‘One of those days when retail fundamentally changed’. That was the view of Retail Week’s George MacDonald when the £10.8 billion Amazon – Whole Foods deal was recently announced. Or, as Whole Foods founder John Mackey hailed: ‘This partnership is gonna change the world’.
The reality of Mackey’s prediction remains to be seen, but there is no questioning the impact the deal could have on the grocery world in particular. Catching them unawares, supermarkets will likely have been shaken by the announcement, with share prices plummeting on both sides of the Atlantic amidst fears that Amazon will slash prices.
Unquestionably the deal threatens to be a game-changer in an already highly competitive market, still recovering from inflation, thin profit margins and the rise of Aldi and Lidl, as well as grappling with Brexit unpredictability. That said, predicting the scale of potential disruption in the UK should be more qualified when considering the saturated grocery market, and how Aldi and Lidl are already offering products at low prices.
With limited buying power in the UK, (Whole Foods having just nine stores nationwide), premium brand pricing, and running into the high fixed costs of any other bricks and mortar retailer, Amazon will need to think creatively about how to innovate the store and reduce cost significantly. This is in contrast to the US, where with Whole Foods’ larger network of stores, a more fragmented grocery market, and lower online penetration, mean there is a greater opportunity for disruption.
Nevertheless, grocers are now challenged with how to respond. Across the retail industry, there is much discussion on the return of the store as ‘theatre’ to engage customers beyond the online experience. Retailers are encouraged to ‘surprise and delight customers’, but Amazon’s recent indications of a more concerted push into the physical world places far greater urgency on the need to innovate in this channel.
One way for grocers to mitigate this threat will require them to unpick what the phrase really means, so that they then accelerate their innovation plans. This could be through creatively making their stores more appealing; developing concessions with other retailers or partners to turn stores into ‘mini-malls’ (eg Sainsbury’s with Argos and Habitat); further leveraging their locations for final mile delivery (eg Tesco Now) or improving ways to collect customer data, so that they maximise the opportunity for customers to fill both their online and in-store baskets. Retailers also need to continue focusing on joining up their online and digital offers, reducing friction both in the online journey but also in switching between channels. This is one of Amazon’s strengths, but one that grocers can negate.
Indeed, now that the initial tremors of the announcement have subsided, retailers are realising that the best response is to focus on what they do best. Whilst supermarkets will doubtless be mindful of the potential impact, they should not forget how they have successfully met disruptive challenges in the past, such as improving the online experience in response to the rise of Ocado, and a focus on small format stores so that customers can easily buy select items sooner than their next large online order.
Additionally, supermarkets could well seek to expand themselves, already evidenced by the rumoured deal between Sainsbury’s and Nisa, and the Tesco-Bookers deal earlier this year.
Initially UK grocers may have some breathing space with Whole Foods smaller number of stores nationwide meaning early activity will certainly be focused on the other side of the Atlantic. Companies would be wise however to prepare for a significant assault with Amazon now clearly so intent to throw hefty funds at making a land grab in the grocery world.
Critics have since called for the deal to be dropped claiming it grants Amazon an unfair advantage. With Whole Foods considered a smaller player in the grocery industry that course of events seems unlikely. Previously, Amazon Fresh, Amazon Pantry and the partnership with Morrisons suggested a small-scale ‘stealth’ approach to entering the grocery world and some argue that this deal alone won’t be enough for Amazon to comprehensively transform the industry. But be in no doubt, the proposed deal with Whole Foods shows that Amazon has effectively served notice to grocers that it fully intends to play on their turf.
Sue is a consumer-facing industry specialist and media commentator with over 20 years’ experience in leading major transformational change consulting projects across Europe, the USA and Australia.
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