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Blurring the Lines

Amazon’s impact and what it means for the produce industry
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Fan or foe, Amazon’s invasion of the grocery world sent shockwaves through the food industry. Though the impact varies along the produce supply chain, the big question is whether this ecommerce revolution will be good for consumers—but bad for everyone else.

So buckle up as we explore this new universe, detailing Amazon’s approach and its effects—intended or otherwise—on the buyers, sellers, and consumers of fresh and prepared fruits and vegetables.

Bold Moves
Amazon finalized its $13.7-billion purchase of natural and organic grocer Whole Foods Market in August 2017. The acquisition marked a high-profile step in Amazon’s 10-year journey to remodel consumer food and beverage purchasing.

In the decade since its AmazonFresh delivery service debuted in Seattle in 2007, the company has steadily moved forward with its food/retail upheaval. Testing and rollouts include click-and-collect grocery kiosks; Amazon Go’s cashierless pay platform; Prime Pantry, featuring a wide range of food and household products; and adding a myriad of groceries to its Prime Now same-day delivery service.

In addition, there’s Amazon Key, delivering perishables directly into purchasers’ homes (to mixed reviews), and a deal with cooking website AllRecipes so users can select a recipe, generate a shopping list, link to Amazon, and order all the necessary ingredients for same-day delivery.

Collectively, these actions have enabled Amazon to expand its position in bricks-and-mortar retail as well as in groceries. As of the end of last year, Amazon accounted for 18 percent of online food and beverage sales in the United States according to Rockville, MD-based market researcher Packaged Facts—and the Whole Foods deal represents a major part of this process.

Elephants, Gladiators, and Fear
To gain perspective, the acquisition of Whole Foods also needs to be viewed in the prism of overall grocery industry trends. Ecommerce sales have been exploding across the board, commanding a projected share of 12.9 percent of U.S. retail sales in 2017, with a 17 percent share expected by 2022 according to Forrester Research in Cambridge, MA.

Such growth is attributable to a chan-ge in consumer attitude, as most are no longer reticent to buy a broad variety of goods online.

“Food is a natural extension of this trend,” comments Bruce Peterson, formerly a longtime executive at Walmart and currently president of Peterson Insights, Inc. in Fayetteville, AR.

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Fan or foe, Amazon’s invasion of the grocery world sent shockwaves through the food industry. Though the impact varies along the produce supply chain, the big question is whether this ecommerce revolution will be good for consumers—but bad for everyone else.

So buckle up as we explore this new universe, detailing Amazon’s approach and its effects—intended or otherwise—on the buyers, sellers, and consumers of fresh and prepared fruits and vegetables.

Bold Moves
Amazon finalized its $13.7-billion purchase of natural and organic grocer Whole Foods Market in August 2017. The acquisition marked a high-profile step in Amazon’s 10-year journey to remodel consumer food and beverage purchasing.

In the decade since its AmazonFresh delivery service debuted in Seattle in 2007, the company has steadily moved forward with its food/retail upheaval. Testing and rollouts include click-and-collect grocery kiosks; Amazon Go’s cashierless pay platform; Prime Pantry, featuring a wide range of food and household products; and adding a myriad of groceries to its Prime Now same-day delivery service.

In addition, there’s Amazon Key, delivering perishables directly into purchasers’ homes (to mixed reviews), and a deal with cooking website AllRecipes so users can select a recipe, generate a shopping list, link to Amazon, and order all the necessary ingredients for same-day delivery.

Collectively, these actions have enabled Amazon to expand its position in bricks-and-mortar retail as well as in groceries. As of the end of last year, Amazon accounted for 18 percent of online food and beverage sales in the United States according to Rockville, MD-based market researcher Packaged Facts—and the Whole Foods deal represents a major part of this process.

Elephants, Gladiators, and Fear
To gain perspective, the acquisition of Whole Foods also needs to be viewed in the prism of overall grocery industry trends. Ecommerce sales have been exploding across the board, commanding a projected share of 12.9 percent of U.S. retail sales in 2017, with a 17 percent share expected by 2022 according to Forrester Research in Cambridge, MA.

