Amazon

Amazon’s Whole Foods Whole Pay Play

Fanny Fern was the highest paid journalist in the country in 1855 because of her “witty and irreverent” tell-it-like-it-is style. Fern — a native of Portland, Maine — was paid $100 a week by The New York Ledger to produce columns about life in America to keep middle class women reading their paper.

Fern was both a feminist and an early suffrage supporter. One of her most famous adages — “the way to a man’s heart is through his stomach”— is also perhaps one of the more notable and quotable examples of both her wit and irreverence when remarking about the male species at the time.

Irreverence and wit aside, Fern’s adage seems to have stood the test of time and love for 162 years — 80 percent of women still say that feeding a man is the best way to hook and keep him.

Food and love are also at the heart of Amazon and its now officially cleared acquisition of Whole Foods. How things play out could give Fanny Fern’s adage a decidedly modern and competitive twist: The way to Amazon’s food commerce heart is through the stomachs of its Prime members.

Of Food and Stomachs

When the news broke last week that Whole Foods would lower prices for some items, starting today, in their stores, it sent grocery stocks reeling. They lost $12 billion dollars that day.

Focusing on how the Great American Kale Sale could make kale great again (btw, kale is sooo 2016 — Whole Foods didn’t even have it as a top food pick for 2017) and how it could put pressure on grocery stores to lower their own prices is like talking about whether it was a good idea to rearrange the deck chairs to make the Titanic look nice on the way down.

It’s the wrong thing on which to focus.

What is, though, is how Amazon will materially gut the three things that grocery stores thought would keep them competitive: their private label brands, their shelves of organic foods and their loyalty programs.

Of course, lowering prices is a tactic, but one that’s less about signaling that Amazon wants to make Whole Foods wholly more affordable and more about getting consumer feet inside those stores, buying the cheap kale, bananas and organic eggs — and then lots more stuff once they get there. Remember, Whole Food’s year-over-year same-store comparisons had been off for seven quarters before Amazon decided to buy them. Those lackluster figures were one of the reasons that Whole Foods’ investors started getting grumpy about two years ago. Getting feet in the stores and grocery spending is pretty important.

But it’s also about giving consumers a taste of the Amazon experience when it comes to full-service grocery, including the purchase of prepared foods, yoga mats, natural personal products and flowers in the physical grocery store. And the  trusted and recognizable yellow Amazon logo and messaging that they’ll likely see when they walk through the doors.

It’s about signaling that Amazon Prime customers will soon get lots of benefits when they use their Prime accounts — a.k.a. Amazon Pay — to check out (or to check-in?) at Whole Foods. And how that enormous — and enormously Prime loyal consumer base — will shake up how, when and where all organic food — not just groceries — is purchased, paid for and eaten.

But mostly it’s about how everyone from payments players to logistics and delivery providers, grocery stores and CPGs (consumer packaged goods), local restaurants and QSRs (quick service restaurants) and independent local food markets will soon feel the ripple effects of Amazon’s grocery flywheel.

From my perch anyway, Whole Foods is a lot more than just Amazon’s grocery play — it’s Amazon’s flywheel into local retail, restaurant and services.

Which makes it time for every one of you guys reading this to huddle in your war rooms to figure out your next moves.

The Platform to End All Platforms

For a company that didn’t start life as a platform, Amazon has sure mastered the art of platform ignition.

And no, Amazon wasn’t always a platform.

What started out in 1995 as a place online to buy books that they bought and resold (not a platform) has become the world’s most powerful eCommerce platform twenty-two years later. Amazon’s done that by creating a marketplace that attracts sellers by giving them access to lots of buyer eyeballs and services like Fulfillment by Amazon, working capital and the ability to add the Amazon Pay button to their website. More sellers pull in more buyers who buy lots of stuff at better prices that they can get in two days — and sometimes even faster than that. Amazon’s Marketplace now accounts for 50 percent of units sold and (at last count) 80 million consumers fork over $99 a year to be a Prime member in exchange for two-day free shipping and access to lots of other things, including video and music streaming.

As I’ve written before and so many times, all of these things together — plus all of the things that they’ve added over the years — have recast the consumer’s expectations of all retailers: low prices, expedited delivery and an always-changing supply of products from which to choose. In Amazon’s case, that’s now more than four hundred million SKUs (stock keeping units).

