Can Amazon’s New Grocery Store Challenge Mainstream Supermarkets?
Photo courtesy of Ian Kennedy via Flickr
Amazon recently invited a select group of shoppers to tour its first Amazon Fresh grocery store, in Woodland Hills, California. While the new store has made headlines for its voice-powered Alexa kiosks and computerized “Dash Carts” that scan groceries as you shop, Amazon Fresh represents far more than a high-tech grocery store. The venture launches Amazon’s experiment in taking on more traditional grocery retailers, in an effort to expand its retail dominance. Amazon says that it will publicly open the store “in the coming weeks.”
Amazon sent grocery stocks tumbling when it took over Whole Foods in 2017. But, despite much hand-wringing, Amazon has yet to truly disrupt the grocery industry. Together, Amazon Fresh delivery and Whole Foods controlled just 4% of the grocery market in 2019, and, after minimal cost-cutting, Whole Foods still serves a small set of wealthier customers. Amazon’s lower cost Whole Foods 365 store concept also came and went in less than three years.
Nonetheless, traditional grocers such as Walmart, Safeway, Kroger, and Target have all doubled down on delivery and store pickup programs, to stave off the threat of Amazon. Grocery is the largest sector in retail, and it doesn’t look like the “everything store” is giving up on this important area of commerce just yet.
“If you’re Amazon, you have to be looking ahead and realize if you leave food out of the equation, you have this big vulnerability on one flank,” says Stacy Mitchell, co-director of the Institute for Local Self-Reliance. “We can expect they will finance significant losses in grocery in order to take market share.”
In 2019, a former Amazon grocery operations employee, Brittain Ladd, told The New York Times that “people really need to understand — Whole Foods is the beginning, it’s not the end” of Amazon’s grocery ambitions. The Times reviewed a leaked Amazon memo from 2017 that envisioned a major Amazon grocery chain with more than 2,000 stores. Three years later, Amazon Fresh has arrived.
The soon-to-open Amazon Fresh store in the Los Angeles area carries more Big Food brands, such as Frito and Coca-Cola, as well as Amazon’s private labels, including Whole Foods 365 products and new Fresh-branded goods. The store has kiosks where shoppers can ask, “Alexa, where can I find anchovies?” as well as a customer service desk for returning unpackaged Amazon items. Small-volume shoppers can connect their Amazon accounts to new Dash Carts, which pull up customers’ shopping lists and payment information. Dash Carts hold two grocery bags and use sensors and scales to scan items as shoppers fill their carts, skipping checkout entirely.
Despite these new features and Amazon’s deep pockets, industry analysts are not sure whether Amazon can challenge chains such as Kroger, Safeway, or even Walmart. Neil Stern, a senior partner for retail analysts McMillan Doolittle, says that Amazon needs to acquire a lot of real estate and get up to speed on handling perishable items, in order to compete with legacy grocers. Even with pandemic-driven business closures and with Amazon’s partnership to build grocery stores in Kohl’s, Stern says there’s a lot of prime real estate that even a well-capitalized Amazon cannot get its hands on.
On the other hand, Bill Bishop, chief architect of Brick Meets Click, says that fitting small- to midsized stores in existing properties lowers Amazon Fresh’s overhead, startup costs, and daily break-even sales volumes. “This store is going to maintain profitability as margins compress and sales volumes fall,” Bishop argues. “I don’t think these are designed to attack anybody; they’re designed to outlast other people.”
Amazon Fresh stores also benefit Amazon’s larger retail ecosystem by adding more hubs for grocery delivery and package pickup or return. “They’re looking for other services like delivery, click and collect,” says grocery analyst David Livingston of DJL Research.
Data collection from physical grocery stores may also help Amazon shift more food purchases online, which is part of Bezos’s end goal, argues Mitchell. “You can image a scenario when you shop at the Amazon [Fresh] store, and when you’re online it’s suggesting you purchase some of the same items you bought in the physical store,” explains Mitchell.
In-store surveillance also allows Amazon to study popular products in order to introduce analogous Amazon products, just as they do in e-commerce. Amazon “already has thousands of privates labels online today, they [also] have food private labels,” says Stern. “There’s no question that Amazon is going to follow other retailers' playbooks and build substantial private label programs.”
Altogether, these lower-overhead, built to last, data-collecting stores could be just the foothold Amazon needs to edge into the grocery business. Because there is not much room for growth in grocery, Amazon can only expand by taking market share from other chains.
To stand their ground, other stores may need to trim operation costs and invest more in tech and delivery. But this cost-cutting could come out of workers’ wages and benefits or through labor-saving automation, threatening grocery jobs.
Similar to Walmart’s grocery takeover in the 1990s, Amazon Fresh could drive grocery mergers in an already consolidated market, as stores scramble to gain market share and build buyer power by coming together. “It’s safe to say this new store will accelerate consolidation,” Bishop argues.
Further grocery consolidation means fewer, larger buyers for food producers, encouraging these players to bulk up as well. “More consolidated buying power among grocers … has driven all this consolidation among food processors … and that in turn has squeezed farmers and food workers,” explains Mitchell. “That problem and the ramifications of it for rural communities and for eaters is only going to be made worse by the addition of another predatory monopolist in this sector.”
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