New Ama­zon pur­chase changes ev­ery­thing


IN JUNE, an an­nounce­ment of a takeover bid by US-based on-line re­tailer Ama­zon for the small, up­mar­ket US gro­cery chain Whole Foods Mar­ket sent the food re­tail world into a lather.

There was shock and awe around the globe. Share prices of ev­ery ma­jor gro­cery re­tailer took a dive, and in some cases, for US groups closer to the di­rect im­pact of that deal, those share prices are still fall­ing.

What’s the ex­cite­ment all about? Ama­zon, the com­pany re­spon­si­ble for the big­gest shake up (or “dis­rup­tion” in to­day’s jar­gon) in the re­tail world, made it clear it wants to roll that suc­cess into food.

It is tak­ing over ar­guably the best and most in­no­va­tive gro­cery chain to emerge in the past decade.

A larger move into food was a no­brainer. Ama­zon has been de­liv­er­ing gro­ceries to sat­isfy on-line or­ders in cer­tain cities for a decade but it has only made a small im­pres­sion on the gro­cery land­scape.

In the US re­tail mar­ket alone, Ama­zon is en­gaged in cat­e­gories that make up 70% of all re­tail spend­ing. Food is the only large sec­tor – 17% of avail­able re­tail spend­ing – that it hasn’t cre­ated a ma­jor im­pact. Now it has made its first move – one of sev­eral – to get se­ri­ous in that space.

Noth­ing to fear for es­tab­lished gro­cery chains? Plenty! Will the width of the Pa­cific Ocean be enough to keep Aus­tralia im­mune from this at­tack? No.

Ama­zon showed the world what could be pos­si­ble with on­line re­tail. It has com­pletely re­struc­tured many tra­di­tional re­tail busi­ness mod­els, and cleaned some out.

It started with books way back in 1995 and three years later moved into mu­sic, de­stroy­ing sev­eral fa­mous chains along the way. When it ex­panded into house­hold goods it spelt the demise for a few tired and lazy depart­ment stores.

Threat­ened brick­sand-mor­tar re­tail busi­nesses quickly re­sponded with on­line op­tions, and for many that’s all they did, chang­ing lit­tle else.

Those that learnt and flour­ished in the Ama­zon age have done so by ex­celling in per­son­al­i­sa­tion and qual­ity of the re­tail ex­pe­ri­ence. We’ll come back to this point.

Ama­zon has spawned many smaller ver­sions and copy­cats, while meet­ing the tech­ni­cal needs of on­line re­tail­ers has de­vel­oped a mas­sive mar­ket for IT and lo­gis­tics providers. Some not so small.

China’s Ali Baba adopted a sim­i­lar model but has quickly over­taken Ama­zon in to­tal sales, nat­u­rally sell­ing into a much big­ger mar­ket. Food is a key part of its of­fer­ing, which is work­ing well be­cause of the un­der­de­vel­op­ment of gro­cery out­lets.

Ama­zon will bring skills and cap­i­tal to the Whole Foods busi­ness, but will also learn a lot from a pre­mium gro­cery re­tailer that suc­cess­fully took “nat­u­ral” and “or­ganic” to the mass mar­ket and de­fines “lo­cal”.

Whole Foods ex­cels at the sen­sual food buy­ing ex­pe­ri­ence, help­ing shop- pers en­joy the emo­tion and be­lief in good things and giv­ing them jus­ti­fi­ca­tion to part with a lot more cash.

It has clearly been the most ground­break­ing gro­cery chain on the planet in the past decade. There are many pos­si­ble syn­er­gies in the pur­chase - in man­ag­ing sup­ply chains, brand­ing and reach­ing dis­cern­ing and af­flu­ent consumers.

But will it mean any­thing in this coun­try?

We’ve seen a lot of small-time ef­forts and heard very big prom­ises when it comes to on­line re­tail.

On-line gro­cery has strug­gled to gain trac­tion in this coun­try for the past decade, dis­ap­point­ing sup­pli­ers. The prob­lem is that the play­ers have been so ap­pallingly bad at it.

The top end of the mar­ket will con­tinue to evolve and on-line may be a key part of that. A chain like Whole Foods has en­gaged with af­flu­ent seg­ments of the mar­ket and given them plenty of rea­sons to pay more for food items.

Sup­pli­ers of dairy, fresh pro­duce and other pre­pared foods – mostly small brands – have en­joyed the ride. Ama­zon can make that a much larger busi­ness, go­ing wider than pre­mium foods, reach­ing more house­holds.

It can do the same here, be­cause it doesn’t ap­proach on­line trade as a di­ver­si­fi­ca­tion to an ex­ist­ing tra­di­tional model.

That top-end of the mar­ket may be re­garded as niche, but it is still a valu­able pre­mium com­po­nent of any gro­cery busi­ness, which is sadly miss­ing in this mar­ket­place.

In­no­va­tion to com­pel consumers to pay more for that sen­sual food-buy­ing ex­pe­ri­ence, which I men­tioned ear­lier, hasn’t been en­cour­aged or re­warded by our gro­cery play­ers.

The much big­ger, im­me­di­ate fear which is blight­ing the vi­sion of most es­tab­lished gro­cery chains in the west­ern world is the spread of the ag­ile Ger­man dis­coun­ters and their ac­cep­tance by value-seek­ing shop­pers.

That jar­gon I men­tioned ear­lier would also have chains like Aldi and Lidl la­belled “dis­rup­tors”, but the ma­jor dif­fer­ence with these groups is a low-cost model and store roll­out plans that have gone past the pain thresh­old af­ter decades of steady growth.

The com­pul­sion for consumers to save money won’t go away. The drift to Aldi gained mo­men­tum as house­hold sav­ings rates grew post-GFC.

Those that shopped there liked that other sen­sual joy of sav­ing cash on ba­sics … and stayed. Ma­jor gro­cery chains do the easy thing – match them on price.

Just as hap­pened in other tired seg­ments of re­tail, the un­dif­fer­en­ti­ated “rump” in the mid­dle of the gro­cery mar­ket (i.e. our big two chains) will con­tinue to be re­ac­tive and, in the long term, suf­fer.

This lat­est de­vel­op­ment is just an­other sign that the mid­dle ground is an un­com­fort­able place – it’s time to choose a side.

• Steve Spencer is a Di­rec­tor with www.fre­sha­

A chain like Whole Foods has en­gaged with af­flu­ent seg­ments of the mar­ket and given them plenty of rea­sons to pay more for food items.

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