Back in the late 1960s, I used to go to the grocery store with my grandmother when I was visiting her in Conyers, GA. She could have gone to the new, modern Piggly Wiggly. Instead, she chose to sit down each week, write out a list by hand, and head downtown to Cooper’s Grocery.
We’d walk through the door to a warm greeting, Granny would hand Mr. Cooper her list. While we went down to the drugstore for an ice cream cone, Mr. Cooper would pull and pack our order and load it in my grandmother’s car when we were ready to leave.
In other words, online ordering and in-store pick-up were invented by Mr. Cooper and thousands of other Mr. Coopers. Every retailer in the world now is just using modern technology to roll back the clock.
Even Amazon, which dramatically altered the fresh retail landscape last week when it shockingly paid $13.7 billion for 431 Whole Foods stores – and instant entry and credibility in the $800 billion grocery space, one of the few frontiers as-yet unconquered by CEO Jeff Bezos and company.
Now here’s the scariest part for other retailers: Amazon doesn’t even have to make a profit in grocery or anywhere else to keep going and growing.
“Does Amazon ever have to be profitable? Probably not,” analyst Deb Gabor told SPW this week. Gabor heads up SOL Marketing in Austin, TX. She’s worked with clients like FreshDirect, NBC Universal, CheezBurger and Readers Digest (she also wrote a book called Branding Is Sex — available on Amazon, of course). “People are still going after it [Amazon stock] hard and still investing in this unprofitable company. They see the picture of retail and they don’t know what it looks like right now, but they think Amazon’s going to change it.”
Retail is a mammoth question mark at the moment. The CEOs of both Southeastern Grocers and Fresh Market threw up their hands and walked away this week. German giant discounter Lidl is chasing other German giant discounter Aldi into the U.S. market and they’re both trying to back behemoth Wal-Mart into a corner. Every other retailer in America is offering or tinkering with home delivery, meal kits, ready to eat meals, online ordering, in-store pick-up – they’ll probably even come entertain at your kid’s birthday party.
Meanwhile, Amazon lurks and looms.
Why Buy Whole Foods?
So why buy Whole Foods? The chain has struggled to keep market share as other retailers answer consumer demand for organic, usually at a lower price. Whole Foods has also made its mark as a destination – but with more people shopping online does that even matter?
“Whole Foods has been searching for where they fit into this new retail landscape – everybody’s starting to do what they do but for less money,” retail and CPG growth strategist Peter Killian, a principal with Chicago’s The Cambridge Group who’s worked with brands like Allstate, BestBuy and Anheuser Busch, told SPW this week. Whole Foods has made its mark with “the perception of value versus actual value. Some shoppers will display brand loyalty — but don’t most of us shop with our eyes, ears, hearts minds and wallets?”
So okay, you’re saying about now, that’s all great – but didn’t you say something about farmers getting rich in the headline that made me want to read this piece?
Hold on, we’re getting there.
A June 20 Wall Street Journal article suggests Amazon bought WF for its database. In a June 20 Reuters article, Whole Foods Chief Executive John Mackey teases that Amazon might do more with retail than just fly the WF banner.
Pete Killian’s way ahead of all that. After all, Amazon is simply a service provider. They don’t make anything. They don’t grow anything (except stock portfolios). What Amazon bought with Whole Foods was something it realized it couldn’t get with its own AmazonFresh program for years and years: instant experience and instant credibility in the fresh space.
‘They Have to Feed The Beast’
Killian calls media speculation that Amazon simply wanted WF’s 431 brick-and-mortar stores “something of a red herring. The coverage has been on the footprint rationale. The 431 locations are great, but I think footprint is something Lidl-ish, it’s something you can do quickly and someone with Amazon’s sheet can to that 10x to Lidl. Footprint doesn’t seem rational. Produce is punishing margins and relationships that take years if not decades to build and then and only then do shoppers start taking you seriously. Amazon cannot move that slowly, they have to feed the beast, they have to do something that will give them overnight results. That credibility can only be bought and nobody sets the bar higher on a national level than Whole Foods.”
Gabor says no doubt Amazon will benefit by having distribution points from which to reach a whole new crop of would-be Whole Foods shoppers and vice versa: “There are benefits in the physical locations for both brands.”
