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Touted by many as a “game changer” for the food and beverage sector, Amazon’s purchase of Whole Foods Market may have just shaken the industry. After weeks of speculation about their respective futures, Amazon and Whole Foods announced in June the e-commerce giant would buy the natural and organic food company. And the question reverberating throughout the sector is “how will this impact my business?”
I sat down with John Muffolini, MNP’s Technology Leader and Natasha Perkins, one of our Food and Beverage Processing Consulting Services Managers, for a roundtable discussion about evolution of the sector and what Amazon’s move into the bricks-and-mortar space could mean for the future of the industry.
Why Bricks and Mortar? Why Whole Foods?
The better question may be, why not? Amazon wants to be everything to everybody. And if you want to dominate the retail space, you must be in both the online and the bricks-and-mortar arena. I think there are a few strategic plays at work.
Amazon started its AmazonFresh grocery delivery service more than a decade ago, but it's been slow to expand the business. Amazon, over the past year, announced two experimental store concepts in Seattle:
Amazon Go, a cashier-less convenience store still in development, and
AmazonFresh Pickup, grocery pickup locations. It also delivers some perishable and frozen foods through its rapid-delivery service Prime Now.
Acquiring Whole Foods, which operates stores in prime locations and major marketplaces, could bolster the network for AmazonFresh, the company's grocery delivery service. To efficiently ship groceries to consumers, you need physical distribution (item-picking to put parcels together, click-and-collect points) close to the consumer.
Although Whole Foods currently offers online shopping / delivery in the U.S. and some stores in Canada, current estimates show that online orders make up only one to two per cent of grocery sales. Amazon can use their current infrastructure (warehousing, inventory systems, shipping and transport) to increase demand for this service.
Whole Foods also provides Amazon with a new upscale brand, after the e-commerce company has made its name as a low-cost competitor. Whole Foods’ demographic, are upper, middle-class with highly disposable incomes that are busy and likely to look for alternative options for convenience. Whole Foods had given up a lot of market share because they didn’t capitalize on this demographic and being the leader in natural and organic products. They were not aggressive enough in their pricing strategy but I think we’ll see very aggressive pricing out of Amazon now that they are leading the charge.
If you scratch beneath the surface, Amazon’s acquisition of Whole Foods makes sense on many levels.
Understanding the Future of Grocery Retailing
Buying habits are changing as online shopping and Artificial Intelligence (AI) become more commonplace. It’s not difficult to imagine that a few decades from now, we’ll tell our great grandchildren about how we used to go to the store and they will look at us and say, seriously?
Take Amazon’s Dash Wand. The wand sticks to your refrigerator with magnets and lets you order products by talking or by scanning barcodes. In Amazon’s promotional video for the Dash Wand, a couple in their kitchen is preparing for a dinner party. The woman looks into the fridge, where she discovers a bag of shrimp. She asks the wand for a simple shrimp-pasta recipe, then orders ingredients for it, scanning the barcode of an empty jar of pasta sauce. The next day, these items are delivered in a cooler bag.
Amazon isn’t just selling products; it’s inventing a new method of selling, which uses technology to vertically integrate nearly the entire process of consumption. This integration is Amazon’s real product and it’s what you purchase when you become a member of Amazon Prime. Amazon has created the world’s most efficient order-fulfillment system, including a network of warehouses and a delivery arm, Amazon Logistics. It has a shipping subsidiary,
Amazon Maritime, to transport goods on cargo ships from China to the United States. Netflix, NASA, and the C.I.A. are among the million customers who run their systems using Amazon’s cloud-computing platform, Amazon Web Services (A.W.S.), which is expected to earn thirteen billion dollars in revenue this year.
In addition to its own point-of-sale devices—the Dash Button, Dash Wand, and Amazon Echo—it has created its own in-house advertising network. Its television shows encourage customers to sign up for Amazon Prime, and pull them away from traditional television, where they might see ads for the competition.
Earlier this month, Amazon also filed a
patent application describing large, multi-story
drone towers in urban centres. The towers will have loading docks and warehouses on the lower floors and bays for drones higher up. The drones may even be repaired and supplied by robots. This may seem like something out of a sci-fi movie but in the future, such buildings will seem ordinary.
Amazon is ‘The’ retailer of the AI era. AI is the main advantage of e-commerce over its brick-and-mortar competitors, which allows a company to understand their customers and cater to their shopping patterns. Let’s face it, e-commerce, particularly via Amazon's online retail marketplace and its delivery service, is the next wave in grocery retailing - and the sector needs to get on board in a big way if they want to profit from it and not be left behind.
What Else Does Amazon’s Move Mean for the Food and Beverage Processing Industry?
In the short-term, it can create more opportunity. It gives the smaller companies who are only dealing with say the Walmart’s of the world another opportunity and another avenue to get their products out there. While there are certainly opportunities associated to Amazon’s entry into the food and beverage space, existing companies in the space need to think strategically in order to mitigate risks and secure their future market share.
The combined Amazon-Whole Foods is a strong private-label player. A potential benefit for Amazon is it can immediately add Whole Foods' 365 private brand to its existing array of private brands. There may be fears among some companies that, should Amazon decide to put a major emphasis on its own label, they could be left in the dust. However, Amazon will not necessarily use 365 to cut out manufacturer brands, which at moment include thousands of products made by small- and mid-sized businesses. It's not a limited assortment operator like the big grocery chains. Amazon online has unlimited 'shelf space' so to speak. Traditionally this has been Amazon’s practice and I don't see that changing. It will most likely use 365 like it uses its existing private brands - to create differentiation and enhance margins. Keep in mind, Amazon was already “the great equalizer” by placing smaller operator brands next to the “big company, well-known” brands.
But at the same time, Amazon is providing private label solutions i.e. AmazonBasics and AmazonFresh on the backs of entire marketplaces (groceries, electronics, entertainment, etc.) and the acquisition of Whole Foods is an example of this commoditization. At end of the day, brands are on notice and will have to be careful from being replaced, particularly as consumers don’t have the time or desire for in-person shopping and revert to Amazon on-line shopping.
To compete with Amazon’s private label products, food processors need to get back to innovation. Many companies may have been satisfied with the profits they’ve been making by creating look-alike brands and brand extensions. But the one thing the private label industry, in general, has not always done well is come out with truly innovative products. Innovation is a way to keep the legacy brands ahead of the pack with new products, new packaging, new sizes, new innovative products that today’s consumer wants to buy. This has always been the mark of the branded food business, but in the pursuit to get quarterly profits higher, some may have taken their eye off the prize – the consumer.
Of course, being competitive on prices is part of Amazon’s core culture. Buying larger quantities of a smaller number of products helps a retailer lower its overhead. Amazon will most likely demand lower prices from food manufacturers than Whole Foods has, so the food and beverage industry needs to be conscious of that. The industry needs to be mindful of their difference in negotiating limits, or find their own ways to inform economies of scale.
So yes, Amazon’s acquisition of Whole Foods may have been the latest shake up in the industry game but it’s just another reminder why those in the industry need to be ready to evolve. Today, more than ever food and beverage processors need to focus on their value proposition of their business, concentrate on cost efficiencies and productivity, while still being innovative.
To help you stay in the game, contact Glenn Fraser CPA, CA, MBA, VP, National Leader, Food & Beverage Processing at 416.263.6914 or
Related Topics:Risk Series; Technology; Business Performance
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