How Massachusetts grocers can prepare for (and compete with) ‘The Everything Store’

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Insights  <  How Massachusetts grocers can prepare for (and compete with) ‘The Everything Store’

Founded as an online bookstore in Jeff Bezos’s garage back in 1994, has grown into the most valuable retailer in the United States, surpassing Walmart in market capitalization in 2015. It’s responsible for more than half of the United States’ annual book sales and more than 40 percent of the country’s total online shopping activity.

The number of industries Amazon has disrupted is seemingly endless, spanning from apparel to cloud computing to Academy Award-winning films, while its misses-the Fire Phone and short-lived Amazon Wallet come to mind-are few and far between.

At times, it seems the e-commerce giant known as “The Everything Store” has nothing left to conquer. That is, until something else comes along.

With a $13.7 billion bid to purchase Whole Foods Market, Amazon appears to be turning its disruptive attention to the hyper-competitive American grocery market, leading some to wonder if traditional grocers may eventually meet the same fate as Borders bookstores.

However, this potentially groundbreaking merger is still a mere proposal, months (and countless hearings and approvals) away from becoming a reality. Rival grocers here in the Bay State still have time to make necessary adjustments to compete.

In order to strategically make those decisions, though, it’s important to first answer a few questions:

Why does Amazon want Whole Foods?

The most obvious answer is that Amazon wants to bolster its presence in the grocery market, and Whole Foods will help it accomplish that goal. Amazon already offers a wide variety of nonperishable products and other household goods as part of its slate of nearly 500 million items available online. The challenge for a company like Amazon, however, lies in fresh goods.

Amazon currently offers fresh food delivery in a few select markets through AmazonFresh, but expensive delivery costs combined with a lack of product supply made expanding that service in an affordable way nearly impossible. Last year, nearly a decade after launching the AmazonFresh initiative, Amazon posted less than a one percent share of total U.S. grocery sales. Whole Foods, with its marketable reputation, built-in partnerships with local suppliers and-most importantly-its more than 400 locations across the country (including 38 in Massachusetts), would help solve that problem.

Amazon’s nearly $14 billion purchase could also come with a few added perks, namely:

  • Data Collection: By acquiring Whole Foods, Amazon will have access to the shopping habits and other personal data of the retail chain’s mostly upper-middle-class, brand-loyal customers.
  • Real Estate: Many of Whole Foods’ existing locations are in urban, affluent neighborhoods, adding thousands of square feet of valuable real estate to Amazon’s growing fleet of distribution centers.
  • Potential for Experiments: Earlier this year, Amazon opened its first brick-and-mortar storefront. Located in Seattle, it’s a typical grocery store that eliminated cashiers and most other store employees

and replaced them with barcodes. Customers simply take what they want, and they’re automatically charged via their Amazon accounts. Some industry experts theorize that Bezos is looking to expand this idea, and Whole Foods could be the future home of the experiment.

How would Amazon help Whole Foods?

Over the past few years, Whole Foods has struggled to turn consistent profits. As the popularity of organic, health-conscious food-once Whole Foods’ undisputed stronghold in the market-rapidly increased, more and more competitors began offering those products at a lower price. Many analysts believe Amazon’s first step after completing its purchase of Whole Foods would be to solve that pricing problem by, quite simply, slashing prices.

Unlike just about every grocery retailer in the country, Amazon operates on a zero-margin business model. Even though it’s one of the world’s most iconic and valuable companies, Amazon’s model is that of a startup. Rather than take profits and pay dividends, Amazon typically takes nearly all of its annual income and invests it into new ventures.

The result of this model, for Amazon: Near-constant growth and (at least so far) happy shareholders.

The result, if Amazon indeed decides to carry its familiar strategy into the grocery industry: Pricing pressure.

Finally, what can grocers do to prepare?

Using the information detailed above, it appears Amazon’s goals with this acquisition are to: 1) leverage its e-commerce prowess with Whole Foods’ established physical presence to become a disruptive player in both the brick-and-mortar and online delivery grocery industries; 2) immediately compete in the marketplace by controlling product costs and collecting shopping behavior data to attract new customers; and 3) sometime in the future, bring Amazon-led technology to change the way consumers shop.

Knowing this, regional grocers in Massachusetts can implement strategies to adapt to a new marketplace. A few strategies we expect to see in the future are:

Grocers will consider entering the home delivery field: Most industry experts agree that online shopping won’t replace traditional grocery stores any time soon, but that doesn’t mean it won’t gradually increase its share of the market. If Amazon can add Whole Foods products and distribution channels to its AmazonFresh service, expect more regional grocers to look into adding delivery services. Some local companies, such as Wellesley-based Roche Bros. Supermarkets, already offer in-house delivery services. Others partner with third-party delivery vendors like PeaPod or Instacart, the latter of which currently has a contract with Whole Foods–a contract many believe will be terminated if the Amazon deal becomes final.

In the next few months, grocers will double down on what they do best: To avoid losing their customer base to a revamped, potentially less expensive Whole Foods, local grocers will heavily invest in their customer service, customer experience and physical store layouts. Expect to see traditional grocery stores laid out like “showrooms,” with the fresh, organic products-the products you can’t buy online-front and center. If Amazon does decide to expand its AmazonGo idea across the country, it will be up to regional grocers to remind shoppers of the value of great customer service.

Grocers will consider boosting their investment (and interest) in consumer research: When it comes to data collecting on a macro level, there likely isn’t a company in the world that could beat Amazon at its own game.

But by investing early in new software and marketing solutions, local and regional grocers can establish a clearer picture of their consumers’ shopping habits and improve their targeted sales and other advertising efforts. Be on the lookout for our upcoming article “Unlocking the Mystery Behind Predictive Analytics” by Michael C. Pelletier, a Partner and Chief Innovation Officer leading the technology consulting group at BlumShapiro.

Grocers may consider expanding into other niche markets: Take Springfield-based Big Y for example. In addition to its 37 traditional grocery stores across Massachusetts, Big Y also runs Table & Vine, a chain of upscale beer and spirits shops, and Fresh Acres Market, a locally stocked farmers’ market, across the state. Offering standalone establishments that cater to niche markets will help regional grocers compete with a store that sells “everything.” The research and development (R&D) tax credit is beneficial to businesses entering these niche markets. Companies can use this credit to develop or improve food recipes, processes, packaging and sustainability efforts.

What’s next?

As is the case with any major merger proposal, the news cycles in the days following Amazon’s announcement were rife with conjecture and knee-jerk reactions, with some analysts quick to predict the demise of traditional grocers and others quick to criticize Amazon for spending so much money on a struggling brand.

Fortunately for all parties involved, most industry leaders-including many here in Massachusetts-agree that the reality is less flashy than the headlines. A partnership between Amazon and Whole Foods will likely change the landscape of the national grocery retail industry, but it’s too early to tell exactly how.

It’s not, however, too early for regional competitors to start preparing.

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