Such growth is attributable to a chan-ge in consumer attitude, as most are no longer reticent to buy a broad variety of goods online.

“Food is a natural extension of this trend,” comments Bruce Peterson, formerly a longtime executive at Walmart and currently president of Peterson Insights, Inc. in Fayetteville, AR.

Although online grocery sales accounted for just 1 percent of total food and beverage sales in 2014, according to Packaged Facts this could skyrocket to 20 or even 30 percent by 2022—equating to $41.7 billion in sales. Much the same is predicted by the Food Marketing Institute and Nielsen, forecasting 20 percent of all grocery sales will occur online by 2025, which these organizations believe will be valued at $100 billion for that year.

Ease surpasses reluctance
It really boils down to one word—convenience. Consumers want to be able to purchase merchandise of all kinds, Peterson explains, wherever and whenever they want to, be it online or in a store. This is part of the reason Amazon is moving into bricks-and-mortar retail and why Walmart is making a big push into the online realm.

“These two companies are driving the market in retail, in general,” elaborates Peterson, “and you have to watch when elephants dance.” Both Amazon and Walmart, he points out, were pioneers among general merchandise sellers moving into food: Walmart in the 1990s and Amazon in about 2000.

Using a more forceful metaphor, Peterson compares the retailers to gladiators exchanging blows, but forcing spectators to react. “Amazon may not be a big deal by itself, but it’s important to watch how other competitors react,” he stresses.

Impact and repercussions
Peter J. Larkin, president and CEO of the National Grocers Association, which represents the interests and voice of independent supermarkets, says time will tell what the ramifications of the Amazon-Whole Foods deal will be. “There will definitely be an impact on the supermarket industry in general, but it’s too early to tell just how much,” he says.

“Ecommerce is still relatively new in grocery,” Larkin continues. “All signs say it will grow, but the question is whether it will be dominated by Amazon versus traditional supermarket chains or independents.” All are moving in the same direction, he notes, but “it’s too early to know the final result.”

Consultant David Livingston, founder of Wisconsin-based DJL Research, agrees. “Competitors don’t know how this is going to affect them, and it might not affect them at all. But it’s gotten their attention and they’re scared.”

Reputation, Synergy, and Expertise
The Amazon-Whole Foods deal makes sense for each of the partnering companies, in multiple ways. Amazon has been selling perishables through AmazonFresh for some time, but was unable to earn a reputation as a seller of fresh foods. “Whole Foods instantly gave Amazon cachet and credibility,” Peterson says.

On the other hand, Whole Foods was struggling with lackluster results as a bricks-and-mortar organics grocer, and now has access to an enormous online presence.

“Whole Foods has a lot to teach Amazon about how to handle procurement of fresh foods,” observes Ed McLaughlin, director of the Food Industry Management Program and professor of marketing at Cornell University in Ithaca, NY.

“For all its prowess in consumer products and supply chain efficiencies, Amazon doesn’t know so much about procuring fresh and very perishable foods,” McLaughlin says.

Diving in with purpose
The deal is also a signal of Amazon’s commitment to the business of selling food. “This is a wakeup call that this tech giant is serious about getting much deeper into grocery,” says Bill Bishop, chief architect at consultancy Brick Meets Click in Barrington, IL northwest of Chicago. “Up until now, Amazon has mainly been what we call a ‘basket bandit,’ selling just one or two typically hard-to-find grocery items to a household,” explains Bishop. “ Now it’s interested in the whole enchilada.”

Whole Foods gives Amazon a substantially broader bricks-and-mortar presence as well. The former’s 465 locations dwarf the less than 25 locations Amazon previously operated. This is important since physical retail locations enhance the ability of consumers to purchase the companies’ combined brands either online or in-store.

“The keyword at retail is relevancy,” Peterson points out. “As a consumer, you have nothing but choices. If you’re a retail entity and you can accommodate this need, you will grow.”

