Amazon is assessing locations to build more Whole Foods Markets. Photo Credit: GettyGetty
According to the Wall Street Journal, Amazon is planning to build and expand Whole Foods stores across the U.S. to put more customers within range of the e-commerce giant’s two-hour delivery service. The push would bring Whole Foods to more suburbs and other areas where the natural grocer is quickly adding customers since the merger according to the WSJ.
The report by the WSJ contains information similar to what I have written in multiple articles for Forbes related to Amazon and it’s grocery ambitions.
For example, consumers prefer to buy groceries inside grocery stores. In order to become a major player in groceries, Amazon must increase its store count. Online grocery sales account for only 2% of all sales. Regardless of the popularity of the topic, online sales of groceries remain statistically insignificant in the $800B grocery industry.
Based on my research, I estimate that Amazon can build a total of 2,000 Whole Foods Markets and up to 1,000 Whole Foods 365 stores. Amazon can build up to 5,000 AmazonGo stores and between 1,000 to 1,500 AmazonFresh Pickup locations. (The numbers were identified using tools and techniques I used at Deloitte. The numbers are not an exact science, they are estimates only).
To scale Whole Foods, however, Amazon will have to drastically change the assortment of products sold. Walmart, Kroger and Albertsons have more stores and more customers because they offer the products that the majority of consumers want to buy. For Whole Foods to scale, Amazon will have to identify the optimal product assortment consisting of affordable organics and branded CPG products (Tide, Coke, Pepsi, Cheetos and so forth). Amazon will have to create a value proposition that will significantly increase traffic in the stores and online.
Prices will have to drop. Kroger, Aldi, Albertsons and Walmart will launch a price war against Whole Foods as Amazon scales the chain.
Frito-Lay snacks, Oreo cookies, Coke, Tide and other well-known products will eventually be sold within Whole Foods to increase the number of customers that will shop at the stores. Photo Credit: Bloomberg Finance LP© 2015 Bloomberg Finance LP
The reason why Whole Foods has so few stores is because the business model and exclusive focus on organics isn’t a concept that can scale. Founder and CEO, John Mackey has admitted as such. Amazon cannot maintain the status quo. Like it or not die hard Whole Food customers and fans, Amazon will have to make Whole Foods more like Kroger to grow the business.
A recent article I wrote about Whole Foods outlined that Amazon has multiple options for expanding the size of Whole Foods.
Amazon has the option of building stand-alone locations or partnering with one or more retailers to create a multi-use retail experience. For example, partnering with Kohl’s to build a combination Whole Foods and Kohl’s retail format. Amazon can partner with Best Buy on a similar concept.
Consumers like and want bold retail solutions, not old and tired retail formats.
A review of the current number of stores operated by the leading grocery retailers highlights the disadvantage faced by Whole Foods in terms of store count:
- Walmart has a total of 5,352 stores in the U.S. with nearly all offering groceries
- Kroger operates 2,782 stores across multiple banners located in 35 states
- Aldi will operate 2,500 stores by 2023
- Albertsons operates 2,328 stores
- Ahold-Delhaize USA operates 2,265 stores
- Publix operates 1,172 stores
- Whole Foods operates 479 stores
Walmart has a significant advantage over Whole Foods as 90% of the population in the U.S. lives within 10 miles of a Walmart store. In addition, Walmart is in the process of rolling out online grocery ordering and delivery as well as online grocery ordering with pickup at the store to the majority of its stores in the U.S.
I have made the argument that Amazon can surpass Walmart in terms of grocery sales without having to match Walmart’s store count. In order to achieve the goal, my research indicates that at a minimum, Amazon must operate 2,150 grocery stores nationwide (Whole Foods, Whole Foods 365, AmazonFresh Pickup) as well as provide online ordering and delivery.
Amazon can complement the stores with AmazonGo locations.
Amazon can buy, build or lease to add more stores. For example, Amazon could acquire the incredibly well-run and highly-respected Midwest grocery retail chain Hy-Vee that operates nearly 250 stores in eight states. Hy-Vee is the Whole Foods of the Midwest, only better.
