It was well over a year ago that Amazon completed the purchase of Whole Foods. Looking around as a consumer at the combined businesses, it doesn’t appear that much has changed. Sure, Amazon Echoes are now sold at Whole Foods and there are benefits for Prime members who shop in-store. But none of those things would appear to justify spending $13+ billion as Amazon did to acquire Whole Foods.
Did Amazon make a mistake spending all that capital to buy a physical-store retailer? Maybe, but the point of the Whole Foods acquisition didn’t really have to do with the stores. It had to do with selling online. Here’s what I mean: In order to maintain its high stock price, Amazon has to grow its revenues. For that, it has to keep finding new products to sell. Because it’s so big, it’s not likely to sell so much more of what it already sells, it has to find new products to sell to consumers. When you think about what it might sell that it doesn’t already, a few market segments come to mind: health, banking/finance, cars, grocery and maybe some others depending on how daring Amazon wants to be. But of all those possibilities, grocery is closest to what Amazon knows best because it involves selling and delivering consumer products. Also, the percent of groceries sold online is very low right now. It has enormous potential to convert to online and that would be a huge industry, perfect for Amazon to grow into and dominate.
Why is grocery so slow to convert to online? Five words are the answer: meat, chicken, fish, fruits and vegetables. Consumers don’t want someone else picking those fresh products for them, consumers want to see the products for themselves. As long as they have to go to the store to buy those fresh products, consumers aren’t motivated to go online to buy their other groceries. It’s easy enough to buy them in-store if you’re already there. Also, grocery is a notoriously competitive and low-margin business. No one has yet figured out how to scale up selling groceries online, deliver the products to consumers at home and make a profit.
Amazon bought Whole Foods not because it wanted to know how to operate stores. Amazon bought Whole Foods to learn about the grocery business so it could convert grocery consumers to online. But making money selling groceries online is just plain hard and no one has figured it out yet. Even Amazon, with all its access to capital and technological knowhow, doesn’t have the answer yet. That’s why it looks like nothing much has changed at Whole Foods. It was never about the stores, it was about learning the business and understanding how customers behave in order to convert them to online grocery consumers. What’s so amazing about that is how long it’s taking, which tells us it must be a super difficult problem to solve with many complex components.
How This Problem Gets Solved
For consumers to be comfortable buying protein and produce online, they have to be confident they will always get fresh products sent to them at home that reflect their preferences. The only way that can happen efficiently is with technology. Amazon is the technology leader in retail. It owns more innovative technologies than any other retailer and is in the best position of any retailer to figure out the solutions that will solve this problem.
We are seeing two types of solutions that address the relevant issues:
Video: A large number of young companies are developing software that can watch a video or look at an image and make a human-like decision from it. That video/image software development is a large part of the artificial intelligence business right now. That software is exactly what’s needed for machines to be able to pick out protein and produce that has no bumps or spots and looks right to consumers. It could even be set so a consumer to tell the store how they like their fruit, vegetables or meat by color, marbling, size and many other criteria and still get exactly what they want. (If you think it’s far off, look at this article about a sensor for a smartphone that can tell you what’s in the food you’re looking at, like which tomato is ripest.)
Data: The process grocery stores use to forecast their protein and produce needs is human-based; there is an enormous amount of waste and damaged product in the supply chain. One company trying to tackle this is Afresh Technologies, which is building software to use artificial intelligence to forecast how much fruit, vegetables, meat, chicken and fish a store will need. So far, it has been able to cut waste in half for the stores that are experimenting with its system.
Together, these technologies make it much more likely that consumers can be confident they’ll get the products they want. That will open the door for online grocery to be a much more potent force than it is now.
One more important factor about these technologies: Once you build them, they’re not done. They keep learning to improve themselves over time. That means whoever gets there first has a big advantage and can stay ahead if they build software that can self-improve. Amazon knows it’s in a race to get there first and that’s why buying Whole Foods makes sense.
Once online adoption in the grocery business happens, a lot will change. Here are a few things:
We won’t need so many stores and we won’t need such big ones. There will be a surplus of large supermarket spaces that will come on the market and have to be repurposed. Susie Fogelson of F&Co, a food and beverage strategy firm, told me grocers have “an opportunity to utilize available real estate to provide the rich food experiences consumers seek that they can’t get online, such as workshops, demos and interactive events.” The pure grocery spaces then will be smaller spaces that will be closer to homes and will sell the products consumers need to fill in between deliveries from their online grocer.
Subscriptions could become a lot more interesting in the grocery business. Jesse Horwitz, co-CEO and cofounder of contact lens subscription business Hubble, told me: “One of the ways to look at a supermarket is to divide products into two types: core and periphery.” Core products are primarily dry goods that are in the center of the store. Breakfast foods and condiments are perfect examples. Periphery products are things you find around the outer walls that are more discretionary, impulse and higher margin for the stores. Baked goods and prepared foods are good examples. Horwitz says that core products are ideal for subscription. You buy them regularly, you have a pretty good idea of how often you need them, you don’t want to change brands, and you just want to be sure you never run out. One of the ways an online grocer can make its relationship stickier is to offer core products by subscription. Horwitz says that dividing up products into perishable vs. non-perishable and branded vs. unbranded may also be good ways to look at subscriptions and overlapping those categories may also be a way to subdivide it. The important point about it for grocery retailers is that consumers are much less likely to change grocers if the grocer keeps cabinets filled with what consumers want. Consumers only have to think about it if they want to change how often certain products are delivered.
Specialty foods will be more available because the economies of scale will justify it. A company called Subziwalla just started shipping Indian groceries purchased online in the Atlanta metropolitan area. We will see more of such specialty foods becoming more easily available online. (Disclaimer: I am an investor in Subziwalla and an advisor to the company.)
Although a great deal is uncertain about how grocery will change, here are some things we can be pretty sure of:
According to a recent report from JDA, this year more people started their shopping journey for Thanksgiving meal planning online than in any other place. It’s inevitable that if you give those people the chance to reliably buy their groceries online at a competitive price, they will go smoothly from planning online to shopping online.
There’s probably a lot more change coming that isn’t visible right now. But one thing is for sure: The way your mom shopped for groceries is going to be part of American cultural history and not part of its future.
By Richard Kestenbaum
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