Amazon’s Whole Foods: Grocery Chains are F*cked

If you haven’t heard by now, Amazon just bought Whole Foods for a whopping $13.7 billion dollars. There’s been a lot of speculation about Amazon’s motives. But let’s rewind for a second to December 2016, when Amazon announced their automated grocery stores.

Remember Amazon Go and the debates on automation and joblessness that followed? Amazon has already launched Prime Pantry and Amazon Fresh, but has been struggling to find a foothold in the grocery industry, controlling only 1% of the $800 billion US market. The industry has “stubbornly stayed offline” in the past few years, according to Sucharita Mulpuru, Chief Retail Strategist at Shoptalk, and Amazon hasn’t successfully overcome the issue.

Amazon’s vision has been “to be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online” since its inception. It has overhauled industries and rebuilt supply chains (remember big chain bookstores?). Yet the largest retail market, groceries, has remained out of their reach.

Image Credit: Jeff Lewis (@ChicagoPhotoSho)

Enter Whole Foods

The grocery industry, described as archaic by some and traditional by others, is still thriving offline. Whole Foods has a fanatic customer base, a high-end market, prime locations in urban areas, and is now Amazon’s entry point into the offline grocery market and food supply chain. They also offer big data on offline food retail. Essentially, Amazon just bought a pricey playground to test ideas and gather information before they overhaul the food retail industry.

And this is about more than just Amazon Go’s automated checkout.

Amazon is the king of online data analytics and they now have the ability to apply this in the offline world. Amazon’s Whole Foods will blend online and offline analytics and consumer tracking to create an entirely new retail experience.

Amazon Go’s video is a sneak peek of this in action. But Amazon’s reach far exceeds just your grocery list.

Last week, Amazon was awarded a patent called “Physical Store Online Shopping Control” that they filed in 2012. The patent permits Amazon to limit searches on their in-store WiFi to hide competitors and also allows collection of data, including the customer's location and activities while inside the store. In practice, this would let Amazon track your usual route through the store, see where you pause, and correlate it with what you purchase.

Stephen Defranco describes a fully integrated online/offline shopping experience:  

“While walking down the cereal aisle, it may send notices of products you usually buy, like a favorite brand of granola for example. Amazon may then suggest turning left to grab some Austrian yogurt, because “it goes great with granola! If a shopper buys a product frequently, it may suggest it for Amazon.com home delivery. Its point of sales checkout systems will log purchases against traffic patterns and begin to build each customer’s Whole Foods profile just as it has for amazon.com profiles.”

A continuous flow of incoming data is necessary for the collection of big data. Whole Foods stores will provide Amazon with enough data to identify meaningful patterns.

Soon, Amazon will know the time of day you shop, the path you take through the store, the brands you prefer, and the typical decisions that characterize your shopping habits, allowing them to market specifically to you every time you enter the store.

The Effects on the Grocery Industry

Amazon is known for disrupting industries. Amazon’s first product was books. They identified key issues within the industry, reinvented the wheel, and subsequently ran every other big retailer into the ground.

The main issue with books?

There are far more books than any retailer could ever fit in one store. Amazon.com made every book only one click away, stocked their own warehouses, and added two-day shipping; all of a sudden Books-A-Million was gone and in its place was a Prime package at your doorstep.

Food offers a much tougher supply chain to crack than books.

Food is perishable and preference goes as deep as comparing one red apple to another. The Amazon method for books would never have an impact in the food industry, and the limited scope of Prime pantry is an example of that. Groceries are a “fundamentally different problem, which will require a fundamentally different solution,” according to Ben Thompsen, founder of the Stratechery

Currently, the grocery industry comprises a complex web of distribution networks involving wholesalers who specialize in specific products like fish or meat and vendors who pay top dollar to get eye level space on shelves.

Jeff Bezos will likely reinvent this distribution system as he has done with other industries, making it leaner and primarily Amazon-owned, bringing down costs and overhead.

Amazon's Self-Moving Shelves, Image Credit: The Robot Report

With the redesign of distribution will come Amazon’s inventory system, which could easily track perishables as they move between distribution stops. Amazon fulfillment centers are heavily automated, with humans and robots working in sync at rapid speeds. The shelves stocked with products move themselves, instead of needing humans to walk to retrieve items.

The fulfillment centers are hailed as the world’s most nimble infrastructure for the transfer of things. Grocery distribution isn't a problem they’ve solved yet, but with the power of fulfillment centers, the distribution chain is likely to shrink.

Where does that leave other grocery companies?

In a tough spot. When the merger was announced, the stock of competitor chains began to plummet. Competing with Amazon is a hard sell. They routinely close out quarters with a net income of nearly zero.

With your competition operating on almost non-existent margins, staying in the game becomes nearly impossible. If Amazon does crack the integration of online and offline grocery retail, Publix and other major chains may become the next Borders.

Automation & Jobs

According to an inside source, Jeff Bezos is reportedly planning on cutting jobs and reducing prices while retaining Whole Food’s “fresh” image, leaving behind the “Whole Paycheck” stigma.

Whole Foods has had a rough few years already, cutting 1,500 jobs in 2015 and facing its worst sales slump since it went public in the ‘90s. Amazon’s public press release contradicted this report, with Drew Herdener, an Amazon spokesman, stating that Amazon has “no plans to use no-checkout technology to automate the jobs of cashiers at Whole Foods and no job reductions are planned.”

Amazon already owns and operates 30,000 robots and mans their 1 million square foot warehouses with thousands fewer workers than other factories of comparable size.

At the end of the day, automation is what Amazon does well and a byproduct is job loss. As I’ve said previously, cashiers and retail salespersons occupy the most common job in America, with 7.8 million Americans potentially in jeopardy of losing a job to automation down the road.

Major changes are still a long way off, with the $13.7 billion deal expected to close in the second half of the year. But if Amazon succeeds in this new market, we may soon see a global delivery system, through which Americans can simultaneously binge-watch their favorite T.V. show while asking Alexa to purchase a carton of eggs and a new rice cooker without ever leaving their couch.