There have been early indications of synergies between Amazon and Whole Foods; Amazon quickly added thousands of items from Whole Foods’ 365 Everyday Value private label to its website, selling $500,000 worth within a week and $1.6 million in the first month, according to One Click Retail.

The company also integrated the Amazon Prime free shipping service into Whole Foods’ point-of-sale system, with plans for it to become Whole Foods’ customer rewards program. Amazon also be-gan selling electronics and other products in some Whole Foods stores, and announced the installation of its Locker pickup system for online orders at select Whole Foods locations.

Virtual vs. bricks-and-mortar sales
Some experts believe Amazon’s goal is not to become a grocery retailer at all, but rather to strengthen its position in delivery of all kinds of products by turning stores into pickup points and delivery hubs for online purchases across categories. “The most expensive part of ecommerce is the last mile,” notes Larkin.

The company could also be looking at food as a loss leader. “The food business drives frequency of shopping, and purchasing of fresh is even more frequent,” Peterson reports.

If so, that strategy is likely to have a great impact on the grocery industry. “The reason Amazon is a competitor to be feared is because Amazon doesn’t have to make a nickel on produce,” McLaughlin explains. “It only wants groceries to drive business to its websites and drive sales of other products that have better margins.”

If this is true, predictions that Amazon would purchase Target and its vast network of stores in the United States would add a new dimension to the stores vs. online bonfire.

Pricing, Margins, and Survival
When Amazon bought Whole Foods, the latter’s association with high quality perishables was accompanied by a reputation for very high prices. Immediately upon closing the acquisition in August, Amazon announced it would discount a number of popular, high-volume items.

Among the price-chopped were organic and conventional bananas, as well as organic avocados, baby kale, baby lettuce, Gala and Fuji apples, broccoli, salad mixes, and russet and sweet potatoes. Prices came down from 30 percent to almost 50 percent in some cases.

“People said it wasn’t a big deal, but everyone else lowered their prices, too,” Peterson says. “Price matters; consumers will look for what they want at the price they want.”

The price cuts had an immediate impact, causing six large food retailers (including Walmart and Kroger) to collectively lose $12 billion in stock value within 24 hours. This followed a $22 billion stock drop among leading grocery retailers on the day the Amazon-Whole Foods deal was first announced in June 2017.

Conversely, Whole Foods’ share of the U.S. grocery market rose by 16 percent in the week following the price cuts, according to inMarket, and store traffic increased 25 percent in the first two days, according to Foursquare.

Data from research firm Thasos showed customers from many stores, including Trader Joe’s, Sprouts, Target, Costco, Safeway, Kroger, and Walmart shopped at Whole Foods after the price reductions. By October, however, many of the prices had reverted to pre-merger levels—though additional, limited rounds of price cuts continue.

Price wars
“Amazon has the ability and the strategic capability to drive prices to the lowest level,” says McLaughlin.

“This will certainly reverberate on the supermarket industry as a whole—they’ll have to compete on the low prices consumers have come to expect from Amazon, just [like what] happened with books, media, and other products.”

He adds that the early price cuts sent a message. “It was a limited number of items, but they were high-visibility items,” McLaughlin stresses. “That was a big statement,” he emphasizes, with Amazon furthering its intention to make Whole Foods more accessible and affordable than its previous ‘Whole Paycheck’ reputation.

Some observers believe, however, that the price decreases were not as significant as touted, and more important are the changes to suppliers that will no longer be able to keep up with Amazon’s economies of scale. Not only will shelf variety be compromised, but customers may lament the loss of specific products and brands.

“Whole Foods has many really neat vendors, but they’re unique niche players and they can’t scale up, there’s no way,” comments John Pandol, director of special projects for Pandol Bros., a Delano, CA-based grower-shipper of grapes and tree fruit.

Amazon had already begun centralizing some purchasing decisions and reducing reliance on local suppliers near many Whole Foods locations.