The so-called “Amazon Effect” that everyone talks about isn’t because of the share shift that Amazon is driving — since Amazon, overall, accounts for less than 5 percent of all retail, excluding auto — but because retailers that don’t deliver to Amazon’s standard don’t get their business, or as much of it, anymore.

When it comes to the “Amazon Effect” and groceries, those of you who follow me regularly also got a sneak peek into my thinking about their grocery game plan in April 2015 after Amazon launched Dash buttons and I wrote a piece asking whether Amazon would do to grocery stores what it did to bookstores (I said yes by changing how consumers buy groceries and use grocery stores). And then again, a few months ago when I commented specifically on the implications of Amazon’s bid to buy Whole Foods (to change how consumers buy all their food, not just the groceries that they take home and use to prepare meals).

Now that we have a peek into what Amazon has said they plan to do with Whole Foods, it seems that it is now all of that — and then some.

Blurred Lines in Aisle 17

According to the USDA, U.S. consumers today spend nearly 10 percent of their income on food — 5.3 percent on groceries that they buy and bring home to cook and then eat and another 4.3 percent on food that they eat out. Those lines have gotten increasingly blurry over the years as busy families and not-all-that-interested-in-cooking millennials ratchet up their grocery spend on ready-to-eat/convenience foods.

Amazon, with the Whole Foods acquisition, will make those lines blurrier, still.

The USDA reports that 26 percent of a consumer’s food budget is now allocated to those ready-to-eat/convenience foods — a.k.a. fast food bought at QSRs. In an attempt to siphon some of that spend back to them, grocery stores have beefed up their selection of prepared foods. According to NPD Group, in 2015, 40 percent of consumers bought prepared foods there. They also report that sales of prepared foods at grocery stores have increased 30 percent since 2008, accounting for 2.4 billion trips to the grocery store in 2015.

Today, Whole Foods devotes a fair amount of real estate to prepared foods and will likely sharpen its focus there going forward. It won’t just be other grocery stores that will potentially feel the prepared foods competition — QSRs will too, as consumers opt for a “healthier” set of options at Whole Foods, quite possibly delivered to their homes by Amazon trucks for free as part of a Prime membership.

Meal kits will feel the slow burn, too — see Blue Apron as Exhibit A. Meal kits sound great until they arrive and the consumer realizes that the “kit” part of it means that they still have to cook, wash the pots and pans and be content with portioned meals with no leftovers.

Amazon Fresh will likely play a starring role in making that shift — and the blurring of the lines — more pronounced now that Whole Foods is officially in the tent. It will be interesting to watch what, if anything, happens with the annual fee, the roster of participating players and the pricing of foods offered.

And, how prepared foods from Whole Foods will be priced to make them more appetizing to consumers.

The Price Is Always Right

Speaking of pricing, Amazon has already proven that it’s mastered the pricing game on both national and private label brands.

Amazon’s pricing algorithms are legendary, although no one outside Amazon really knows how they work. What’s certain is that Amazon constantly monitors the prices of goods sold by competitors and what products are selling. They then take action on seeing that data. So, it’s not uncommon for Amazon to drop the prices of items that are selling well to less than what competitors sell it for or raise prices on the things that aren’t — sort of a reverse supply and demand to get consumers hooked. Most consumers either don’t notice or don’t care on an item-by-item basis, and, if they do, they’re happy to trade off a couple of bucks for the certainty of delivery in two days, for free.

Now, with Whole Foods, Amazon has roughly 40,000 new physical grocery SKUs to monitor and play with, accordingly — and use to sharpen its pricing of grocery products sold on Amazon today through Pantry, its Dash buttons and offline in their physical stores.

When Private Labels Become Very Public

Private label brands were once viewed by most consumers as the brands for people who couldn’t afford to pay for “name brands.” No more. Today, 80 percent of consumers say they see no perceptible difference in product quality between the two.

Not surprisingly, private label strategies rank at the top of the grocery store survival list.

The intersection of consumer preference and the chance to offer consumers cheaper products without taking a hit on margins has caused grocery stores to expand those parts of their businesses. Nielsen says that roughly 21 percent of traditional grocery store SKUs are private label brands, increasingly driving more consumer spend. The Private Label Manufacturers Association (PLMA) claims that more than 50 percent of consumers bought more store brands from grocery stores in 2016 than they did a year ago — saving about a third of their spend on basic grocery and household items.

