Can Amazon Succeed in Grocery?

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By Timothy Green

E-commerce giant Amazon.com (NASDAQ:AMZN) has only dabbled with physical stores. A handful of bookstores and its Amazon Go cashier-less convenience-store concept are the extent of the company’s physical retail presence. The $13.7 billion acquisition of Whole Foods (NASDAQ:WFM), expected to close during the second half of the year, will plunge Amazon into the world of brick-and-mortar grocery.

The U.S. grocery industry accounts for around $800 billion of spending each year, with the average consumer spending about 5.5 percent of their disposable personal income on food consumed at home. Amazon already ships nonperishable grocery items via its website, but success with fresh foods like meat and produce has eluded it so far. Amazon Fresh, its fledgling grocery delivery service, has failed to truly take off.

According to Bloomberg, Amazon plans to cut prices at Whole Foods in order to get rid of its “Whole Paycheck” reputation. Job cuts, inventory changes, and automation are reportedly on the table.

However, margins in the grocery business are razor-thin and the industry is ultra-competitive. Kroger (NYSE:KR), the second largest grocery chain behind Wal-Mart (NYSE:WMT), managed an operating margin of just 3 percent in 2016. And that was a good year. The company’s operating margin has been as low as 1.4 percent in the past decade.

Amazon enters the industry at a time when competition is more intense than it has been in quite some time. Walmart and other discounters have been aggressively slashing prices to win share, creating food price deflation typically not seen outside of recessions. Kroger issued a profit warning earlier this month, cutting its guidance for 2017 due to falling food prices. Aldi and Lidl, two German chains known for low prices, are also planning major expansions in the U.S.

Amazon will undoubtedly aim to use technology to lower costs at Whole Foods, and it will likely use the stores to launch grocery delivery and pickup services. But grocery is not an industry that has been asleep at the wheel. Walmart has been pushing its own online grocery service for years, now offering free curbside pickup at 700 locations, with plans to reach 1,000 locations by the end of the year. Kroger also offers online grocery ordering and pickup at hundreds of locations.

Can Amazon succeed in grocery, turning Whole Foods into a mainstream supermarket that can compete on price? Sure. The company has been willing to lose money in order to grow in the past, and it has the capability to be extremely aggressive.

But those who believe that Amazon will simply roll over rivals and become a grocery leader in short order are overly optimistic. Amazon first needs to figure out how to run stores, then it needs to figure out how to undercut brutally efficient rivals. Those rivals won’t be sitting on their hands, likely matching Amazon blow for blow.

This is all great for consumers. Whether it’s great for Amazon investors is another matter.

Disclosure: John Mackey,  CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. Timothy Green owns shares of Best Buy. The Motley Fool owns shares of and recommends Amazon and Whole Foods Market. The Motley Fool has a disclosure policy.

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Featured Image Credit: By Jim – https://www.flickr.com/photos/alphageek/121953651, CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=1103173

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Drew Limsky

Drew Limsky



Drew Limsky joined Lifestyle Media Group in August 2020 as Editor-in-Chief of South Florida Business & Wealth. His first issue of SFBW, October 2020, heralded a reimagined structure, with new content categories and a slew of fresh visual themes. “As sort of a cross between Forbes and Robb Report, with a dash of GQ and Vogue,” Limsky says, “SFBW reflects South Florida’s increasingly sophisticated and dynamic business and cultural landscape.”

Limsky, an avid traveler, swimmer and film buff who holds a law degree and Ph.D. from New York University, likes to say, “I’m a doctor, but I can’t operate—except on your brand.” He wrote his dissertation on the nonfiction work of Joan Didion. Prior to that, Limsky received his B.A. in English, summa cum laude, from Emory University and earned his M.A. in literature at American University in connection with a Masters Scholar Award fellowship.

Limsky came to SFBW at the apex of a storied career in journalism and publishing that includes six previous lead editorial roles, including for some of the world’s best-known brands. He served as global editor-in-chief of Lexus magazine, founding editor-in-chief of custom lifestyle magazines for Cadillac and Holland America Line, and was the founding editor-in-chief of Modern Luxury Interiors South Florida. He also was the executive editor for B2B magazines for Acura and Honda Financial Services, and he served as travel editor for Conde Nast. Magazines under Limsky’s editorship have garnered more than 75 industry awards.

He has also written for many of the country’s top newspapers and magazines, including The New York Times, Washington Post, Los Angeles Times, Miami Herald, Boston Globe, USA Today, Worth, Robb Report, Afar, Time Out New York, National Geographic Traveler, Men’s Journal, Ritz-Carlton, Elite Traveler, Florida Design, Metropolis and Architectural Digest Mexico. His other clients have included Four Seasons, Acqualina Resort & Residences, Yahoo!, American Airlines, Wynn, Douglas Elliman and Corcoran. As an adjunct assistant professor, Limsky has taught journalism, film and creative writing at the City University of New York, Pace University, American University and other colleges.