Analysts expect the process to accelerate as the new owner looks for deeper efficiencies and more price reductions. Yet with the elimination of many of these small vendors, Whole Foods may lose a bit of its character, which has long attracted specific groups of consumers to its stores.

The margin effect
Although the initial lowering of prices was nowhere near as widespread as portrayed in much of the press coverage, if the strategy continues and expands, it could have a profound impact on not only retailers but the entire food industry.

Continuing to lower prices will exacerbate the pressures already inherent in the supermarket sector as a whole—due to the proliferation of private labels, competition with Walmart, the expansion of deep discounters including Lidl and Aldi, and the commoditization of some specialty produce categories.

“With this deal, along with the simultaneous rise of discounters, supermarkets are very mindful of price levels,” McLaughlin confirms, adding, “every supermarket should be concerned about Amazon’s effect on prices.”

That said, there are limits to how low prices can go. “We are an extremely competitive industry, with an average margin of 1 percent,” Larkin points out. He notes that while grocers always strive to balance the lowest possible prices for consumers with the need to maintain a margin, strategies will vary by retailer and market. “A retailer in a given market looks at all of its competition and sets prices accordingly.”

Supply, Demand, and Innovation
The threat to supermarkets is not just about prices and margins. “Amazon and Whole Foods are taking volume from existing retailers, which is affecting their overall profitability,” contends Steve Grinstead, founder of the Grinstead Group in Plano, TX, north of Dallas. “The challenge with bricks-and-mortar is the fixed costs, and even a small percentage loss of sales has a disproportionate negative impact on the bottom line.”

Losses, of course, will reverberate throughout the supply chain. “If Amazon is forcing supermarkets to reduce prices, that reduces their margins,” Peterson points out. “The only place to turn is to the suppliers. Amazon can say, lower your prices or we won’t do business with you.”

“Amazon’s main impact on suppliers will be in the area of trade relations, for example, increased demands for better prices, more deliveries that arrive on time, more online-friendly packaging, etc.,” agrees Bishop. This has already proven true, with Walmart instituting new delivery requirements and fees for late arrivals.

“The supply chain [must] get more efficient, and you didn’t need the deal with Whole Foods to make this a true statement,” McLaughlin points out. “Supermarkets will have to dramatically reduce costs so they can invest in growing their business—this means radically lower costs and increased efficiencies, and innovation in the supply chain is one area where this can be done.”

Examples of such innovation could include reviewing the number and location of warehouses to streamline deliveries, creating partnerships to decrease overall shipments and deliveries, or even better onsite temperature management to reduce the possibility of spoilage.

Demand champions
Peterson believes smaller produce suppliers may be well positioned to succeed, even in this intense world of price pressures. “Smaller suppliers can succeed if they play in an area where demand is greater than supply,” he says. “These are the areas where their profitability will be protected.” He cites organic produce as one, and the strong demand for local/seasonal fruits and vegetables as another.

Larkin thinks independent grocers have similar advantages in a price-driven market. “Independent supermarkets are uniquely positioned to effectively compete in the marketplace,” he suggests, noting that most are flexible, have strong relationships with local growers, know their customers, and can quickly react to market changes.

“I like to say they’re the entrepreneurs of the industry,” Larkin continues. “They’re already responding to changes in how consumers shop and are doing it very effectively.”

Amazon may spur more retailers to improve their customer relationships. “The positive is Amazon is forcing retailers to better focus on their target niche,” Grinstead explains, “to begin providing the experience today’s consumers are looking for.”

Produce, Convenience, and Choice
Since Amazon’s claim to fame is online sales, some observers question whether fresh produce will ever follow in the footsteps of other retail or food categories.

“All supermarkets should be mindful of and a little threatened by the move to ecommerce,” asserts McLaughlin. But, he adds, “The dry grocery bins will be more impacted by Amazon than fresh foods. Absolutely, there will be a move online, but nowhere near the extent of dry groceries. Consumers know what they’re getting when they buy a liter of Diet Coke online, but not with a tomato or an avocado or a cantaloupe.”