I anticipate that Amazon is going to offer consumers a bulk sales experience similar to Costco if new Whole Foods stores are built. If this happens, the value of Boxed and BJs Wholesale will increase as they will become acquisition targets of grocery retailers wanting to remain in-step with Amazon.
(Amazon has the potential to create a new business model for groceries that reduces the need for stores. I am in the process of writing an article that will outline several ways in which Amazon can change the way everyone shops for groceries if they so choose.)
AmazonFresh – Is It Strategic To Amazon?
The one area of Amazon’s grocery strategy that I disagree with is AmazonFresh.
As the former Head of Worldwide Expansion for AmazonFresh and Pantry, I believe the time has come for Amazon to make the decision to shut down AmazonFresh as soon as operationally possible. I have stated in articles and at conferences that AmazonFresh was an “afterthought” at Amazon. Amazon wanted to offer its customers groceries and AmazonFresh was the mechanism created to provide the service.
Although launched in 2007, AmazonFresh controls less than 1% of the grocery market. Put simply, AmazonFresh has limited value to Amazon and I do not believe it is strategic to Amazon over the long-term.
The picture below showing a recent delivery of milk, eggs and chicken to a customer with frozen water bottles in the bag in an attempt to keep the products cool is indicative of what’s wrong at AmazonFresh:
- No optimized distribution network
- Lax operating procedures
- High operating costs
- High product out-of-stock levels
- High-levels of variance in the customer experience
- Lack of best-in-class products and processes to protect the integrity of all groceries delivered
Using frozen water bottles to cool groceries is unprofessional, unsanitary and unsatisfactory. Photo Credit:Brittain Ladd
Instead of AmazonFresh delivering groceries with frozen water bottles or other unsanitary and unsatisfactory gimmicks to keep products cold or frozen, AmazonFresh should only utilize the best products available.
To solve the problems with grocery delivery and improve the customer experience, my advice to Amazon remains the same: Acquire the company PACKIT or sign a strategic partnership with PACKIT. Depending on the product used, PACKIT’s revolutionary materials can keep products cold or frozen between 12 to 48 hours. PACKIT also offers solutions for keeping food hot and fresh.
AmazonFresh, Prime Now, AmazonFresh Pickup, AmazonGo and Whole Foods can easily utilize the products from PACKIT to improve the customer experience.
Founded by CEO Melissa Kieling, PACKIT is a leader in its industry. I rate Kieling as the most-capable and knowledgeable CEO in the business of providing leading-edge solutions for safe and healthy food preparation, storage and delivery.
The value to AmazonFresh is that the concept of using PACKIT’s new line of commercial products is super-simple. The entire bag completely freezes without the need to ever add gel packs, ice or frozen water bottles. In addition, the totes from PACKIT are reusable eliminating tons of totes, gel packs and other workaround items from ever going into landfills.
PACKIT products can keep products cold or frozen for up to 48 hours without the use of gel packs or ice. Products can also keep food hot. The products are reusable thus eliminating tons of waste going to landfills. Photo Credit:PACKIT Corporate
PACKIT is a solution that is good for the environment. As the largest e-commerce retailer and soon to be one of the largest grocery retailers, Amazon should be a leader in environmental initiatives.
AmazonFresh can recognize savings throughout the supply chain because of the extended cooling duration offered by PACKIT’s innovative design and products. The longer food can be kept cold according to the needs of each product purchased by a customer, cost-saving efficiencies can be optimized. For example, fulfilling multiple orders and staging the orders to maximize available capacity in delivery vehicles. In addition, costs are reduced because gel packs, ice bags, bottles and other materials are eliminated from the process of storing and delivering groceries.
Online grocery ordering, fulfillment and delivery is a razor thin margin business. Any opportunity for reducing costs is a wise investment.
PACKIT also has the ability to manage the pickup of totes from customers and return the totes to AmazonFresh locations for reuse. One of the biggest customer complaints is totes piling up. PACKIT’s last mile pickup and delivery service removes the friction.