Whole Foods has had an untouchable éclat as a destination, she says, but over the last five years “healthy, organic, thoughtfully sourced foods” have become available everywhere. “I’m in Austin, TX, the home of Whole Foods, and I can buy that kind of food at my local H-E-B store.”
Killian calls it “the democratization of healthy foods.” That’s why he believes Amazon was buying experience and street cred instead of stores with the WF deal. He points out that about 40% of Amazon’s business comes from third-party re-sellers. Amazon is simply the service provider that connects those sellers with customers and completes the logistics of the deal.
Meanwhile, brick-and-mortar retailers “have been plagued by thin margins,” Gabor says, and increased pressure from discounters can only eat into those. Focusing on store brands is the best way to drive down costs and increase margins that allow for further discounting.
Produce companies that have invested big in building consumer-facing brands are increasingly feeling pressure to sell bulk product to retailers. The benefit to grocers is two-fold, Killian says. First they get the branding boost of being connected with quality produce; instead of giving credit to Produce Brand X for quality, consumers will connect that product with the store. And of course there’s that margin thing again.
“Do retailers want another Driscoll’s Berries to take over raspberries and other parts of produce? Probably not,” Killian says. “They’d probably rather keep these important categories to themselves, that’s how retailers build trust.”
Okay, So How Might The Farmers Get Rich Already?
He points out the difference between chicken and beef at retail. Everybody knows the Tyson and Perdue names. Nobody can name a brand of beef. “That identification is a substantial part of the value [stores] get from having their own brand halo and the margin.”
So, since retail has no idea where it’s going, could a savvy grower set up digital shop on Amazon and go direct to consumers, with the service provider handling fulfillment and transactions?
“This could be a way for new brands to emerge that are effectively co-ops and have a direct connection with consumers,” Killian says. “It won’t happen with retail.”
So a grower with a label who can dive into the Amazon fresh pool – once the WF teams gets done testing the waters – could become a very successful farmer indeed.
Gabor says the Amazon/WF deal is “potentially a disruption to the entire consumer packaged goods market. How’s it going to change CPG?” She wonders what the new company might do with WF’s emerging, more price-friendly 365 brand.
Regardless, the new entity will have the power to put pressure on other retailers directly and indirectly and “we could see a big shift in consumer” shopping habits. “What Amazon can do with customization and individualization, how are they going to bring that to brick and mortar retail? I hope it’s going to be a really, really exciting experiment. Retail is like the Wild West right now and I love it.”
It’s a pretty safe bet that other retailers don’t love it.
“The short term environment is going to be very price focused, aggressive promotions will continue, clients we talk to and serve know it’s coming and know it’s going to be tough in the short term,” Killian says.
While Gabor believes “there’s always going to be a subset of consumers who want to buy their groceries at retail and touch and feel,” will there be enough of those to sustain brick-and-mortar stores? And moving forward, will other retailers be able to hang on in the Amazon/Aldi/Lidl/Wal-Mart wake?
‘Everybody’s Hoping to Crack the Magic Code’
Maybe, Killian says, if they specialize more. It may be time to accept the fact that Amazon just may be able to be all things to all people, so anybody else who wants a sustainable business model better be offering something unique in the way of product or experience. “I think where you’ll see winners emerge is where there’s real differentiation happening instead of adopting that generalist store environment. If I’m all about fresh, maybe, or all about kids’ products, or all about convenience, or first-to-market with new and cool stuff – some key consumer benefit – that’s what it’s going to take.”
Even then, can’t Amazon just cater even to consumers who cherry pick the best of particular items from a variety of stores – one for fresh produce, one for meat, one for baked goods and the like – by simply offering all those to consumers online themselves? Or from savvy third-party suppliers?
“Everybody is hoping to crack the magic code,” Gabor says. “Here’s what’s different [in today’s retail landscape] from Cooper’s: You went to Cooper’s and your grandmother knew Mr. Cooper and he was the family grocer – there’s an intimacy in that relationship, there’s a level of trust when you can see the family grocer by the whites of their eyes. The reason that model worked 50 or 60 or 70 years ago is because there was a relationship and an intimacy and a trust and a bond. It might be almost impossible to duplicate that through an app. The brands that win e-commerce are the ones that don’t focus solely on the product but emphasize the relationship with the customer.”