Will Amazon Eat Grocery Stores For Lunch?
By Karen Webster
Retailers, already sweating bullets over the “Amazon Effect” on their business, now have one more reason to keep sweating.
Amazon Go, Amazon’s new grocery store format in Seattle, opened last week. Right now, its only customers are Amazon employees, who are putting it through its paces, but that will change in early 2017, a spokesperson said. Few details have emerged as to how Amazon Go powers the experience that shoppers will find once they get inside the store, but the combination of the Amazon Go app, a turnstile at the entrance/exit, deep learning and sensors enables a cashier-less, counter-less checkout experience for the consumer. When said consumer leaves the store, the items she purchased will be charged to her Amazon account, and a digital receipt will itemize all of what she bought.
The “Uber” experience meets brick-and-mortar retail.
And for sure, that’s pretty cool. It’s another important milestone in the “Look, Ma, no countertop terminals needed to check out” experience that we’ve been talking about for some time and that other retail innovator — Starbucks — showed us was possible when it unveiled mobile order-ahead a little more than a year ago. Today, mobile order-ahead at Starbucks accounts for 6 percent of sales and is posting double-digit growth quarter over quarter. During peak hours, Starbucks says that mobile order-ahead accounts for 20 percent of all orders.
That trend towards order — and pay — ahead is moving well beyond Starbucks.
Last week, Chase Pay and LevelUp teamed up to take it to hundreds of thousands of QSRs nationwide, leveraging LevelUp’s mobile payments platform and mobile order-to-go capabilities. LevelUp CEO Seth Priebatsch has said that the shift that Starbucks has seen his QSR customers have seen, too, along with average order values sometimes spiking 15 percent or more.
But to say that Amazon Go is about innovating checkout is like saying the iPhone innovated the telephone call.
Kinda misses the whole point.
Sure, Amazon Go innovates checkout, but if you’re a retailer, that isn’t why you’re curling up in the fetal position right now. Like Uber changed the way that consumers think about and use transportation and Apple’s iPhone changed how consumers use their phones, Amazon is changing how consumers shop for the one thing that everyone needs to buy: food.
WHAT’S GREAT ABOUT GROCERIES
The U.S. grocery business is ginormous.
At $606 billion in total annual sales (those are 2015 numbers), spending at grocery stores for food eaten at home accounts for 7.1 percent of consumer spending (assuming a median annual income of $56,516 and annual grocery spend of $4,015).
The Food Marketing Institute reported that about 50 percent of that spend is on perishables — stuff like meat (13 percent of that 50 percent), produce (11 percent of that 50 percent) and dairy (8 percent of that 50 percent). Food non-perishables account for another 25 percent, and non-food non-perishables — paper towels, toilet paper, laundry detergent and cleaning supplies — are another 7 percent.
Buying all of that today still happens in the physical store. Online sales today are a speck on a pinhead, accounting for just $7 billion, or a little more than 1 percent of total grocery sales. The trek to the grocery store is still a well-engrained ritual that happens 1.6 times a week, on average.
At least for now.
Amazon’s had its eye on grocery — and changing it — for awhile.
Its launch of Pantry in April 2014, Dash in March 2015 and the Dash replenishment system later that same year were all aimed at shifting the spend of the 32 percent of grocery sales that consumers regarded as “staples” online. A huge part of the consumer’s at least weekly visit to the grocery store is to replenish the oft-purchased staples that don’t require inspection — or all that much thought to buy. Letting its Prime customers buy Bounty paper towels or Tide Laundry Pods or extra-large Milk-Bones online eliminated the hassle factor of having to go to the store to get them and then lug them home. Paying five bucks to ship those items home was an easy and welcome tradeoff for many Prime customers to make.
Not long thereafter, Alexa and her Echo speaker came onto the scene and into the kitchens of millions of Americans — the same kitchens where moms and dads were eyeballing the things they needed to buy at the grocery store. Asking Alexa to add what was needed to the weekly shopping list — and have her order them — became a simple and convenient voice command away.
This subtle change in behavior wasn’t only about Amazon moving the sales of the bulky grocery items once bought in a physical store online — and to Amazon. It was about changing how consumers do their grocery shopping, including how they use brick-and-mortar grocery stores to buy their food.
Which brings me full circle to Amazon Go and its reinvention of retail.
MORE THAN SHOPPING FOR GROCERIES
Think about what’s going on here.
Amazon is driving the commoditization of the grocery category, starting with the non-perishable grocery items that consumers consider “staples.” Getting consumers over that first hump — buying those items online — was done by making friends with the brands whose products consumers already knew, bought and trusted: Bounty paper towels, Tide laundry detergent, Pringles potato chips, Folgers coffee.
But grocery is a thin-margin business, and shipping bulky items to consumers’ homes is costly — as Amazon’s escalating shipping costs prove. Shifting more consumer dollars to Amazon’s private-label brands in key categories is one lever Amazon can use to control its cost of sales, not to mention the entirety of the consumer’s grocery experience. A report released by 1010data last month on two categories — the sale of batteries and baby wipes — seems to prove that theory.
The report suggested that Amazon now accounts for 94 percent of online battery sales — a market pegged at $113 million. Batteries are also one of the items positioned in that all-coveted impulse-buying zone near the checkout in physical grocery stores. Not only is Amazon making it easier to buy batteries online and denying physical grocery stores of that high-margin sales opportunity, its private-label brand has captured about a third of that volume and is well on its way to eclipsing the sales of brand name stalwarts, such as Eveready and Duracell.
The same can be observed for baby wipes. Amazon’s private label-branded baby wipes, the same 1010data report said, is experiencing year-over-year growth of 266 percent. It estimated Amazon’s market share to be 16 percent, as measured by sales, which puts it a not-so-distant third behind category leaders Huggies and Pampers.