Amazon got into the private label game in 2009 and since then has introduced more than 20 private label brands. In each case and category, those private label products have quickly gained share on national brands. For example, 1010data reports that 94 percent of all batteries sold online are sold via Amazon. After only a few years, Amazon’s private label battery brand now accounts for a third of all online battery sales.

A little more than two years after Amazon introduced private label baby wipes, 1010data also reports that Amazon holds a 16 percent share of the market, just behind Huggies (33 percent) and Pampers (26 percent), and has grown 266 percent year over year.

Private label is also a big deal for Whole Foods. In 2014, Whole Foods’ private label 365 brand accounted for roughly 13 percent of its sales. Amazon said last Thursday that it will begin selling the Whole Foods 365 line online. There, no doubt, we’ll see Amazon’s powerful pricing engine rev up to compete with both national brands and grocery store private label brands.

Analysts at SunTrust Robinson Humphrey project that over the next five years, the sale of Amazon’s private label brands could reach as much as $20 billion — and that was before the Whole Foods buy.

Taking a Swipe at Loyalty

Grocery stores have long used loyalty programs as a lure to get consumers to shop more frequently at their stores. Nearly 80 percent of grocery stores have a loyalty program in place. But having a loyalty program hasn’t necessarily kept consumers loyal. Only 18 percent of consumers say that they’re totally loyal to a single grocery store, with the vast majority of people reporting that they more or less play the field.

This has been confirmed by the fact that half of all U.S. shoppers travel to three or more stores to get their grocery and household items.

One loyalty program that has kept consumers loyal is Amazon Prime. Amazon Prime members shop more frequently (raise your hands if you’ve ever bought more than once a day on Amazon and thought nothing of it) and spend more than twice ($1300) each year than what non-Prime members spend ($700). It’s been reported by retail consultancy, Magid, that roughly two-thirds of Amazon Prime members are also Whole Foods customers. Analysts have suggested that’s a bad thing, since it’s not necessarily a big net add for Amazon Prime.

I think that’s a glass very much half empty way to look at it.

Amazon has hinted that Amazon Prime members will get special goodies in the form of savings and other services at Whole Foods “down the road.” These are the same consumers who are loyal to the brand, shop at Amazon and currently shop at three grocery stores, on average.

If just half of those consumers sifted just a third of their grocery spending to the combination of Amazon and Whole Foods, well, you do the math.

That’s the power of a platform.

Learning from Books(stores)

When Amazon started life as a bookseller, it was about selling things online that consumers didn’t need to inspect to buy. A book on a shelf at Borders or Waldenbooks or B. Dalton or Barnes & Noble all looked and read the same way as that same book did at Amazon.

Only cheaper.

The more successful Amazon became at selling books cheaper online and getting them delivered fast, the less able physical bookstores could compete. Since 1994, almost all of the major bookstores have closed — names of shops you probably know and often frequented: Atlantic Books, B. Dalton, Borders, Crown Books, Lauriat’s, Hastings Entertainment, Kroch’s and Brentano’s and Mr. Paperback. Borders even tried the “if you can’t beat them, join them” strategy in 2008 and used Amazon to sell their books online.

They went belly up in 2011.

Barnes & Noble, the last man sort of standing, has shriveled to a mere semblance of itself, with a stock trading at $7 and change, off from a high of $28 in July of 2015. It operates 633 stores now, down from 726 in 2011, with reported plans to close more than 197 stores over the next three years. Independent booksellers have taken a hit, too. By the end of 2009, the American Booksellers Association reported that only about 1,651 of the more than 4,000 independent bookstores that existed in the early 1990s still had their doors open.

In 2012, in a bold move to meet Amazon on its home technology plus bookseller turf, Barnes & Noble CEO, William Lynch, told The New York Times that it had become a “technology company” — flashing the chain’s newly minted eReader, the Nook, as proof. Unfortunately for Lynch and his franchise, it was too little technology about a year too late. Euromonitor reported that 2012 was the first year of the great eReader sales decline. Sales of eReaders dropped by more than 40 percent between 2011 and 2016.

But that really didn’t matter a lick to Amazon, who’d long since turned the Kindle device into an app that anyone could download to their existing tablet or smart device in 2010. And it’s a pretty good thing they did. Despite our digital proclivities, it seems that consumers still prefer their physical books — Pew reported in April of 2017 that only 28 percent of consumers read an eBook, compared to 65 percent who read the real deal.

