“Fresh Perspectives” is a Winsight Grocery Business column from Executive Editor Russell Redman, who will share insights on news, trends, people, issues and events in and around the grocery industry.
Amazon’s recent reset of its Amazon Fresh supermarket business in no way signals a retreat in its charge into brick-and-mortar grocery retail.
Despite a pause in new Amazon Fresh store openings (including locations already built), layoffs and a restructuring in the banner’s operations, and a tune-up of the store format, physical grocery retail represents too big of an opportunity for Amazon to be anything but a leading player.
Jefferies analysts Brent Thill, Corey Tarlowe and Scott Marks this week sized up Amazon’s grocery retail potential in calls with Rick Findlay, a grocery industry expert and consultant for Whole Foods Market, and Sloan Eddleston, a former vice president of e-commerce strategy and business operations at Walmart eCommerce. Their conclusion: There’s a lot more yet to come from Amazon in brick-and-mortar grocery.
“Our experts highlighted that while fresh grocery is a low-margin business, it can be an important category, given it increases shopper frequency, which can help to drive sales to other product categories,” Thill, Tarlowe and Marks wrote in a research note on Thursday. “However, our expert believes Amazon will be fighting an uphill battle in fresh grocery against Walmart and Kroger, who already have the existing customer base and infrastructure built to support fresh grocery.”
The fresh grocery category stands tall for Amazon because it represents just “the tip of the customer’s wallet” and will “help keep customers in the Amazon ecosystem,” in spite of grocery’s slim margins, one expert told the Jefferies analysts. Indeed, getting more food shoppers into physical stores would also translate into Amazon pulling more customers to Amazon.com to buy other (more profitable) products and take advantage of their Prime benefits (maybe resulting new members).
A high hurdle for Amazon would be the need to develop a more extensive fresh grocery distribution network, already in place at big rivals like Walmart and Kroger. Yet this differs significantly from the e-commerce logistics (including for center-store packaged groceries) that Amazon knows well.
“Our expert highlighted the different infrastructure needed to execute in fresh grocery compared to general e-commerce/non-perishable grocery products,” the Jefferies analysts noted. “He believes that frozen grocery is likely the hardest hurdle to overcome, highlighting the need for special flooring, among other logistics tweaks.”
But if Amazon is able to assemble a fresh grocery logistics network, it would be better-positioned to compete on a couple of key counts. One of the experts told the Jefferies analysts that the ability to serve up more grocery SKUs can provide differentiation in “what can be a commoditized space.” In addition, there’s an emerging B2B play for large grocers.
“One expert highlighted the opportunity for Amazon to build a grocery logistics network that allows them to serve the grocery needs of the single-store grocery operators and the vast network of restaurants in the U.S.,” the Jefferies analysts explained.
Amazon’s 2017 acquisition, Whole Foods Market, provided the online retailer a jump-start into brick-and-mortar grocery. And despite a round of corporate-level layoffs earlier this year, Whole Foods has continued a steady expansion and now operates 516 stores in 45 states.
It has been speculated numerous times in recent years that another retailer acquisition could fast-track Amazon’s physical grocery growth—which CEO Andy Jassy has noted requires a broad base of stores—and now might be as good of a time as ever to make a deal. Two large grocery acquisitions are pending, Kroger-Albertsons and Aldi-Southeastern Grocers, and regulatory clearance of those deals likely would trigger further industry consolidation.
“One of our experts stated that he would not be surprised to see Amazon attempt to acquire an existing player in the grocery or drug space to expand its physical presence,” the Jefferies analysts wrote. “However, our second expert expressed doubt that Amazon would be able to make a sizable acquisition in the space without receiving regulatory scrutiny.”
Amazon likely will continue to make further e-commerce advances into grocery despite a slowdown in online grocery sales and traffic following the pandemic, Jefferies added in the research note. “Over time, our expert believes grocery e-commerce penetration could reach as high as 50%, suggesting the opportunity in online grocery remains early,” the analysts said.
At last week’s Groceryshop conference in Las Vegas, Scott Moses, partner and head of the grocery, pharmacy and restaurants advisory group at Solomon Partners, gave a projection from R5 Capital that, in 10 years, Amazon could reach $334 billion in U.S. grocery sales and hold a 16% market share. In his research-filled presentation, he estimated that Amazon now has annual grocery sales of $60 billion—good for a 5% market share—and holds a market valuation of $1.6 trillion, above the $1.2 trillion valuation of all other publicly traded U.S. grocery retailers combined.
Moses also noted that Jassy has been open about Amazon’s ambitions in grocery.
“By Jassy’s own admission, Amazon hasn’t figured out grocery yet,” Moses told Groceryshop attendees. “So given their financial capacity, given their clearly stated commitment to grocery leadership, it kind of begs one simple question, right? What happens when they do figure out grocery?”