Amazon must implement a best-in-class solution for groceries. This is a must-have. PACKIT is strategic to Amazon.
Kroger, Walmart, Target, Albertsons and Ahold-Delhaize would be wise to contact Kieling and assess the products sold by PACKIT. Either retailer would benefit from acquiring PACKIT or signing a strategic partnership to leverage its best-in-class products.
I do not believe AmazonFresh is the best solution for Amazon to leverage for its grocery delivery. Either fix the issues with AmazonFresh or convert all grocery delivery to the Prime Now program to simplify and improve the customer experience.
I am not trying to be critical of Amazon nor am I picking on Amazon. However, I’m not convinced AmazonFresh is following Amazon’s own leadership principles, specifically:
- Customer Obsession
- Insist on the Highest Standards
- Bias for Action
- Have Backbone, Disagree and Commit
Amazon’s grocery customers deserve the best experience possible. Period. I highly doubt anyone in Amazon’s executive ranks will disagree with me.
It’s Not Just Stores, It’s Distribution
Another issue that Amazon must overcome is grocery distribution. Whereas most writers and retail analysts like to focus on Whole Foods and AmazonGo, (Amazon’s physical stores) what I prefer to focus on is stores and grocery distribution. Without an optimized logistics network to cost-effectively distribute groceries to stores and to the home, no grocery retailer will be successful. Distribution is everything.
Amazon has a relationship with several well-known grocery distributors: SpartanNash and United Natural Foods (UNFI). Both distributors have well-earned reputations but I question the long-term value of either to Amazon. It is not beyond the realm of possibility that Amazon could acquire UNFI or SpartanNash but I believe the odds are low.
UNFI has done an admirable job of positioning the company for success. I was a supporter of UNFI’s acquisition of SUPERVALU.
SpartanNash, however, must become more bold in its thinking. Frankly, I am concerned by the company’s lack of a strategy that I believe will generate the most value as well as position the company for growth. SpartanNash has incredible potential but the company must do more. (Word of advice to the executives at SpartanNash: Think Big. Don’t get glossy eyed over one specific customer. Identify your differentiating capabilities and implement a capabilities-based strategy. Own your future.)
Walmart acquired a grocery wholesaler and distributor called McLane to manage its grocery distribution needs when Walmart first began to sell groceries in its stores. Over a period of years, Walmart learned the distribution business from McLane and ended up divesting McLane to Berkshire-Hathaway for $1.5B in 2003. McLane is highly respected for its prowess in grocery distribution and supply chain services. It is possible Amazon will follow a similar strategy.
Amazon does not have to retain its relationship with UNFI or SpartanNash. In many ways, there is tremendous value if Amazon designs and builds its own consumables supply chain and logistics network as it would eliminate the middleman. Let me be clear: Amazon can easily design and implement its own network of facilities to meet its grocery distribution needs. But will it?
So-called industry “experts” that claim grocery distribution is “too hard” for Amazon to manage on its own are similar to the executives who swore Amazon would “never acquire a grocery retailer.”
A question Amazon executives like to ask whenever Amazon enters a new category or channel is: What else? For example, Amazon acquired Whole Foods to provide groceries to customers but what else can Amazon do as it relates to groceries or food? The answer: Become a distributor.
I believe there is a strong possibility that Amazon will become a grocery and food distributor capable of competing against Sysco, U.S. Foods, UNFI, SpartanNash and other distributors. Instead of focusing only on grocery distribution, I believe Amazon will go after opportunities in food distribution to hotels, restaurants, convenience stores and facilities. Amazon enters categories and makes acquisitions of companies it can scale.
The opportunities for Amazon to “Amazon” distribution are nearly endless. Think Fulfillment By Amazon (FBA) reimagined on a massive, massive scale for food and grocery distribution.
