Fresh’s food assortment and prices aren’t so competitive with discount grocers like Aldi, and it has struggled with items being out-of-stock. — Bloomberg
AMAZON.com Inc shares soared after the company posted a “trifecta beat” by topping forecasts for retail revenue, Amazon web services revenue and margins.
But the flood of optimism glosses over issues in Amazon’s grocery business. The company’s physical retail segment revenue – predominantly sales at Whole Foods – have grown by just 10% since 2018.
That’s half the rate of Kroger Co during the same time period. Amazon announced some minor upgrades to the business last week, but the segment really needs a massive makeover if it wants to compete.
The grocery business has dramatically changed since Amazon bought Whole Foods Market for US$13bil in 2017.
Amazon’s most significant upgrade is to make its online delivery less exclusive.
Amazon Fresh delivery service will soon be available to anyone, not just those who pay for Prime, the company’s leading subscription service.
It’s a great offer. But Prime penetration across the United States is already high at an estimated 170 million members, according to Consumer Intelligence Research Partners.
For perspective, there are about 124 million US households.
Using some back-of-the-envelope math, that amounts to about two Prime members per household. By that calculation, the market for new shoppers is pretty small.
Its delivery fees also offer little upside to ordering from Amazon’s Whole Foods Market or Amazon Go without Prime.
Whole Foods charges a US$9.95 delivery fee and Amazon Fresh requires a US$150 order minimum for free delivery with fees for smaller orders ranging from US$3.95 to US$9.95.
To compare, Instacart’s same-day delivery fees start at US$3.99 on orders over US$35. The math doesn’t work for Amazon.
Grocery businesses do best when they have both a fleet of stores and a digital offering. Kroger chief executive officer William McMullen told investors in June that shoppers who used online ordering or its mobile app spend more both in-store and online.
But when it comes to online grocery shopping, the trends aren’t quite working in Amazon’s favour.
Online grocery sales for pickup at stores are expected to grow at an annual growth rate of 13.6% over the next five years, compared with 10.8% for delivery and 8% for ship-to-home, according to a January report from Brick Meets Click and Mercatus.
While Amazon has the expertise to quickly deliver consumer goods to your home, it doesn’t have the store fleet for grocery pick up. Whole Foods has about 500 stores, versus Kroger’s 2,800 and Walmart Inc’s more than 4,600.
Amazon’s confusing grocery offering is also working against it. The company has two grocery brands – Whole Foods and Amazon Fresh – and a convenience store called Amazon Go, which sells snacks you might also find at a Whole Foods.
Part of the confusion stems from their constantly changing names, from Amazon Go to Amazon Go Grocery to Amazon Fresh within just over a year.
Amazon distinguished its Fresh stores from competitors with cashier-less technology. But it turns out that futuristic tech was not enough to attract a sufficient amount of shoppers.
Fresh’s food assortment and prices aren’t so competitive with discount grocers like Aldi, and it has struggled with items being out-of-stock.
To Amazon’s credit, it now allows shoppers to add items from both Fresh and Whole Foods to one checkout cart online – previously a major barrier for online grocery shoppers.
But this change doesn’t seem to address the core issue.
This all presents a big challenge for driving profits in a notoriously low-margin business.
Of course, Amazon’s strength is that it is a tech company and it has a US$36bil business selling ad space and services to companies that might help make up for thin grocery margins, Andrew Lipsman, principal analyst with the market analytics firm Insider Intelligence, said.
With a revamped fleet of Fresh stores and sharpened grocery strategy, it could leverage shopper data to bolster its advertising service offerings by providing more sophisticated insights for national brands, he said.
With this strategy, it may not need to have such a huge fleet of stores such as Walmart or Kroger. It just needs to have enough shopper traffic to gather data.
Either way, they’d have to figure out how to run good physical stores for people to shop even if there are fewer of them.
There was a moment when Amazon acquired Whole Foods in 2017 that industry watchers believed the tech behemoth would completely change how we shop for groceries.
That hasn’t quite happened. Grocery leaders Kroger and Walmart sped ahead with new tech investments such as click-and-collect while Amazon continues to close stores.
Amazon will need to put in quite a bit of money to compete as a grocer.
A big announcement over changes that are quite incremental seems to be more of a marketing play to rally investors than any meaningful update to its business.
It has a track record of making splashy announcements that keep the attention of consumers and shareholders but ultimately end up being a bit of a let down.
A closer read of this announcement appears to be setting us up for another one, unless the company puts in the elbow grease its grocery business needs. —Bloomberg
Leticia Miranda is a Bloomberg Opinion columnist covering consumer goods and the retail industry. The views expressed here are the writer’s own.
