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.freshagenda.com.au
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.