Grocery Wars

On June 16, 2017 Amazon announced that it was purchasing the upscale food market chain Whole Foods for $13.7 billion. The acquisition, completed in August of that year, was Amazon’s largest, and sent shock waves throughout the grocery industry. The purchase has profound im­plications for the future of groceries, the entire food industry, and perhaps the future of shopping itself.

Even before acquiring Whole Foods, Amazon had been expanding into groceries and physical locations, including bookstores, two Seattle drive-through gro­cery stores where customers can pick up online or­ders, and a convenience store called Amazon Go that uses sensors and software to let shoppers pay for pur­chases without waiting in line to check out. Amazon has also acquired experience with online grocery sales through its Amazon Fresh program. However, Amazon hadn’t quite achieved the success with online grocer­ies as it had with books and media. Whole Foods gives Amazon new ways to enhance its online business while establishing a presence in physical retail outlets.

The grocery business is notoriously competitive and low-margin, with profits of 1-2 cents on the dollar. Although Amazon is skilled at competing on low price, why take on this challenge? From Amazon’s stand­point, there are several reasons why Whole Foods might turn out to be a very good investment. Groceries are an important purchase category, representing $800 billion in U.S. sales. A recent report by the Food Marketing Institute found that U.S. grocery sales could grow fivefold over the next decade. Purchasing Whole Foods helps Amazon become a major player in the grocery industry. Whole Foods takes Amazon’s physi­cal presence to a new level, with more than 460 stores in the United States, Canada, and Britain and sales of $16 billion in fiscal 2017. It will be within an hour or 30 minutes of as many people as possible.

Amazon could use its $119-a-year Prime member­ship service, which gives customers free, two-day shipping and other benefits, to offer Whole Foods customers a better price on groceries, as it does for books in its bookstores. The stores could also serve as an advertisement to get more customers to sign up for Prime. As of September 2017, Prime had 49 mil­lion subscribers in the United States, representing about 44 percent of households.

Amazon is a master at providing what’s known as “consumer convenience.” E-commerce is soaring and food-delivery businesses are taking off because people are too busy or otherwise occupied to leave their homes to go out and shop. Americans are ordering more of their groceries and meals online. A study com­missioned by the market-research firm Euromonitor projects that the online market is projected to grow 15 times faster than the rest of the restaurant business through the end of the decade. Amazon can continue to sell groceries online but it can also provide the cus­tomer experience of shopping for food in person.

Whole Foods can also be used as a delivery net­work for Amazon’s other non-grocery products. Amazon has been trying to open warehouses closer to customers so it can deliver orders in as little as two hours, and Whole Foods stores will bring Amazon physically closer to its shoppers. The stores could become locations for returning online orders of all kinds. Amazon could also use them to cut deliv­ery times for online orders.

Several analysts have observed that Whole Foods’ urban and suburban locations are so valuable for Amazon’s delivery business that the deal could be worthwhile even if Whole Foods pretty much stopped selling food. When Amazon bought Whole Foods, it acquired 431 U.S. upper-income, prime- location distribution points for everything it does. With Whole Foods’ footprint in affluent areas and Amazon’s expertise in supply chain and delivery, it could upend both food retailing and food delivery.

One expert has called Amazon a “life bundle,” par­ticularly for affluent Americans. Amazon Prime could become the cable bundle of the future—an annual subscription to a group of diverse services that give Amazon a dependable revenue stream and a grow­ing, loyal customer base. More than half of American households with incomes over $100,000 are already Prime subscribers, and they spend more than $1,000 a year using this service. Affluent families regularly spend $500 a month at Whole Foods. Once Amazon owns Whole Foods, its richest customers could be ex­pected to spend thousands of dollars a year through Amazon. As Whole Foods customers are urged to sign up for Amazon Prime—and as Prime customers get enticing deals at Whole Foods—Amazon’s penetration of the upscale market should grow, even as it offers discounts to lower-income Americans.

Amazon started making changes to Whole Foods as soon as the acquisition was completed in August 2017. The day the acquisition went through, prices of many Whole Foods staples dropped. Prices of some items decreased by up to 40 percent. An identi­cal basket of items from a Whole Foods location in Brooklyn went from $97.76 pre-acquisition to $75.85 post-acquisition. In November 2017, Whole Foods announced another round of price cuts, with a focus on holiday staples and best-sellers as well as Whole Foods’ private-label 365 line of products.

