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1 month ago

What The Whole Foods-Amazon Deal Tells Us About The Future Of Grocery Shopping

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Sometimes our world seems to change at the speed of light. And after this week’s Huge Business News, “I feel a change a comin’ on.” Online giant Amazon just announced it will acquire natural grocer Whole Foods.

The media and the Internet are buzzing – with good reason. The “Whole-Amazon” deal foretells the future of grocery shopping, and will no doubt set off a seismic wave of change that will be felt across this entire market sector. The $13 billion deal will dramatically accelerate the previously slow-but-sure evolution of how we buy groceries. In light of this news, a massive shift from the traditional mode of weekly trips to the grocer to a highly customized, on-demand grocery delivery system seems inevitable.

In essence, the acquisition will likely further catapult us into online shopping spearheaded by virtual marketplace Goliath Amazon.  While Amazon offers millions of products, what it really sells is custom delivery consumerism. And consumers today are eating it up.

It’s the grocery sector’s turn to experience the transformative change Amazon is so capable of causing. While this deal won’t kill the Krogers of the world, it will force them to flex more online and delivery muscle to keep pace. Brick and mortar grocers will have to respond to the merger by further capitalizing on existing partnerships with delivery services like Instacart, Shipt, and Postmates, lest they be left in Amazon’s online dust.

Take a look at the stock market’s response, and it seems investors are clued in to this point. On the day Amazon announced its intention to buy the grocery chain, the company’s stock rose 2.5%.

Over the course of the week, stocks for traditional grocers responded inversely, falling across the board. Kroger lost almost a third of its value this week, really in just two days. The loss translated into almost $6 billion of market cap being wiped away from the largest grocery store in the U.S.

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Look collectively at the grocery industry and tangential grocery stores, and the story is the same. Grocery retailers Target, Walmart, and Costco dipped alongside Kroger, with these three collectively losing $30 billion of market value. For the week, Target was down more than 8%, Walmart more than 5%, and Costco 7.5%.

Back to the $13 billion price tag for Whole Foods, the number seems staggering. But for perspective, remember that Amazon is currently worth half a trillion dollars. Yep, trillion. And the grocery industry is a $630 billion business. At the end of the day, Amazon got one heck of a deal in its move to revolutionize grocery shopping as we know it.

When it comes to Amazon, the company’s gain is the rest of the marketplace’s loss, or so it would seem.

Remember coverage of the “Amazon Effect” and the “Retail Apocalypse?” I do. Commentators and analysts agree that Amazon’s one-stop-online-shop model has redefined how consumers spend money, especially when we look at retail. The effect was felt far and wide, hitting even the biggest retail names, like Walmart and Macy’s. From all appearances, Amazon single-handedly manufactured the move away from traditional shopping and towards e-commerce.

My mantra in explaining the Retail Apocalypse is still true here: The consumer is fine; companies serving the consumer are the ones to take heed.

Right now, Kroger is still a massive and very profitable company. In 2017, the company will still earn over $2 per share. Of the total $630 billion of the grocery industry, Kroger accounts for $120 billion in revenue or almost 20%. (For perspective, Whole Foods comes in at only $16 billion, or about 2.5%). And if you take a look at the last several years, their same-store sales have been growing between 3% and 6%. But this week Kroger announced their second straight quarter of falling sales. That’s why investors are worried.

Remember, there are concerns beyond simply what a company earns and whether it’s profitable. What also matters is the company’s ability to grow profitability. Herein lies the problem that Kroger and other grocery providers face.

Aren’t big name grocers like Kroger and Publix already using technology to provide consumers with grocery delivery?

I’m glad you asked. The answer is yes.

The answer is yes.  Partnerships with service companies like Instacart, Shipt, and Postmates already exist with many grocery chains.  So these companies are already delivering services promised by the Whole-Amazon deal. These on-demand delivery startups are already designed to efficiently bring the store to you, but are currently lesser known and used than Amazon. I think that will change.

Looking at the partners behind the grocers, Instacart is a multi-store delivery company based in California. To date, it’s raised almost $700 million in venture capital to expand its platform. Postmates, also running out of California, is a delivery company with over 20,000 delivery personnel that has raised almost $300 million from venture capitalists to build their business.

Birmingham-based tech startup Shipt just raised another $40 million in June of this year, on top of $20 million from last year. For reference, the company is roughly the same size as Amazon Fresh, and bigger than Google Express (for now). All of these companies allow you to grocery shop online and have the food delivered right to your door.

So, while Amazon may be pushing for change in the way we buy groceries, companies like Shipt are already changing the way we access groceries. Delivery services don’t stop us from buying from grocery stores, they just provide a different avenue of purchasing. If you ask me, this week’s ostensible chant of the “death of Kroger” on Wall Street is exaggerated.

Why is the stock market worried?

Fears seem to stem from the belief that Amazon has a war chest and can afford to cut Whole Foods’ pricing down to a loss. If Amazon uses this strategy and positions Whole Foods as a loss leader in the grocery delivery space, they could eventually dominate the marketplace through attrition. Hence, the downdraft in shares of Kroger, Walmart, and others after the Whole-Amazon announcement. But maybe companies like Instacart, Shipt, and Postmates will step up to battle for their position in the grocery delivery space.

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It seems the prescription for Kroger and other grocery stores is to get on board with their delivery partners by advertising how easy your shopping can be now. They can start by canning the cheesy ads. You know the ones I mean. A perfect family is gathered around a dinner table dressed with a weeknight meal of a roasted turkey and all the fixings. No one is harried. No one is tired. No kids are antsy. I’m not sure how realistic this picture is, and it certainly doesn’t make me want to hit the grocery store.

What these companies need to show in their ads is the real American family. You know, like the lives we live? Where we’re sometimes in the middle of a circus – kids and sports and school and work and life. When the week is too crazy to make six trips to the store. When groceries delivered fresh sounds like a lifesaver. Bottom line – they need to advertise that they can solve our time problem, not just our food problem.

So, yes, traditional grocery stores will survive. The transition to a new way of serving today’s consumers may be pressure-filled. But eventually, they will come up with an answer to the Whole-Amazon elephant in the room. After all, it’s already under their noses.

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2 months ago
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