazon Go's payment technology to the operational efficiency that can be borrowed from Amazon to improve Whole Foods logistically, clear opportunities exist today. This doesn't include in-store applications that haven't even been considered yet.
As you look at the core strategies of U.S. grocery retailers, Whole Foods really set the initial example of what to do. Retailers including Walmart, Kroger, Albertsons, Publix, and H-E-B have been mimicking Whole Foods’ strategies to gain share in naturals/organics. As Whole Foods struggled, these retailers were really the largest recipients of Whole Foods’ lost consumable dollars. If Amazon can really to turn around the momentum at Whole Foods while gaining share on its own, large national grocery players stand to lose their points of differentiation. Today, most Whole Foods shoppers still spend the most on groceries elsewhere, with Walmart, Kroger, Costco, and Target gaining the most spend over the last year. With this news, these retailers may now have the most to lose.
Source: Kantar Retail ShopperScape®, May 2016-April 2017
Another angle to consider is that smaller, successful natural and organic retailers could become much more appealing to grocery retailers that want to embed themselves more effectively in this segment. Sprouts, The Fresh Market, Lucky’s, and others could be wooed as acquisition targets in the future.
Regardless of where the next six months take us, it is certainly going to be a very interesting time to be in grocery in 2017.
Stay tuned for additional insight and perspective from Kantar Retail.
For more information, please contact:
Diana Sheehan, Director