Amazon’s plunge into the $800 billion US grocery industry posed an existential threat to rivals.” CNN August 2018
A couple questions remained in the wake of Whole Foods’ announcement last week that it was dropping prices on over five hundred items by twenty percent. Is this Amazon’s long-awaited spring offensive or is the grocer playing defense, treading water, simply trying to keep its market share? Stretched over a broader canvas: Is Amazon truly the existential threat to the grocery business the click-baiters would have you believe?
Before we get to existentialism, let’s consider a smaller question. Was it really a price reduction at all? Maybe not. The New York Times sent a couple reporters to shop their local Whole Foods for a basket of identical items before and after the ballyhooed price reduction. The total post price-cut savings was five cents on a fifty-five dollar purchase. The paper also used a Morgan Stanley study to report that Whole Foods prices are fifteen percent higher than those at a typical supermarket.
Even the kale and quinoa crowd can add, eventually. To keep paying a fifteen percent premium, they need to feel special about themselves and their supermarket. They need to know that their market is buying sustainably, doing business with the little guy, choosing only pesticide-free truck farm vegetables, wild salmon that have never seen a hatchery—let alone a fish farm—and so on.
That is not Whole Foods’ compass setting today. According to one grocery industry expert, Amazon is “in danger of breaking its shiny toy,” of destroying the Whole Foods brand, of dissolving its organic mystique. He pointed out that the company has cut ties with smaller, more esoteric suppliers in favor of focusing on bigger, national brands. In a word, this competitor says Whole Foods is becoming generic.
To this homogenization point, Amazon announced on March 1st that it would build or acquire about 2,000 brick & mortar supermarkets, averaging 35,000 square feet in size (full-sized markets run about 60,000 feet), selling at a lower price point than Whole Foods and with a different, as yet undisclosed name. This makes logistical sense for Amazon’s e-commerce business. A nationwide chain of stores would both solve its last-mile dilemma (link: Amazon’s Clicking into Bricks October 1, 2018) and acknowledge the latest group-think about on-line grocery sales, namely that click and collect (ordering on-line but picking it up yourself) is more convenient than waiting at home for the delivery guy who availed himself of his state’s liberalized marijuana laws. 2,000 markets could put 90 percent of the US population within a mile or two of an Amazon pick-up spot. This would be brilliant for the company’s e-commerce business, but perhaps less so for Whole Foods. Running a supermarket chain is the hardest act in retail—ice cream gets freezer burn, books don’t. Running two different market concepts—one highbrow and one that deigns to sell Diet Coke—is exponentially more difficult.
And while the generic epithet may be sour grapes, the fact is Whole Foods hasn’t been knocking the cover off the ball since its sale to Amazon. Its in-store sales are flat, its more expensive home delivery sales are up a few percent, but its Prime members aren’t flocking to the stores in the hoped-for numbers, despite the company’s promotions and discounts.
Despite all this, the retail experts I quizzed are so in awe of Amazon (talk about mystique) that they believe the Whole Foods price cutting is an offensive move, intended to break the company away from the peloton, certain to cause the whole industry pain. One went so far as to say, “Since they don’t understand the business, they might as well take a meat-ax to it.”
I don’t understand the grocery business either, but having worked with grocers for the past forty years and built our share of supermarkets, I have a few thoughts. Service helps at the margin, but if you’re delivering the same quality, the business boils down to pricing and convenience. If Whole Foods is fifteen percent higher and noticeably less convenient than its competitors (we would have to drive past Safeway to shop at our local Whole Foods) then it better hang on to its mystique for dear life and sell stuff no other market carries.
And should click and collect truly prove out as the American consumer’s shopping pattern of the future, then Amazon better start building fast. With Whole Foods weighing in at 479 stores, the company would have to build or acquire every one of those 2,000 additional stores to achieve rough convenience parity with Wal-Mart (about 4,360 stores), Kroger (2,800) and Safeway/Albertsons (2,320).
Back to pricing. The bunker buster in the supermarket wars is automation. Amazon isn’t dwarfing the rest of the world for nothing. Put aside the morality, but if the company can replace everyone from the stockers to the cashiers with robots while its competitors are stuck with costly humans, especially unionized humans, it will win the pricing war and the consumers’ wallets, if not their hearts and minds.
The existential threat Amazon posed by its acquisition of Whole Foods was to Whole Foods itself. Whether the company will one day subjugate the grocery business with AI and robots or, like Fortunato in Poe’s Cask of Amontillado, be buried itself behind a wall of bricks and mortar, remains to be seen.
John E. McNellis is a Principal at McNellis Partners in Palo Alto, Calif.
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To read more from McNellis, please consider his book Making It in Real Estate: Starting Out as a Developer.