Amazon Hybridizes Brick-and-Mortar and Online Grocery Paradigms
Amazon looks to capture online grocery by establishing a physical presence to supplement its digital tactics
While industries like fashion and travel are awash in digital, grocery has lagged in digital adoption.听 While the picture looked bleak following the dot-com era鈥檚 dismal failure with Webvan [1], that hasn鈥檛 stopped Instacart, Amazon, Google, Uber, Peapod, Safeway, Walmart, and FreshDirect from playing in the space and attracting capital.
Exhibit 1: eCommerce Grocery Players [2]
Business and Operating Model Rundown
These firms鈥� business models, and thus digitally-enhanced operating models [3], differ:
- A brick and mortar grocer may enhance convenience to supplement buyers鈥� existing habits and familiarity, meanwhile leveraging its logistics capability and physical presence. One method to bring grocers into the 21st century is 鈥渃lick and collect鈥�, grounded in a branded website. [3]
- Instacart delivers value on convenience, speed, and selection, for which it charges a premium. Instacart had adopted a lower-cost model, has relied on the sharing economy, and has built partnerships with Whole Foods/Costcos to bring their selection and speed to fruition. [3]
- Walmart acknowledges the busyness of grocery shoppers, catering to parents who need a large load at low prices, without having to traipse through the aisles with kids in tow. Walmart uses pickup hubs to shift to a new mode of grocery uptake.
- Amazon has traditionally leveraged its image as the online everything store with a willingness to compete on price to win customers. Amazon leveraged successful tactics from its ecommerce business for AmazonFresh, with some flexing around perishables鈥� challenges.听 Last month, however, a Wall Street Journal article surprised the grocery and investing worlds by breaking the news that Amazon is reportedly exploring a convenience store model [4].听 You read right, Amazon in brick and mortar鈥�!
Amazon鈥檚 Tactics to Leverage Digital
AmazonFresh uses digital to reach customers more directly, providing convenience, competitive pricing, and an intuitive user experience.听 Meanwhile, it tries to optimize logistics, minimize sales taxes, reduce warehousing, and control shipping costs to derive the greatest benefit versus the traditional grocery model [5].
Diverging from it鈥檚 pure online play into convenience stores is an interesting strategy.听 Specifically, it intends to introduce convenience store selling perishables, meat, and milk, with non-perishables available through mobile request [4].听 Amazon is also planning on developing pickup models to compete with Walmart, with license-plate reading technology to decrease wait times [4].
Through this approach, these stores can serve not only as 鈥渙nramps to the company鈥檚 online grocery service鈥� [6], but also as broadening mechanisms for their delivery network [7] using the back of the house as a logistics stopover closer to customers.听 Some believe that 鈥渉armonizing the channel experience for customers鈥� [8] through an omnichannel approach is the key to winning in grocery, though most players seem to have some multi-channel approach.听 However, scale and reach can remain problematic if relying on a physical presence.
What Amazon Can Do More of
First, Amazon can leverage the fact that 鈥渉e who controls the relationship with the consumer controls the game鈥� [9].听 Second, Amazon can leverage the trove of data it collects, capitalizing on consumer behavior recognition [8].听 These pose a huge risk to brick-and-mortar grocers, even through algorithms suggesting other products of interest or through its product ratings.听 Third, Amazon can continue to attract the profitable customers who are more likely to end up online: dual-income earners prioritizing convenience [8].
Risks
First, online grocery may not take off.听 Amazon has only captured 1.1% of the food and beverage market based on 2016 projections [4].听 The primary barriers customers report are a preference for selecting their own goods, that traditional channels are not as inconvenient as expected, and that 61% find grocery shopping enjoyable [10, 11].听 Additionally, delivery prices dissuade some buyers, yet they are not the main barrier to adoption [12].
Second, a sufficient ROI on capital investment poses a risk for Amazon鈥檚 new strategy.听 Webvan鈥檚 鈥渃ostly business model of building and operating refrigerating warehouses鈥� [13] stunk it.听 Interestingly, omnichannel strategies have been shown to be costlier at least for non-perishables.
Exhibit 2: Cost to Serve by Channel [2]
Third, 鈥渢here is just so much variability in the grocery delivery model, that it鈥檚 always going to be a more costly delivery, and it doesn鈥檛 lend itself as easily to economies of scale as packages do鈥� [4].听 For instance, previously successful strategies around timing box delivery to maximize full truckloads may not translate here, especially since 鈥渢he logistics are nightmarish鈥� for perishables [1].
