Amazon isn’t wasting time wading in to the food industry – and speed of execution and ease of delivery are at the heart of its business model.
As soon as United States regulators approved its acquisition of Whole Foods last week, Amazon announced it would aggressively reduce the price of several organic staples in all 431 Whole Foods stores in America and 13 in Canada. Amazon’s playbook is about low margins and high-volume sales, for anything, including organics.
Whole Foods was in free fall before its acquisition. Store traffic was shrinking and sales were sluggish. The company was having difficultly convincing shareholders that organic food sales are immune to economic cycles and have a bright future. In fact, Whole Foods reinforced the notion that organics were, for the most part, for the elite. Organic groceries can cost consumers almost twice as much as conventional food.
At the same time, margins for grocers can be five times what they are for mainstream food products.
Amazon obviously knows all this and intends to make organics more affordable and more democratic. It also expects to be an agent of change in the grocery business. It has put its competitors on notice. Slumping stock prices for main U.S. grocery chains show Amazon has the market’s attention.
This isn’t the first time a giant retailer has tried to make its mark in organics. Walmart, with its muscular logistics, has made organics more affordable over the last decade, with mixed results. When it committed to organics, Walmart wanted to offer well over 140 different products but failed miserably. It soon found out that the realities of organic farming make accessibility more challenging. Over the years, it adjusted expectations by offering fewer but cheaper products.
Now Walmart is the largest organic food retailer in America.
Amazon, however, has Whole Foods, a mecca of organic food retailing. That gives it a huge advantage over Walmart. By acquiring Whole Foods, Amazon gained access to a well-established system of organic farms and wholesalers.
And Amazon can execute its strategy almost instantly.
But it remains unclear how all this will affect the Canadian organic market. Unlike in the U.S., food prices in Canada have started to rise in recent months, giving grocers some well-needed breathing room. Organics prices could rise in Canada due to Amazon’s willingness to make the products more appealing to American consumers. With higher demand to the south, procurement could become more challenging for Canadian grocers, even if our currency remains strong against the U.S. dollar. But ultimately, as Amazon increases its footprint in Canada, this may all change.
The American food distribution landscape is much different these days. With German-based Lidl and Aldi also expanding in the U.S., Americans may enjoy a continued food price war. With the exception of July, U.S. food prices have dropped 18 months in a row, the longest stretch since the 1950s. Pricing has a very direct short-term impact on profitability. The survivors are the ones that can absorb shocks.
Since Amazon has never played the high-profit, high-dividend game, this is a non-issue for the company. But with organics, the Amazon-Whole Foods story will only make matters worse for competitors like Kroger and Cie. Convenience, for organics, is the primary factor. Price is less of an issue. And online selling will give Amazon leverage in the marketplace. Amazon’s distribution advantage makes the online giant almost immune to the procurement challenges that are typical with organics.
Amazon’s next move could be with meal kits. For years, grocers have treated food service as an afterthought. But since the online food service market is likely to increase 15 times faster than the traditional restaurant business by 2027, some are starting the move. In Canada, Metro’s brilliant move to purchase food delivery service MissFresh this summer is evidence that grocers are starting to slowly see the potential. Amazon is clearly not as patient.
Meal-kit provider Blue Apron just announced it’s reducing its sales force to better calibrate sales with capacity. Several startups have done well but no one has yet proven that the meal-kit business can be sustained. Many spend an outrageous amount on marketing and have very high product prices.
Amazon can clarify and dominate the meal-kit sector with its massive data-driven sales and distribution schemes.
Amazon is essentially about merchandizing convenience for all. Organics and meal kits fit that formula. For years, Walmart mastered the concept of simplicity in a big box store. Amazon similarly bets on mankind’s indolent nature. It’s a winning formula.
Dr. Sylvain Charlebois is senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.