Over that same period of time, independents tried to fight back too — and for a while it seemed like all was lost for them, too. But a funny thing happened on the way to buying books: The independent bookstores began to emerge, recast as smaller format stores catering to the needs and tastes of the local community, educators and families. In July of 2017, The American Booksellers Association said that the number of independent bookstores had swelled by more than 700 to 2,320 across the U.S., with more waiting in the wings.

But, there’s a “but.”

These smaller footprint stores do offer more than just a place to buy a book. Sometimes they double as office space in the back with a retail space in the front to sell books for a business owner who loves books and wants to subsidize the office rent. Other times, they’re a part-time job for a book lover intent on creating a destination using books and coffee and food and events to appeal to the local community.

But neither, as its owners contend, means that they will succeed as measured by dollars and cents.

“If joy is the only metric of success, and I think it is, it has been successful — and I am enjoying the ride,” remarked one such bookstore owner.

Which is not exactly a ringing endorsement for the profit-making potential of these independent bookstores.

Their survival will depend on the local communities’ interest in changing the way they buy books today — from a shop close to where they live and where they can buy a book and walk home with it that very day — but from a more limited, curated collection at a higher price.

The End and the Beginning  

The acquisition of Whole Foods by Amazon was an important step in moving Amazon into a world where consumers like to see and inspect the goods they buy before they buy them. It’s one thing to buy a book online or a box of Tide laundry detergent online, since a Tide is a Tide is a Tide.

But it’s another when picking out steaks for the grill or tomatoes and lettuce for a salad.

Or, yes, even kale.

Amazon could never get there online even though food, like books, is something everyone buys. The Whole Foods acquisition was a right place/right time opportunity for them.

But as Whole Foods is looking to shed its “Whole Paycheck” reputation, Amazon plus Whole Foods is looking to capture the consumer’s whole spending on food. “Whole Paycheck” aside, Whole Foods has also earned the reputation for being a pretty hip and happening place to shop for food. They’ve ditched the standard grocery store Musak for lively tunes, and the people who work there are friendly and helpful. Some Whole Foods have even created spaces where people can buy prepared foods and eat — and in those stores, it’s also become a place to meet friends and hang out and eat.

Amazon is the master at knowing how to leverage its assets — its data on prices and what consumers are buying, its Prime members who are always getting new reasons to stay Prime — to shape consumer preferences and their expectations of retailers.

The combination of a hip and happening grocery store with a data and technology-savvy retailer is a recipe for not only disrupting grocery sales, but changing how local retail looks — and even how competitors view and use their services.

Whole Foods with Amazon could become logistical hubs for local grocery stores, just like Fulfillment by Amazon is a fulfillment option for a number of physical retailers. Existing delivery services like Door Dash and Instacart could find themselves displaced by Amazon’s delivery operations. Whole Foods’ physical stores could, themselves, become marketplaces for local food purveyors as they set the bar for what charting a “grocerant” looks and feels like. Whole Foods could even become the next generation of “supercenter” by hosting complementary retail storefronts inside its stores for those who’d rather trade a huge showroom for the chance to be in front of its loyal and high-spending Prime customer base.

Including Amazon’s own bookstores.

All linked to an Amazon account that makes buying easy and payment so frictionless that consumers don’t even think about it anymore.

For Amazon and Whole Foods, this is just the beginning of their journey to change how consumers buy food.

For grocery stores, it’s just the beginning, too.

And if the past is prologue, there will be margin-crushing price wars followed by waves of store consolidation followed by a winnowing of brands that are too small to survive or too stuck in the middle to compete. We’ll see grocery brands invest in technology in an effort to get to parity. But by then, Amazon will have likely moved on to the next frontier — using AR and VR to shop at the store via their phones or just having Alexa on speed dial to do all the heavy lifting.

With the Whole Foods acquisition, more than opening upon a handful of bookstores, Amazon has taken the retail wars into the physical world using Whole Foods as its physical retail flywheel. Be happy if you don’t own a supermarket chain. Be worried if you own any other large retail business — or sell branded consumer products.

Especially if you do it on the local level. There may be riches in the local retail niches, but it just may take some digging out of a few deep retail ditches to find them.

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