I am frequently asked to name a distributor that I believe Amazon should acquire. Although there are many contenders, the company I believe that offers Amazon the most possibilities and value is Dot Foods, the largest foodservice redistribution company in the United States. I am not stating that Dot Foods is the only company Amazon should or could acquire to create a best-in-class distribution capability. However, what Amazon can achieve with Dot Foods is significant. (I believe Amazon would leverage Dot Foods’ distributor relationships and established network to its advantage in many ways).
Americold is second only to Dot Foods in terms of the value it can provide Amazon. Amazon acquiring Americold would be a wise move strategically.
From a strategy perspective, Amazon being a grocery retailer; a distributor of food and groceries; and a redistributor offers incredible possibilities for increasing market share and revenue. The larger Amazon becomes in food, the more it can scale multiple aspects of Amazon to gain a competitive advantage in pricing, logistics and distribution. Frankly, it makes Amazon nearly unbeatable.
Many distributors of food and groceries have failed to invest in technology, improve operations and leverage M&A to create a competitive advantage. The distribution industry is old and inefficient. Amazon can disrupt the entire industry with just a few key acquisitions and by leveraging it’s prowess in technology and innovation.
Of the companies I listed, consultants I’ve spoken with all rank Sysco as being the most vulnerable to Amazon. I agree.
Micro-Fulfillment, Kroger And Ocado
I want to point out the fallacy of using micro-fulfillment centers inside grocery stores as a means of trying to create a competitive advantage against Amazon. If Amazon builds more stores to get closer to its customers, and if Amazon becomes a distributor of food and groceries, in-store micro-fulfillment of groceries is meaningless as Amazon’s pricing, margins and cost advantages will lead the industry.
In-store micro-fulfillment may reduce costs (and that’s debatable) but it does not lead to increased store traffic or sales without additional strategies being implemented. (If robots and micro-distribution centers inside stores are all that’s required to become a leader in groceries, Toyota would be the largest grocery retailer in the world).
This means Kroger’s agreement with Ocado to build 20 or more Customer Fulfillment Centers (CFC) may not only fail to achieve the desired results, it could place Kroger at a severe competitive disadvantage. I am not convinced Kroger will build 20 CFCs.
In fact, I can envision Kroger ending the relationship with Ocado before more than one or two CFCs are built. Changes are taking place so fast in the grocery industry that Kroger may determine that it doesn’t make sense to move forward with building CFCs. (I wrote extensively on the topic of what Kroger should do to better compete with Amazon in this June 2017 article).
When I worked for Kroger as a consultant, I recommended that Kroger enter into an agreement with Ocado plus create a separate company called Kroger Logistics to design and implement the optimal supply chain and logistics strategies, as well as manage its own logistics and distribution needs. I believe the only way Ocado is a wise investment for Kroger is if Kroger implements the following strategy:
- Fulfill online grocery orders from CFCs (Introduce dark stores where optimal)
- Assemble ClickList orders inside CFCs
- Implement robotics and software to perform each pick and case picking of products inside every CFC (This will allow Kroger to close the majority of its older 46 distribution centers and replenish products to its stores, fulfill online grocery orders and assemble ClickList orders using CFCs exclusively.)
- Merge with Target or Ahold-Delhaize; acquire Boxed to move into bulk sales; acquire Overstock.Com; or be acquired by Costco or Alibaba (If Kroger merges with Target or Ahold-Delhaize, it will allow Kroger to scale Ocado’s CFCs across a much larger geographic region for increased savings and strategic value).
My advice to retailers, food and distribution companies, and corporations across industries that want to reduce costs and complexity, improve performance and create a long-term competitive advantage is to seek guidance from a company that realizes the fallacy of maintaining the status quo when it comes to business, distribution and retail. My advice is to contact Monarchfx, a business unit of Tompkins International.
I do not have a consulting or business relationship with any company named in this article.
Amazon plans in terms of a decade and Amazon has owned Whole Foods for less than two-years. Amazon has options, lots of them, related to its grocery strategy.
Amazon doesn’t want to be a grocery retailer, Amazon wants to reimagine the entire grocery and food experience. Amazon conceived a new model for retail. Imagine what Amazon can create and implement for food, groceries and distribution.