In February 2018, Amazon and Whole Foods launched a test to deliver groceries and other goods directly from Whole Foods in four cities across the United States. Whole Foods was basically used as an Amazon depot. Customers can order fresh produce, seafood, meat, flowers, baked goods, and dairy prod­ucts for delivery, with items arriving at their door­step within two hours. The company plans to roll out the service through Prime Now to more cities. Later in February, Amazon extended its 5 percent cash-back benefit to Prime members shopping at Whole Foods with the Amazon Prime Rewards Visa Card. Selected Whole Foods stores have begun selling Amazon technology products, including the Amazon Echo voice-controlled speaker system, Echo Dots,

Fire TV, Kindle e-readers, and Fire tablets.

Whole Foods announced that Amazon Prime would replace Whole Foods’ loyalty program. And Whole Foods goods are now available on Amazon. com, AmazonFresh (Amazon’s grocery delivery ser­vice), Prime Pantry, and Prime Now. Some Whole Foods stores have added Amazon Lockers, allowing customers to have their Amazon.com orders deliv­ered to a secure location inside certain Whole Foods stores until it’s time to pick them up. Customers can also use lockers to return Amazon items. Amazon and Whole Foods are integrating their point-of-sale systems to enable more of Amazon’s brands to be available at Whole Foods, and vice versa.

Buying Whole Foods represents an escalation of Amazon’s long-running battle with Walmart. Walmart is the world’s largest and most successful physical retailer, while Amazon dominates the online com­merce space. Each wants to move into the other’s turf: Amazon would like to have a more formidable physical presence as well as online, while Walmart is making a big push to expand in e-commerce.

Walmart is the largest seller of groceries in the United States, and with Sam’s Club, accounts for about 18 percent of the grocery market. Grocery ac­counts for 56 percent of Walmart’s total sales, and grocery shopping is a major driver of store traffic and customer loyalty. The company is intent on main­taining its position as the leading U.S. grocer. Walmart has invested and tested in click-and-collect programs, stand-alone grocery pick-up sites, and scanning and paying for items with smartphones. Grocery is where Walmart really shines. If Walmart loses the grocery battle to Amazon, it has no chance of ever overtaking Amazon as the world’s largest e-commerce player.

Online grocery sales were a key part of Walmart’s e-commerce sales growth in 2017, and management expects online grocery expansion to be the main driver of Walmart’s sales growth going forward. But if Walmart wants to meet their goal of 40 percent growth in online sales in 2018, it will have to do even more. Management rolled out same-day grocery delivery to 100 markets by the end of 2018, covering 40 percent of U.S. households. Deliveries are handled by Uber Technologies and other providers, with a $9.95 service fee for a minimum $30 purchase. Walmart’s online order and pickup service was available at 2,000 stores by the end of 2018. Management is hoping growth will continue to increase year over year with rollout of new stores into the online order and pickup program.

The move into home delivery will help get more of Walmart’s in-store shoppers to start buying online as well, where they typically spend twice as much. It also complements Walmart’s rollout of curbside gro­cery pickup, now available in 1,200 stores and adding an additional 1,000 this year.

Walmart will compete against Amazon’s Prime Now service, which offers free two-hour delivery to members of its loyalty program. Both companies have also introduced services that allow delivery people to enter homes and leave packages inside.

How will the rest of the grocery industry fare as a re­sult of these developments? Amazon terrifies competi­tors because it can offer such low prices on so many different categories of items. If Whole Foods follows this playbook, shoppers can expect prices to fall, and other grocery industry players will suffer. Stocks for Kroger, Costco, and Dollar General all fell more than six percent when Amazon announced the Whole Foods acquisition. The merger might be even worse news for Instacart, the grocery-delivery service that has had a close relationship with Whole Foods.

There are other forces at work affecting Amazon-Whole Foods, Walmart, and the grocery industry’s competitive landscape. Money spent on dining out has surpassed grocery sales. Instead of shopping weekly at the supermarket for gro­ceries to prepare meals at home, consumers are increasingly snacking and using prepared foods. Companies in the $1.5 billion meal kit industry (such as Blue Apron) have moved into the market, though grocery chains are creating their own pre­packaged food kits as well.

Grocers are also adapting to surging consumer de­mand for fresher items, personalized options, and use of technology to improve the food-buying experience. Deloitte researchers found an overwhelming majority of shoppers are deploying digital devices to research the groceries they intend to buy. Deloitte also found that shoppers spend more when using digital tools.

Despite the growth of online food shopping and these other shifts in the competitive landscape, ex­perts believe the market for supermarkets is strong. According to brokerage and advisory firm Marcus & Millichap, there will be a wave of grocery store open­ings consuming 25 million square feet of commercial space over the next five years. Domestic chains and German discount supermarkets Aldi and Lidl are opening U.S. locations and smaller-format stores are likely to be part of the mix.

Source: Laudon Kenneth C., Laudon Jane Price (2020), Management Information Systems: Managing the Digital Firm, Pearson; 16^th edition.