Amazon & Whole Foods: The Everything Store for Everyone

The War for Retail

With a 44-per-cent share of the online U.S. retail market in 2017, Amazon’s goal to take over the global retail industry has come closer to fruition. In a landmark $13.7 billion deal in August 2017, the e-commerce giant acquired Whole Foods, the pioneer of the organic foods market. Through this acquisition, Amazon gained an opportunity to expand into brick-and-mortar and grow its online grocery delivery platform. The company has since focused its efforts on integrating Whole Foods into its Prime ecosystem through initiatives like building Amazon Lockers in stores and providing Whole Foods discounts for members with the Amazon Prime Rewards Visa. Many of the tactical changes Whole Foods has made since the acquisition are focused on cross-selling products—integrating the Amazon Prime and Whole Foods customer experience. However, as competitors like Walmart continue to build their own omnichannel capabilities to compete for the retail mass market, it is becoming increasingly vital for Amazon to embrace an active customer acquisition strategy instead. To stay dominant, the company must shift its strategy to target those who are neither within the Amazon Prime nor the Whole Foods network—only then can the strong cross-selling initiatives between the two have a truly significant impact.

Amazon: Retail Giant

Since its conception, Amazon’s goal has been to dominate the retail world. To accomplish this, it has focused on quickly acquiring customers to capture market share—even if this meant sacrificing profits. Through its Prime membership, it has developed a powerful loyalty program that aims to serve a wide range of consumer needs and retain shoppers across its growing product ecosystem. By 2016, Prime members comprised over half of the retailer’s online customer base. With its strong foundation in online retail, Amazon is now looking to fuel its future growth through new channels, as shown by the Whole Foods acquisition. The grocery industry is a particularly attractive new market for Amazon’s loyalty-driven strategy, as grocery shopping is one of the most regular and predictable retail behaviours. This creates a recurring customer touchpoint that gives frequent opportunities to build strong and long-lasting relationships.

However, the current strategy to integrate Whole Foods into Amazon’s umbrella does not reflect Amazon’s overall mission. By implementing initiatives that primarily drive value for existing Whole Foods shoppers and Prime members, Amazon is missing an opportunity to expand its customer base. To truly achieve CEO Jeff Bezos’ vision of becoming the world’s “everything store,” Amazon should look to create value for customers outside of its existing ecosystem.

Rising Competitive Pressure

Although Amazon has traditionally led the online retail industry with low prices and high customer volume, it is facing increasing competitive pressure from traditional brick-and-mortar stores moving into the online space. Walmart is aggressively challenging Amazon’s leadership position in retail by slashing prices and investing in e-commerce infrastructure. The company has recently cut its prices to compete with Amazon, matching its online price on 67 per cent of grocery products. While Amazon is still the industry price leader, Walmart is clearly focusing on grocery as a key area in which it can close the gap. Currently, Walmart leads the food and beverages industry with 17-per-cent market share, while Whole Foods holds only 1.7 per cent, and Amazon a mere 0.8 per cent.

In addition to competing with Amazon on price, Walmart is encroaching on its hold of the e-commerce industry. The brick-and-mortar giant currently offers free two-day delivery of qualified items. Furthermore, it is expanding its grocery pickup and delivery services to better match Amazon’s offerings. In 2,100 stores across the U.S., shoppers can place Walmart orders online and pick them up without ever leaving their car. Walmart is further expanding its delivery capabilities by partnering with Instacart to give consumers access to inexpensive groceries without paying membership fees.

Walmart is not just threatening Amazon’s hold over the industry, but also Whole Foods’ ability to compete in the evolving grocery space. Whole Foods was a pioneer of the retail organic foods market, selling products that were expensive but claimed to be healthier and more natural. However, organic food has become more accessible with increased competition driving down prices. Mass grocery retailers like Walmart are now able to sell organic foods inexpensively given a leaner cost structure and benefits from economies of scale. This introduces a significant threat to Whole Foods by replicating its core value proposition at lower cost. In 2016, despite the industry growing by 16 per cent, Whole Foods’ share of the market fell by 31 per cent.

