Grocery Wars

Case Study
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
implications 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 sales through 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 standpoint, 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 membership 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 up for Prime. As of September 2017, Prime had 49 million 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 people are 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 commissioned 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 network for Amazon’s other non-grocery products.
Amazon has been trying to open warehouses closer to 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 stores could 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, it could upend
both food retailing and food delivery.
One expert has called Amazon a “life bundle,” particularly for affluent Americans. Amazon
Prime could become 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
offers discounts 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 identical 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 an Amazon depot. Customers can order fresh produce, seafood, meat, flowers,
baked goods, and dairy products for delivery, with items arriving at their doorstep 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, AmazonFresh (Amazon’s grocery
delivery service), 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 Foods stores until it’s time to pick them up. Customers can also 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.
Walmart is 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 is making 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 accounts for 56 percent of Walmart’s total
sales, and grocery shopping is a major driver of store traffic and customer loyalty. The company
is intent on maintaining its position as the leading U.S. grocer. Walmart has 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 overtaking Amazon 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 service fee for a minimum $30 purchase.
Walmart’s online order and pickup service was available at 2,000 stores by the end of 2018.
Management is hoping growth will continue 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. It also complements Walmart’s rollout
of curbside grocery pickup, now available in 1,200 stores and adding an 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 companies have 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 Foods acquisition. 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 on dining 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 demand for fresher items, personalized options,
and use of technology to improve the food-buying experience. Deloitte researchers found an
overwhelming majority of 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 openings 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 are
likely to be part of the mix.
Sources: Kate Taylor, “Here Are the Changes Amazon Is Making to Whole Foods,” Business
Insider, March 2, 2018; Adam Levy, “Walmart’s Grocery Efforts Probably Aren’t Enough to
Overcome Amazon,” The Motley Fool, March 17, 2018; Matthew Boyle, “Walmart to Expand
Grocery Delivery as Amazon Battle Rages,” Bloomberg, March 14, 2018; John Cook, “Walmart
Counterpunches Amazon with Plan to Expand Grocery Delivery Service to 100 U.S. Markets,”
GeekWire, March 14, 2018; Toby Clarence-Smith, “Amazon vs. Walmart: Bezos Goes for the
Jugular with Whole Foods Acquisition,” www.Toptal.com, accessed March 21, 2018; Tom
McGee,” Perspective for the Grocery Wars: Shoppers Crave Experience,” Forbes, September 13,
2017; Derek Thompson, “Why Amazon Bought Whole Foods,” The Atlantic, June 16, 2017; and
Nick Wingfield and Michael J. de la Merced, “Amazon to Buy Whole Foods for $13.4 Billion,”
New York Times, June 16, 2017.
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 in these strategies?
4. Which company is more likely to dominate grocery retailing? Explain your answer.