Amazon’s Whole Foods Acquisition Rocked Traditional Grocers – They Must Fight Back as Industry Shifts Online, Says New L.E.K. Consulting Report

BOSTON, MA (June 7, 2018) – The grocery industry’s battle against the Amazon Effect took a new turn May 17 as Kroger announced its exclusive deal with UK-based online grocery giant Ocado.

But Kroger’s move – which pairs the brick-and-mortar grocer with Ocado, a leader in robotic distribution centers – may not be enough to counter the impact of Amazon’s June 2017 acquisition of Whole Foods.

The Amazon Effect has transformed other industries, but not yet grocery. It will, though, and soon, says global management consulting firm L.E.K. Consulting. An upsurge in online sales will shift major product categories – especially shelf-stable foods – out of brick-and-mortar. But traditional grocers will fight back with fresh, fresh prepared and even frozen offerings – the categories least suited to Amazon-style online supply chains.

The shift will be dramatic. “As of 2017, the $800 billion food and beverage retail sector claimed only about 2 percent of online sales,” says L.E.K. Managing Director Rob Wilson, coauthor of the firm’s new report, “Digital Grocery Lessons From Amazon’s Acquisition of Whole Foods.” “Grocery’s online e-commerce presentation is dwarfed by other consumer sectors.”

“But the gap is closing rapidly. By 2025, online sales will account for as much as 20 percent of the overall food and beverage market,” Wilson says. “That’s a tenfold increase over 2016. And the move to e-commerce will come at the expense of traditional distribution channels.”

Amazon’s 2017 Whole Foods acquisition sent shockwaves

Amazon’s June 16, 2017, acquisition of Whole Foods Market for $13.7 billion sent shockwaves through a grocery sector already struggling with razor-thin margins and cutthroat competition.
“The combination of Amazon’s e-commerce and distribution capabilities with Whole Foods’ physical locations – and the overlap between Amazon Prime members and Whole Foods shoppers – looked like a decisive advantage out of the gate,” says Maria Steingoltz, Managing Director at L.E.K and report coauthor. “Grocery and retail share prices reacted accordingly.”

Not only grocers but also delivery services and meal kit providers felt the heat

Amazon’s Whole Foods acquisition also hit hard at delivery services like Peapod and Instacart, and meal kit providers such as Blue Apron, Plated and Hello Fresh. And it escalated the battle for “last-mile” grocery distribution, with Kroger and Walmart pairing with Uber, and Walmart and Aldi partnering with Instacart. Albertson’s bought Plated. And Walmart, in an ambitious move, acquired Jet.com in 2016 and has partnered with Google to build its own massive e-commerce capability. 

Assembling and distributing grocery items has been a challenge for online sellers – services like Instacart rely on shoppers, which drives up costs, and Amazon’s warehouse-and-distribution system is best suited to shelf-stable packaged foods. The Whole Foods acquisition gives Amazon a brick-and-mortar network for last-mile distribution or customer pickup – Whole Foods stores now feature Amazon Lockers, and Amazon is rolling out one- and two-hour grocery online delivery. Traditional grocers are trying direct countermoves, with both Kroger and Walmart adding large numbers of pickup locations. 

Kroger’s alliance with Ocado represents a different kind of countermove – an attempt to sharply lower the cost of distribution thanks to Ocado’s reliance on robotics. 

Amazon’s advantages include Prime, Alexa and Go

According to the report, Amazon’s ability to integrate Whole Foods with its Prime membership program and its other products brings several advantages. Amazon is marketing aggressively, offering 5 percent cash-back benefits to Prime members for Whole Foods purchases; the Prime membership base gives Amazon an instant channel for promotion and distribution, and a source of rich data on customer preferences and buying habits that can be used to create customized private-label products and “digital shelves.”  Echo and Alexa now accept voice orders for grocery purchases. “The recent launch of the Amazon Go grocery store in Seattle, suggests that checkout-free Whole Foods stores may be a reality in a matter of time,” says Manny Picciola, Managing Director at L.E.K.

Demographic shifts will push industry online, but keep physical channels in play as millennials mix and match

The rise of Millennials will accelerate the shift to online grocery distribution – but the report notes that it’s unclear what channels will dominate. By 2025, Millennials will make up to 75 percent of the US workforce. Millennials are time-pressed and willing to shop in any combination of channels that saves them time and suits their lifestyles. That suggests the future of grocery will be a mix of online delivery, in-store pickup, automatic subscription, and virtual supermarket.

A mix of online distribution channels may mitigate some of the effects of online shopping that grocers fear most – such as the reduced browsing and sampling by online shoppers that threatens to limit the uptake of new products. Traditional grocers will benefit from some features of online shopping, including the real-time feedback of a crowdsourced dynamic shelf, as well as user-generated social media content that helps drive sales. 

 
Implications for brands and consumer packaged goods (CPG) companies

According to the report, traditional consumer packaged goods (CPG) and grocery players might be able to counter Amazon by developing their own combinations of online and brick-and-mortar. The report suggests that traditional competitors should study Amazon’s efforts with Whole Foods to see that they can apply to their own digital grocery efforts. Among the moves they should consider:

  • Optimize the “digital shelf.” Companies and brands will need to develop capabilities to manage their digital assets, showcase their products, stay relevant to consumers, and manage online reviews and feedback.
  • Rethink pricing and packaging architecture. Digital grocery offers the chance for brands to offer different product configurations, like multi-packs and variety packs, specifically created for online shoppers and work around consumer’s price comparison shopping habits.
  • Package for at-home delivery. Emphasizing flexible, low-cost and sustainable, distinctive new packaging can memorably enhance a consumer’s “unboxing” experience and thus advance brand loyalty.
  • Develop a comprehensive digital strategy. CPG companies must strike a balance between what they need from their own websites in terms of selling products and what they need from online retail partners’.

Amazon isn’t new to grocery – the company’s first entry, Amazon Fresh, challenged the company to master last-mile delivery. But Amazon’s embrace of brick-and-mortar has changed the landscape. “In store or online, the world of groceries is going digital,” says Picciola. “It’s time for brands to get on board.”

About L.E.K. Consulting
L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make better decisions, deliver improved business performance, and create greater shareholder returns. The firm advises and supports global companies that are leaders in their industries — including the largest private and public-sector organizations, private equity firms and emerging entrepreneurial businesses. Founded in 1983, L.E.K. employs more than 1,200 professionals across the Americas, Asia-Pacific and Europe. For more information, go to www.lek.com.