On Friday, June 16, 2017, the earth shook. On this date, Amazon, the $470 billion Market Cap behemoth, acquired Whole Foods, the quality and organic grocery chain, for $13.7 billion, sending shock waves throughout the industry.
Why is this earth shaking, you may ask? Think it’s just hyperbole? It’s not, as this surprising deal will impact every human being that buys or sells groceries – which includes you.
The acquisition of Whole Foods clearly identifies that Amazon is committed to being a major force in grocery and that within two-years, it will be among the largest, if not the largest, grocery player in the industry.
Let’s start with how grocery buyers will be impacted. A recent study by the Food Marketing Institute and Nielsen revealed 20 percent — a total of $100 billion — is expected to come from online shoppers by 2025, and online grocery buying is increasing at an accelerated pace. This is especially true among millennial shoppers who are now entering the family cohort.
However, numerous hurdles of buying online exist, such as the perceived quality of items, high price, a less than perfect user experience and delay in delivery. With this one acquisition, Amazon is now positioned to address all of these challenges and more:
1. Perceived Quality – Whole Foods is known as the high-quality, healthy, organic grocer, seen by shoppers as a provider of premium quality products. Combining Amazon’s quality online and delivery service with Whole Foods' superior products will allow shoppers who were previously hesitant to buy “sight unseen” the confidence to buy online at an even faster pace.
2. Price – This is the hurdle that will be most challenging for Amazon. Whole Foods has long been nicknamed “whole paycheck” due to its reputation for high-priced organic goods. However, Amazon is a deflationary force in almost every category it competes in and I would expect it to make similar strides in the grocery industry. Amazon entering the grocery business is sure to drive down costs.
3. Online User Experience – Whole Foods was clearly trailing Wal-Mart, Kroger and Target in the ecommerce technology space. But just like that, Whole Foods leaps from the back of the line to becoming the leader in superior online experience and suggestive selling. Amazon’s first-class digital capabilities are known for providing the best online user experience and this will take the friction out of online grocery buying, making it even simpler to access.
4. Delivery Delay – Amazon’s logistic system is famous for speed of delivery, and will bring this winning trait to the grocery space, championing same-day delivery, order online and pick up in store, and replenishment programs such as Amazon Prime. Furthermore, shoppers will soon see the expansion of Amazon programs such as Amazon Go and drone delivery.
Amazon’s acquisition of Whole Foods will also accelerate the shopper trends that we have seen over the past five years and it will change the way consumers shop, how they shop and whom they buy from. In five years, the grocery industry will look vastly different than it does today.
Let’s now move from those that buy to those that sell groceries.
Legacy retailers, such as Target, Supervalu, Albertsons, etc. that were already having challenges keeping up will now have even greater pressure to compete. Many of these retailers will fall to the wayside or be gobbled up by a larger player.
The grocery retailers that were holding their own such as Wal-Mart, Kroger, Wegmans, etc. will now need to increase their investment in online and logistics capabilities much faster than they were planning. This will put pressure on margins and their ability to invest in other critical areas such as distribution centers, technology and logistics.
And the Amazon acquisition of Whole Foods will affect the CPG manufacturers who supply the goods that these retailers sell. Amazon pricing is going to put de-flationary forces into the market, squeezing the slim margins that manufacturers and retailer currently hold.
Here are three necessary ways that manufacturers will need to shift their focus to address the new Amazon reality:
1. Consumer Packaged Goods companies will now need to immediately move into a proactive role with Amazon if not already there – Amazon has previously been seen as an afterthought in the CPG sales world due to its low level of sales versus traditional grocery.
2. CPG companies need to develop a stable of brands that are appropriate for this new player in the grocery space and that means realigning its offerings. Brands that are millennial-focused, experiential and offer packaging and case packs that are appropriate for home delivery and in-store pick-up as well as at shelf, such as products with handles and multi-packs, will reap the benefits.
3. The days of CPG marketers thinking about shopper marketing in terms of coupons, in-store signage and merchandising as the primary drivers are coming to an end. Implementing channel agnostic, consumer-back strategies with digital at its core is now table stakes for CPG manufacturers. And content driven strategies and digital merchandising will become increasingly important to a winning strategy.
We felt the world shake and we, as consumers, shoppers and business people that work within the grocery industry have entered a new reality. This reality will have more and more shoppers buying online and being influenced by online retailers.
Paul Kramer is chief executive of Catapult Marketing. He tweets @pekramer