Amazon Coming, Amazon Going

Basket Economics: Reported Go building spree seems ambitious, even for Amazon, but supermarkets will still pay
Photograph by Winsight Staff

jon springer

Alexa, bake me a potato.

Given its vast offensive firepower and a great track record for invention, it’s hard to put anything past Amazon. Just this week the company announced a new fleet of voice-powered devices, including an Alexa-integrated microwave oven. Why a microwave? Because, as an official reportedly explained at an event, “the user interface for a microwave is still stuck in the 70s.”

Also this week came a report that the company’s nascent physical store program bringing the innovative Amazon Go stores to life is on the verge of a major expansion. The report in Bloomberg, which was based on anonymous sources and which Amazon wouldn’t confirm, said the company is potentially looking at operating 3,000 Amazon Go stores by 2021.

Amazon has yet to invent a voice-powered microwave that prepares retail stores as quickly as potatoes but it’s hard to see them getting to 3,000 units in three years without one.

Three thousand stores is a lot of stores. The Bloomberg article indicates Amazon would have 10 Amazon Go units by the end of this year, 50 by 2019 and then 3,000 by 2021. To reach that, Amazon would have to open four stores a day, every day, for two straight years. That’s 28 new stores a week, or 112 every month. Even beavers like Dollar General don’t build that fast, so if it's going to happen, it will likely need to be accompanied by an acquisition or three, but even then, it’s hard to imagine who you’d need to take over if you wanted a sizable fleet of urban stores of a few thousand square feet each. Rite Aid? Save-A-Lot? A quick-service restaurant chain?

It most likely wouldn’t be a supermarket operator. Given what we’ve seen of Go stores so far, it’s not supermarket trips they are necessarily after here (in Whole Foods, they already have a vehicle for those trips, whereas Go seems more concerned with immediate mealtime consumption). Of course, it’s the combination of them that ultimately costs share. But when it came time for Wall Street to find someone to punish for the Go speculation, there was Kroger absorbing a 3% stock hit. To an extent, that’s because Wall Street sees grocery stores in the same way Amazon looks at a microwave.

“Amazon is building an ecosystem that is radically transforming retail forever,” Scott Moses told me this week in an interview. Moses is the head of the food retail and restaurants investment banking practice PJ Solomon, and he advised Supervalu on its sale of Shop ‘N Save to Schnucks and Fred’s Inc. on the sale of its pharmacy to Walgreens.

Moses believes Go doesn’t need to be a success to change retail.

“Amazon’s very low cost of capital and extremely high equity valuation give it a near limitless ability to invest in transformational competition for grocers without fear of failure,” he says. “If Amazon loses $1 billion trying something that destroys an entire subsector, it really doesn’t change the answer for its shareholders, given its nearly $1 trillion market value.”

A competitive response from existing players is in the “early innings” and will involve crafting ecosystems of their own. These will require greater scale leading to more consolidation and vertical integration than had ever been considered in the past.

Whether Amazon ultimately builds 3,000 Go stores or half that many, the message is: If you’re not busy addressing your outdated interface, you could be zapped too.



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