Amazon’s purchase of Whole Foods will have profound implications for the grocery market and commerce as a whole. Going forward, stores will increasingly become extensions of the mobile shopping experience, not the other way around.
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Amazon stunned the business world on June 16 by announcing that it will acquire Whole Foods Market and its 450+ retail locations for $13.7 billion. While the response to the deal was largely positive for the two companies, there still appears to be a lot of debate about Amazon’s goals. Interestingly enough, Amazon’s retail strategy has been public for months. The Amazon Go announcement in December 2016 laid out the company’s vision for retail in the mobile first world. But before Amazon could move forward with this vision, it had to contend with the challenges it has faced in the grocery space.
AmazonFresh, Whole Foods and Perishables
According to the IPO Prospectus recently filed by meal delivery service, Blue Apron, online grocery sales had a mere 1.2% share of the $781.5 billion US grocery market in 2016. While online grocery sales are expected to grow more than six times faster than the rest of the market through 2020, its share of the market would remain low. One of the barriers to scaling online adoption is consumer preference for picking out perishable products in person. This has been a critical hurdle for Amazon, and is among the primary reasons why AmazonFresh still hasn’t had a meaningful impact on its topline.
This scaling challenge compounds other problems as well. In order to appeal to customers, AmazonFresh stocks 500,000 different items. However, grocery products are perishable and have a limited shelf life. If not sold by a certain period, excess inventory is essentially a loss. As a result, a sub-scale online grocery is a significant drag on profitability, which in turn limits investments in improving distribution.
The Whole Foods acquisition largely solves these issues. Amazon now owns a perishable product supply chain that already serves customers across the US, which can be combined with its own logistics efforts around AmazonFresh. More importantly, Whole Foods’ retail footprint makes near-term customer reluctance to online orders a non-factor for Amazon’s grocery ambitions and helps scale their grocery business much faster than with an online-only model.
The Whole Foods quality brand promise coupled with Amazon’s same-day delivery should also boost many consumers’ appetites for trying and using grocery delivery. Amazon can immediately expand their combined customer base for perishables by dropping prices and linking mobile efforts to the in-store experience. Supply chain scale also allows AmazonFresh to expand to the B2B arena, i.e., restaurants, where customers have fewer sensitivities about grocery delivery. Furthermore, Whole Foods' prepared foods and catering service provides another avenue for food delivery that can be further expanded as logistics and consumer adoption of delivery improve. Success is all about reducing friction for the customer.
Linking Physical Purchases With Amazon’s Digital World
Solving its immediate challenges in the grocery market allows Amazon to push forward with its larger vision for retail — a convenient, mobile-centric, shopping experience. Amazon visualizes customers signing into a store with the Amazon smartphone app while sensors in the store track various items in the shopping cart. These items would then be charged directly to the user’s Amazon account when they sign out of the store. While convenience is the clear selling point here for consumers, it also helps Amazon link physical purchases with Amazon accounts. This data would become a key input for Amazon’s recommendation engine and also help target offers to Prime subscribers.
While the exact scenario laid out here is unlikely to be fully realized in the near future, Amazon can implement key themes of this vision — convenience and a physical-digital link — today with a hybrid retail strategy. We expect the Amazon app to become a key part of the shopping experience at Whole Foods stores, with the ability to make shopping lists, find deals, research products and purchase on the app for in-store pickup. The Whole Foods Market app already helps customers with some of these tasks and has seen 750% growth in monthly active users (MAU) over the last two years. In addition, Amazon is also likely to leverage Amazon credit cards to help link store purchases with Amazon accounts.
App Annie’s data shows that iPhone users of the Whole Foods Market app are 3.2x as likely to use Amazon Prime Now than the general US population. Also, 62% of Whole Foods customers are Amazon Prime members, according to a Morgan Stanley survey. The overlap between Whole Foods and Amazon Prime customers will help Amazon implement this hybrid strategy.
Stores Open Up New Opportunities in Mobile Commerce
Finally, the eventual impact of this deal will be felt far beyond the grocery sector. Amazon now owns 450+ prime real estate locations which opens up new opportunities in other areas of mobile commerce. These stores are concentrated in high-income neighborhoods, which in turn should contain a high concentration of Amazon customers and Prime subscribers. As a result, Whole Foods stores can also act as last mile logistics hubs, enabling quicker and cheaper same day deliveries across Amazon’s product range. This will make it even more difficult for other retailers to compete with Amazon.
In addition, sections of stores could be used for showrooming products beyond fast moving consumer goods (FMCGs), serve as Amazon pick up locations and help the company enter new retail categories like pharmaceuticals. But through it all, one fact will remain consistent — Amazon’s retail strategy will make stores an extension of its mobile app and not the other way around. It’s time for the rest of the industry to take notice.
June 22, 2017Mobile App Strategy