Amazon Rocks Food Retail: Four things the industry needs to do
Amazon’s acquisition of Whole Foods Market is sending shock waves through the world of grocery retail. This striking move introduces more disruption into the grocery wars. As the c-suites form their war rooms and build their responses, the industry faces an array of significant challenges.
1. Food retailers must think bigger and faster
The acquisition of Whole Foods invigorates and improves the credibility of Amazon’s grocery and fresh offerings. Combining Whole Food’s brand trust and food expertise with Amazon’s financial resources and relentless focus on customer experience creates a substantial threat to traditional grocers. Whole Foods’ store footprint also gives Amazon a new platform to integrate in-store and online sales.
The urgency level just went way up for grocers. Food retailers will need to move quickly to reevaluate their strategies, determine what needs to change in their priorities and focus, and ensure that they are building organizations and operating models that can move at the speed of digital.
2. The middle ground is uncomfortable
Amazon’s move magnifies the challenge of surviving in the middle. One battle is occurring online, with Amazon leading the way to create a digital shopping experience that provides both choice and operational excellence, particularly for premium customers. The other battle is in brick-and-mortar stores, where hard discounters such as Lidl and Aldi are entering or accelerating expansion in the U.S. market, poised to capture more of the low-income shopper wallet.
For most traditional food retailers, attempting to go head to head with Amazon is not an option, given the capital and scale at which Amazon operates. Competing with Aldi and Lidl may also be unrealistic without matching their operational leanness and asset structure.
Traditional grocers will need to accelerate their efforts to create a shopping experience that integrates the physical and digital worlds, deepen relationships with their customers, and dramatically step up efforts to reduce costs to enable investments in pricing, digital offerings, and in-store experiences.
3. M&A strategy should be broadened
Amazon’s purchase is likely to trigger a domino effect of consolidations. The U.S. grocery industry has already been consolidating in recent years. (Think Ahold and Delhaize, Albertsons and Safeway, Kroger and Harris Teeter.) A.T. Kearney’s 2017 Consumer and Retail M&A study, Off to New Peaks in Uncertain Times https://www.atkearney.com/consumer-products-retail/cirp-ma-executive-report reveals that most executives believe acquisitions will accelerate beyond the 2016 post-recession peak. Format innovators such as Sprouts, Fresh Market, and Fresh Thyme will remain interesting consolidation targets, but grocers will need to look beyond conventional targets to consider innovative players with digital, e-commerce and logistics capabilities. M&A strategies should be retooled to ensure a broad lens that considers firms that enable deeper engagement and loyalty from existing customers through improved in-store and online shopping experiences.
4. New partners are needed to win this fight
Grocery retailers will need to think more broadly and urgently about the ecosystem of partners needed to win both in-store and online. Because of capital constraints, most grocers will not be able to buy all required capabilities. They will need to find the right mix of partners across multiple areas, including digital shopper engagement, digitally augmented store and supply chain operations, e-commerce fulfillment (such as Instacart and Shipt), and both local and international food producers and farms. Reinvigorated partnership strategies will be vital for traditional players to remain competitive — and even differentiate — from both an experience and offering standpoint.
Food retail was already at a fever pitch in the U.S., but Amazon’s acquisition of Whole Foods turns up the heat. Conventional players need to act quickly to shore up their positions and accelerate efforts to differentiate and grow in a world that just got even more perilous.
Randy Burt is a partner in the consumer and retail practice of A.T. Kearney, a global strategy and management consulting firm, and an expert in food retail, merchandising and supply chain. He can be reached at [email protected].