Case Study: Grocery Wars

On June 16, 2017 Amazon announced that it was purchasing the upscale food
market chain Whole Foods for $13.7 billion. The acquisition, completed in
August of that year, was Amazon’s largest, and sent shock waves throughout
the grocery industry. The purchase has profound im-plications for the future
of groceries, the entire food industry, and perhaps the future of shopping
itself.
Even before acquiring Whole Foods, Amazon had been expanding into
groceries and physical locations, including bookstores, two Seattle drive-
through grocery stores where customers can pick up online orders, and a
convenience store called Amazon Go that uses sensors and software to let
shoppers pay for purchases without waiting in line to check out. Amazon has
also acquired experience with online grocery salesthrough its Amazon Fresh
program. However, Amazon hadn’t quite achieved the success with online
groceries as it had with books and media. Whole Foods gives Amazon new
ways to enhance its online business while establishing a presence in physical
retail outlets.
The grocery business is notoriously competitive and low-margin, with profits
of 1–2 cents on the dollar. Although Amazon is skilled at competing on low
price, why take on this challenge? From Amazon’s stand- point, there are
several reasons why Whole Foods might turn out to be a very good
investment. Groceries are an important purchase category, representing $800
billion in U.S. sales. A recent report by the Food Marketing Institute found
that U.S. grocery sales could grow fivefold over the next decade. Purchasing
Whole Foods helps Amazon become a major player in the grocery industry.
Whole Foods takes Amazon’s physical presence to a new level, with more
than 460 stores in the United States, Canada, and Britain and sales of $16
billion in fiscal 2017. It will be within an hour or 30 minutes of as many
people as possible.
Amazon could use its $119-a-year Prime member- ship service, which gives
customers free, two-day shipping and other benefits, to offer Whole Foods
customers a better price on groceries, as it does for books in its bookstores.
The stores could also serve as an advertisement to get more customers to sign
upfor Prime. As of September 2017, Prime had 49 mil- lion subscribers in the
United States, representing about 44 percent of households. Amazon is a
master at providing what’s known as “consumer convenience.” E-commerce
is soaring and food-delivery businesses are taking off because peopleare too
busy or otherwise occupied to leave their homes to go out and shop.
Americans are ordering more of their groceries and meals online. A study
com-missioned by the market-research firm Euromonitor projects that the
online market is projected to grow 15 times faster than the rest of the
restaurant business through the end of the decade. Amazon can continue to
sell groceries online but it can also provide the customer experience of
shopping for food in person.
Whole Foods can also be used as a delivery net- work for Amazon’s other
nongrocery products. Amazon has been trying to open warehouses closerto
customers so it can deliver orders in as little as two hours, and Whole Foods
stores will bring Amazon physically closer to its shoppers. The storescould
become locations for returning online orders of all kinds. Amazon could also
use them to cut delivery times for online orders.
Several analysts have observed that Whole Foods’ urban and suburban
locations are so valuable for Amazon’s delivery business that the deal could
be worthwhile even if Whole Foods pretty much stopped selling food. When
Amazon bought Whole Foods, it acquired 431 U.S. upper-income, prime-
location distribution points for everything it does. With Whole Foods’
footprint in affluent areas and Amazon’s expertise in supply chain and
delivery, itcould upend both food retailing and food delivery.
One expert has called Amazon a “life bundle,” particularly for affluent
Americans. Amazon Prime couldbecome the cable bundle of the future—an
annual subscription to a group of diverse services that give Amazon a
dependable revenue stream and a growing, loyal customer base. More than
half of American households with incomes over $100,000 are already Prime
subscribers, and they spend more than $1,000 a year using this service.
Affluent families regularly spend $500 a month at Whole Foods. Once
Amazon owns Whole Foods, its richest customers could be expected to spend
thousands of dollars a year through Amazon. As Whole Foods customers are
urged to sign up for Amazon Prime—and as Prime customers get enticing
deals at Whole Foods—Amazon’s penetration of the upscale market should
grow, even as it offersdiscounts to lower-income Americans.
Amazon started making changes to Whole Foods as soon as the acquisition
was completed in August 2017. The day the acquisition went through, prices
of many Whole Foods staples dropped. Prices of some items decreased by up
to 40 percent. An identi cal basket of items from a Whole Foods location in
Brooklyn went from $97.76 pre-acquisition to $75.85 post-acquisition. In
November 2017, Whole Foods announced another round of price cuts, with a
focus on holiday staples and best-sellers as well as Whole Foods’ private-
label 365 line of products.
In February 2018, Amazon and Whole Foods launched a test to deliver
groceries and other goods directly from Whole Foods in four cities across the
United States. Whole Foods was basically used as anAmazon depot.
Customers can order fresh produce, seafood, meat, flowers, baked goods, and
dairy products for delivery, with items arriving at their door- step within two