Battling for online produce dollars
McLaughlin notes there will, however, be some migration. “Amazon has not yet figured out how to do fresh in general and produce in particular, but its focus on physical retailing shows it’s committed to getting there.

“Peapod has demonstrated that consumers are comfortable buying produce online; when Amazon figures this out, more consumers will quickly shift the majority of their grocery shopping to Amazon,” he predicts.

The retail landscape supports the idea that the produce category may be less impacted by the move to online than grocery as a whole. “In the past few years, some of the heaviest new bricks-and-mortar growth has been in stores that focus on fresh produce,” reports Livingston. “The growth in fresh stores such as Lucky’s Market, Fresh Thyme, and Sprouts continues.”

Livingston believes the jury is still out on whether consumers will want to purchase produce online rather than picking it out personally. Over the next few years, we’re going to see supermarkets closing by the bushel, most likely financially distressed chains, along with mediocre independents.

“Amazon will gain a lot from the dry grocery business, and stores that focus on fresh perishables will gain in the bricks-and-mortar segment,” Livingston adds. The latter, he reports, tend to average about 35 percent of their sales in produce, versus 10 to 15 percent for the average chain super-market and about 20 percent for Whole Foods.

“The easier route to online is the nonperishable product,” agrees Larkin. “AmazonFresh left some markets, which is probably an indication there are some issues.” Indeed, last November Amazon discontinued its AmazonFresh service in a number of communities in nine states, mostly in smaller markets.

Pressure, Differentiation, and Opportunity
Grinstead points out that, just as Amazon’s move into groceries will affect traditional supermarkets, the latter’s move to the online space will also impact Amazon’s prospects.

The Amazon-Whole Foods deal has driven supermarkets to solidify their ecommerce as well as their delivery and pickup services, many through partnerships with Instacart or Shipt, both of which have benefitted in recent months. Instacart has inked several high profile deals, while rival Shipt was gobbled up by Target Corporation in attempt to level the playing field against Amazon.

“I believe Amazon is going to get more pressure, not less, from the online portion of the market as bricks-and-mortar retailers get better at this offering,” Grinstead shares. “The Whole Foods acquisition continues to be a bit of a wild card until there’s more clarity on Amazon’s intentions.”

Meanwhile, retailers benefit by having a strong produce department in their bricks-and-mortar stores.

“No other department can differentiate a retailer like produce,” declares McLaughlin.

Produce gives retailers a positive story to tell about sustainability, local sourcing, authenticity, and health benefits. “These are the things consumers care about,” he explains, adding, “There are many opportunities to differentiate in produce that aren’t possible with dry grocery.”

Upping the experience
“Amazon will drive traditional retailers to provide a much better customer experience for their customers,” Grinstead says. “Today’s consumers and particularly millennials are motivated by the experience, including food and menu inspiration, product demonstrations, a fresh and clean atmosphere, ease of getting in and out, etc. Buying decisions are driven by inspiring experiences more than shopping lists.”

The potential for success in the online world varies by category. Peterson believes consumers will still want to pick out their own produce in some cases, but not necessarily in packaged and processed items such as bagged salad, meal kits, fresh-cut fruit, and the like.

Loose tomatoes, cilantro, or bananas are more of an in-person choice, Peterson reiterates, while potatoes, onions, and celery are easier to trust online. “It’s not necessary for shoppers to pick an item if they trust the brand,” he explains.

“It comes down to ‘do you trust the brand’ or ‘do you want to pick it yourself?’—it’s undeniable that convenience is driving so much of the decision process, especially of the younger consumer,” he says.

Logistical concerns
Logistical issues may keep some suppliers away from Amazon and other online retailers. One supplier, who served as a secondary vendor for Amazon for a time and spoke under condition of anonymity to protect industry relationships, notes there can certainly be barriers to working with the online giant.