Moreover, already 鈥渧anishingly thin鈥� [1] margins may not be sustainable or worthy of the investment, especially if Amazon and Google and Walmart pursue a race to the bottom [14].
Parting Questions
- Will online grocery will take off?
- Will Amazon capture this space? What strategies would make Amazon more successful?
- How different will Amazon鈥檚 operating model be from others pursuing omnichannel strategies (say Walmart)?
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Citations
[1] Mitchell, Dan.听 鈥淣ext up for disruption: The grocery business.鈥� 听贵辞谤迟耻苍别.听 4 Apr 2014.听
[2] Hodson, Nick and Lauster, Steffan.听 鈥淥pportunities and Challenges in Online Grocery.鈥澨� Strategy&.听 23 Jan 2016.听
[3] Bacos, James et al.听 鈥淭he Future of Online Grocery.鈥澨� Oliver Wyman.听
[4] Bensinger, Greg and Stevens, Laura.听 鈥淎mazon to Expand Grocery Business with New Convenience Stores.鈥澨� The Wall Street Journal.听 Updated 12 Oct 2016.听
[5] Wessel, Maxwell and Christensen, Clayton.听 鈥淪urviving Disruption.鈥澨� 性视界 Business Review.听 Dec 2012.听
[6] Alba, Davey.听 鈥淎mazon is Opening Grocery Stores so You Don鈥檛 Have to Shop in Them.鈥澨� Wired.听 12 Oct 2016.听
[7] Palladino, Valentina.听 鈥淎mazon to challenge Walmart with new brick-and-mortar grocery stores.鈥澨� ArsTechnica.听 12 Oct 2016.听
[8] Garc铆a L贸pez, Enrique, Said, R茅mi, and Westphely, Khiloni.听 鈥淗ow to win in online grocery: Advice from a pioneer.鈥澨� McKinsey & Co.听 Dec 2014.听
[9] Stuckley, Barb.听 鈥淗ow Google and Instacart Are Hijacking The Grocery Business From Supermarkets.鈥澨� Forbes.听 听2 Feb 2016.听
[10] 鈥淎re Groceries the Next Big Driver of Global eCommerce?鈥澨� Morgan Stanley Research.听 22 Jan 2016.听
[11] 鈥淭he Future of Grocery: E-Commerce, Digital Technology and Changing Shopping Preferences Around the World.鈥澨� Nielsen.听 April 2015.听
[12] Huang, Yan and Oppewal, Harmen.听 鈥淲hy consumers hesitate to shop online: An experimental choice analysis of grocery shopping and the role of delivery fees.鈥澨� International Journal of Retail & Distribution Management, Vol 34 Iss: 4/5, pp.334-353.听
[13] Bensinger, Greg and Plank, Willa.听 鈥淎 $5.39 Bag of Chips?听 Doing the Math on an Instacart Order.听 The Wall Street Journal.听 13 Jan 2015. 听
[14] Halzack, Sarah.听 鈥淭he staggering challenges of the online grocery business.鈥澨� The Washington Post.听 20 Jan 2015.听
I think it’s really interesting how these companies are attempting to capture such a niche space. While I do see why Amazon would want to enter into it, considering they are already selling all other items, the operational logistics around it seems very aggressive to pursue. I don’t personally think this is going to take off.
While convenience is important – at which point is convenience too much?
We are getting to the point where everyone has their groceries, packages, meals, and household goods delivered to their door. I’ve ever seen start ups that deliver gas to your car! Many of these smaller companies playing in the space are funded by VCs counting on the space to take off while the companies are burning cash and have huge net losses. Even plays like Google and Amazon are negative in these spaces. While it’s important to try to adopt to customer trends (like wanting convenience), doing it in a profitability way is absolutely crucial and is currently not a top priority to many of these companies.
Great article, thanks for sharing. I think Amazon is making a great move by building “brick and mortar” for perishables. I don’t think that in-store grocery shopping will ever go away, but we all acknowledge the inconvenience of grocery shopping, specifically for people like busy mothers and dual-income households. The problem that I personally have with grocery delivery is that the inability to select the “best” perishables of the lot makes me feel like I get low quality produce. It sounds like Amazon is trying to address that issue, among others, with these stores. The biggest advantage I see compared to traditional competitors such as Kroger, is the lower fixed costs associated with this model, specifically as we see more e-grocery competitors come on the scene. As a member of a dual-income household with a young child, I look forward to trying out the service!