hours. The company plans to roll out the service through Prime Now to more
cities. Later in February, Amazon extended its 5 percent cash-back benefit to
Prime
members shopping at Whole Foods with the Amazon Prime Rewards Visa
Card. Selected Whole Foods stores have begun selling Amazon technology
products, including the Amazon Echo voice-controlled speaker system, Echo
Dots, Fire TV, Kindle e-readers, and Fire tablets.
Whole Foods announced that Amazon Prime would replace Whole Foods’
loyalty program. And Whole Foods goods are now available on Amazon.
com, Amazon Fresh (Amazon’s grocery delivery ser- vice), Prime Pantry, and
Prime Now. Some Whole Foods stores have added Amazon Lockers,
allowing customers to have their Amazon.com orders delivered to a secure
location inside certain Whole Foodsstores until it’s time to pick them up.
Customers canalso use lockers to return Amazon items. Amazon and Whole
Foods are integrating their point-of-sale systems to enable more of Amazon’s
brands to be available at Whole Foods, and vice versa.
Buying Whole Foods represents an escalation of Amazon’s long-running
battle with Walmart. Walmartis the world’s largest and most successful
physical retailer, while Amazon dominates the online commerce space. Each
wants to move into the other’s turf: Amazon would like to have a more
formidable physical presence as well as online, while Walmart ismaking a big
push to expand in e-commerce.
Walmart is the largest seller of groceries in the United States, and with Sam’s
Club, accounts for about 18 percent of the grocery market. Grocery ac- counts
for 56 percent of Walmart’s total sales, and grocery shopping is a major
driver of store traffic andcustomer loyalty. The company is intent on
maintaining its position as the leading U.S. grocer. Walmarthas invested and
tested in click- and-collect programs, stand-alone grocery pick-up sites, and
scanning and paying for items with smartphones. Grocery is where Walmart
really shines. If Walmart loses the grocery battle to Amazon, it has no chance
of ever overtakingAmazon as the world’s largest e-commerce player.
Online grocery sales were a key part of Walmart’s e-commerce sales growth
in 2017, and management expects online grocery expansion to be the main
driver of Walmart’s sales growth going forward. But if Walmart wants to
meet their goal of 40 percent growth in online sales in 2018, it will have to do
even more. Management rolled out same-day grocery delivery to 100 markets
by the end of 2018, covering 40 percent of U.S. households. Deliveries are
handled by Uber Technologies and other providers, with a $9.95 servicefee
for a minimum
$30 purchase. Walmart’s online order and pickup service was available at
2,000 storesby the end of 2018. Management is hoping growth willcontinue
to increase year over year with rollout of new stores into the online order and
pickup program.
The move into home delivery will help get more of Walmart’s in-store
shoppers to start buying online as well, where they typically spend twice as
much. Italso complements Walmart’s rollout of curbside grocery pickup, now
available in 1,200 stores and addingan additional 1,000 this year.
Walmart will compete against Amazon’s Prime Now service, which offers
free two-hour delivery to members of its loyalty program. Both
companieshave also introduced services that allow delivery people to enter
homes and leave packages inside.
How will the rest of the grocery industry fare as a result of these
developments? Amazon terrifies competitors because it can offer such low
prices on so many different categories of items. If Whole Foods follows this
playbook, shoppers can expect prices to fall, and other grocery industry players
will suffer. Stocks for Kroger, Costco, and Dollar General all fell more than
six percent when Amazon announced the Whole Foodsacquisition. The
merger might be even worse news for Instacart, the grocery-delivery service
that has had a close relationship with Whole Foods.
There are other forces at work affecting Amazon-Whole Foods, Walmart, and
the grocery industry’s competitive landscape. Money spent ondining out has
surpassed grocery sales. Instead of shopping weekly at the supermarket for
groceries to prepare meals at home, consumers are increasingly snacking
and using prepared foods. Companies in the $1.5 billion meal kit industry
(such as Blue Apron) have moved into the market,though grocery chains
are creating their own pre- packaged food kits as well.
Grocers are also adapting to surging consumer de- mand for fresher items,
personalized options, and use of technology to improve the food-buying
experience.Deloitte researchers found an overwhelming majorityof shoppers
are deploying digital devices to research the groceries they intend to buy.
Deloitte also found that shoppers spend more when using digital tools.
Despite the growth of online food shopping and these other shifts in the
competitive landscape, experts believe the market for supermarkets is
strong.According to brokerage and advisory firm Marcus & Millichap, there
will be a wave of grocery store openinga consuming 25 million square feet of
commercial space over the next five years. Domestic chains and German
discount supermarkets Aldi and Lidl are opening U.S. locations and smaller-
format stores arelikely to be part of the mix.

CASE STUDY QUESTIONS

1- Analyze Amazon.com and Walmart using the value chain and
competitive forces models.
2- Compare the role of grocery sales in Amazon and Walmart’s
business strategies.
3- What role does information technology play inthese strategies?
4- Which company is more likely to dominate grocery retailing?
Explain your answer.