In both cases, 1010data concluded that consumers are three times more likely to purchase the Amazon private-label brand than name-brand category leaders. That’s a big deal for another important reason: Kantar’s recent research reported that 55 percent of consumers who buy online buy the same brands from the same merchant each time they do their shopping. Consumers also spend more each time they buy groceries online — nearly three times as much. Getting consumers to shift preference to Amazon and then to Amazon private-label brands, therefore, comes with three potentially very big payoffs: Amazon as the merchant consumers prefer, Amazon’s private label as the products they purchase once they’re there and Amazon as the grocer with whom consumers spend more of their grocery dollars.
At the same time that Amazon is chipping away at moving consumer non-perishable grocery spend online and to it, it’s turning its attention to capturing the 50 percent of grocery spend that’s a heavier and harder lift to move online — perishables. But rather than forcing a change in how consumers shop for their meat, produce and dairy products, Amazon’s opted to give them a different physical store experience.
Amazon Go is only about perishables and presented in a smaller store footprint. Checkout is easy once consumers make their selection, but making their selection is just as efficient since consumers don’t have to wind their way through a 60,000-square foot-store to get what they want. And since Amazon Go also carries prepared foods, it offers more of a reason for consumers to visit the store more often. More frequent foot traffic also comes with the potential to capture more of the consumer’s overall spend on food, which is roughly 15 percent of the consumer’s overall budget, and on higher-margin items.
WHY ONE PERCENT MATTERS
Naysayers push back on Amazon’s ability to be successful in grocery by pointing to the fact that only 1 percent of grocery sales happen online today. These are no doubt the same folks who took comfort in the census data reporting of a decade ago that 98 percent of all retail sales still happened in the physical store. While retailers were fiddling, the S.S. Retail ship was sinking — and badly in many categories, having run into the Amazon iceberg. Categories once the bastion of brick-and-mortar shopping saw big chunks of their sales move online — categories that, not so coincidentally, Amazon had also targeted to grow its online business: Electronics, office supplies and sporting goods have all seen nearly 18, 33 and 25 percent of their sales shift online, respectively — and a lot of it to Amazon.
But don’t worry, folks — 90 percent of retail sales still happen in a physical store.
Grocery stores are next up to experience this shift. With the introduction of Amazon Go, it appears that Amazon isn’t only disrupting grocery shopping; it’s on its way to reinventing the entire category.
The disruption is getting a little help, courtesy of the double whammy of falling food prices. And traditional retail is doing what it does best when faced with stiff competition: discounting. Competition from Walmart, which derives 50 percent of its sales from groceries, and Amazon are to blame, analysts say, for discounting levels not seen since 2009. Kroger, the nation’s largest grocery chain, has seen its stock lose more than a quarter of its value as it has slashed prices to get consumers into the stores but who, once there, then cherry pick the items they find on sale.
The race to the bottom is now well under way.
While traditional grocery dukes it out over who gets inducted into the grocers’ discount hall of fame, the reinvention of grocery will be ushered in by Amazon — which will unlock a wave of innovation that capitalizes on a new smaller store model where convenience and self-service reigns supreme. Amazon has denied reports that it plans to open 2,000 Amazon Go stores — maybe that’s because it plans to open 6,000 <joke> — but it doesn’t have to have a footprint as large as Kroger’s to shift the balance of power in the grocery business by changing how consumers shop for food. Amazon’s become the largest retailer by market cap with its 300 million customer base by capturing a very small percentage of overall retail sales but big shares in certain categories — by doing exactly that. That beachhead has given Amazon many other options to keep Bezos’ famous flywheel spinning and use it to move in and capture new retail territory.
It also won’t take two decades for grocery to feel the brunt of the Amazon Effect that’s headed its way.
Uber’s been around for a mere seven years and has managed to place a hundred-plus-year-old taxi industry on notice that its days are numbered. Taxi rides have declined by two-thirds in San Francisco. In two years in L.A., taxi rides are down 42 percent. In New York City, Uber has achieved a 51 percent market share among business travelers, up from 9 percent just two years ago. It’s well on its way to blowing a hole in the rental car industry, too. Today, 15 percent of business travelers say that they use rental cars less because it’s just easier to find an Uber or a Lyft.
Once consumers have found a suitable alternative, it doesn’t take them long to make it their new habit, and it doesn’t take a lot of them to deal a world of hurt to an incumbent’s bottom line. That means that it’s probably a good time for grocers to stop hiding behind the fact that 99 percent of sales still happen in the grocery stores — while there’s still time — and do something besides discounting to prevent going the way of the taxi industry.
And for every other retail sector to do the same thing. If Amazon is successful with groceries, it won’t stop there.
When Amazon introduced the Dash button in 2015, I wrote a piece that posited the question whether Amazon could do to groceries what it did to books. I suggested in that piece that buying “commodities,” like paper towels, laundry detergent, toothpaste and dog food, online could change how consumers used grocery stores more holistically. And that they would use them in a much more nuanced and focused way, stopping on the way home to pick up the few things they needed to prepare dinner that evening — forcing a huge shift in the traditional grocery store experience.
Amazon’s move into grocery is also reminiscent of how Amazon started its life online. Books were a category that Bezos found that everyone bought and could buy easily online. Food fits that same profile — and then some. Most people eat three times a day, seven days a week, 365 days a year. Buying non-perishables online today isn’t that much different than buying a book — setting in motion a whole new way to craft the grocery-buying experience on and offline and the retail business model to support it.
Twenty years ago, 100 percent of book sales happened in a bookstore. Today, that stands at a little more than 50 percent and falling — with most of those online sales going to Amazon.
Let the retail reinvention of grocery — and retail more generally — begin.
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