For consumers to find some items online, for example, suppliers pay Amazon marketing fees that can range from $50,000 to $100,000 for five highlighted items. This is too big an expense for many, he says. On the other hand, he admits, “We got pretty good sell-through, and Amazon was good about working with us to help us succeed.”

Pandol says history suggests that online sales of produce may remain a challenge. “Look at the purchase of Peapod by Ahold Delhaize in 2000,” he suggests. Although the online grocer and delivery service was founded back in 1989 and there was plenty of press about the acquisition, “What impact did it have in Ahold’s markets? It’s been 20 years and it hasn’t been widely adopted,” insists Pandol. “Whole Foods has fewer stores than Ahold, and Amazon’s model involves many third-party sellers—it’s more like a mall than a store.”

Pandol also points out that there were more retail openings than closings during 2017 across all types of retail, according to research and advisory firm IHL Group, based in Franklin, TN. “If we’re going online, why are people still building stores?”

Risk, Rewards, and Metamorphosis
Some observers note that Amazon’s acquisition of Whole Foods was a low risk financial transaction for the partners. Overnight, after the announcement, the increase in Amazon’s and Whole Foods’ combined stock prices covered the cost of the purchase.

“Was it primarily financial or primarily operational?” questions Pandol. “I think it was more financial.” He points out that activist investors were putting pressure on Whole Foods due to its low stock price, so Amazon may have simply seen it as a good value. “If Amazon really wanted a platform for delivery, wouldn’t it buy something like 7-Eleven, with almost 11,000 outlets, instead of a platform with 400? I don’t think this will move the needle as much as the press seems to think.”

Pandol admits to possible operational benefits and online-offline synergies. “One thing that could happen is consumers who like Whole Foods and its brands but don’t have a store in their neighborhood, or don’t feel like going out to the store, will shop online,” he allows. Others include those who are already fans of delivery services and/or buy prepared foods. Neither, he feels, constitutes a major part of the grocery-shopping public.

Further, Pandol makes another solid point, as he believes the infrastructure required to support a delivery-based economy, from parking to employees, is not in place. “We’re all saying we can’t find enough truck drivers—where are we going to find all the delivery people?”

Benefits to Whole Foods
Whole Foods, meanwhile, certainly had financial reasons for accepting the deal. “Before this happened, Whole Foods was experiencing substantial challenges in its own performance,” confirms McLaughlin, citing a 50 percent drop in stock price from its 2013 peak. “Amazon threw it a lifeline,” he says. This is evidenced by Amazon’s 2017 full-year financial results, which showed physical store revenue (mainly comprised of Whole Foods), at $4.5 billion.

Livingston has a different point of view: “I think the primary reason for the acquisition was to scare competitors into making irrational and costly decisions.” These decisions, he notes, “will turn out badly and have a negative financial impact, weakening their position, and then [forcing the closure] of stores.”

Wall Street seemed to agree the Amazon-Whole Foods deal was not optimal for the supermarket sector after the purchase. “The biggest negative impact is that [the deal] has discouraged investor interest in grocery,” states Bishop. “To me, this was an unfortunate overreaction.”

What the Future Holds
Although the long-term implications of the Amazon-Whole Foods deal are still indecipherable, is Amazon still in an acquisitive mood? Target Corporation and Carrefour have been mentioned as possible takeover targets, while others have pegged grocery chains without a substantial online presence such as Kroger, Hy-Vee, and Publix as being ripe for M&A activity.

“How long will a company be relevant in the minds of consumers if it only has a bricks-and-mortar presence?” asks Peterson. “Being a standalone bricks-and-mortar operation is not a viable solution long term.”

While the significance of the Whole Foods deal, along with other moves by Amazon is a matter of debate, many in the industry believe it is indeed a game-changer. Could a name change be in the future, to reflect Whole Foods’ new identity, like Amazon Foods? Or will the grocery landscape settle down a bit this year? “It’ll be important to watch what Amazon does,” concludes Bishop, “because it has the scale, capability, and commitment to radically impact the grocery marketplace.”

Image: ideatraveller/Shutterstock.com

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