With such fierce competition, Amazon cannot afford to simply extract more value from its current customers. Instead, the company must find new ways to grow its customer base if it hopes to lead both the online and brick-and-mortar retail industry.

Recommendation

To succeed in attracting new customers, Amazon should launch a two-phase action plan: sell private label products in Whole Foods to reduce its cost structure and develop a mobile recipe-sharing platform to drive omnichannel acquisition. With these initiatives, Amazon can fulfill its customer acquisition gap in the grocery market and aggressively grow to overcome mounting competitive threats.

Whole Foods Graphic 2 - Key Figures

An Amazon of Private Label Products

Whole Foods must become more accessible to the middle class if it hopes to encourage customers to switch from competitors like Walmart. At the expense of Whole Foods’ profit margins, on its first day of ownership, Amazon slashed Whole Foods’ prices by as much as 43 per cent to drive customer acquisition. The strategy was effective in increasing same-store traffic by 25 per cent that week, demonstrating that reducing prices has an immediate and meaningful effect on converting new customers from its mass market competitors. Nearly 25 per cent of these new customers came from Walmart, 16 per cent came from Kroger, and 15 per cent came from Costco. While Whole Foods’ price cut was a step in the right direction, its products are still priced significantly above Walmart’s price point. This move will ultimately be unsustainable because the underlying cost structure has not changed.

To make its lower prices more sustainable, Whole Foods should reduce its cost structure by exclusively selling Whole Foods-branded products in-store. These products will carry a strong brand association while being less expensive to produce. Unlike most grocery stores who rely on top-selling branded products like Tropicana orange juice to draw customers, it is Whole Foods’ brand, rather than the brands of products it carries, that draws customers to stores. Because of the strength of its existing reputation, anything under the Whole Foods umbrella will be immediately associated with and positioned as premium, natural, organic, and healthy.

Whole Foods private label products will yield higher margins as Amazon will deal directly with suppliers, forgoing any markups paid to intermediary brands and distributors. Already, much of Whole Foods’ fresh food is private label. Its produce, prepared food, and fresh pressed juices currently all operate under the Whole Foods name. Therefore, to transform its store to carry entirely private label products, it must proceed to brand items with longer shelf lives, like pasta sauce or cereal. Because Whole Foods already operates a private label for most fresh food, only items with longer shelf-lives will require a new distribution system. As such, the implementation of the proposed strategy is made easier because Whole Foods will not require a cold chain.

Amazon also has a unique advantage in developing private label products, due to the large pool of data it collects through its online retail channel. It can use customer response data to determine which product and features are most well-received, and curate goods accordingly under its own brands. Amazon has significant expertise in this space, which extends to food items. For instance, its private label baby food has been praised for its taste, which would have been difficult to develop without a deep understanding of the product acquired through aggregate data analysis.

Reducing its cost structure by exclusively selling private label goods will enable Whole Foods to sustainably keep prices low. The strategy will drive sales volume without sacrificing existing margins, appealing to grocery shoppers’ primary concern: high-quality food at affordable prices. However, although keeping prices low and building private brand equity will reduce the barriers for customers to switch, grocery shopping is habitual and consumers may be reluctant to change their behaviours without a significant catalyst. Therefore, Amazon should also look to create this incentive by building its omnichannel capabilities to provide a more integrated service offering to attract new customers.

Whole Foods Graphic 3 -New Customer Acquisition Pie Chart

Omnichannel: Convenience and integration

An omnichannel strategy that provides a seamless shopping experience across e-commerce and brick-and-mortar, if well-executed, could be highly effective in driving customer growth. This approach increases shopping accessibility by meeting customers on all channels and providing an integrated customer experience. A study conducted of 46,000 customers has found that over 73 per cent of Americans prefer to engage in a combination of brick-and-mortar and digital shopping. Omnichannel shoppers are also more profitable, as they tend to spend four per cent more in store and 10 per cent more online compared to traditional shoppers. Finally, omnichannel shoppers log 23 per cent more repeat shopping trips to stores and are more likely to recommend the experience to others.

Although Amazon has been effectively using omnichannel strategies to cross-sell Whole Foods and Prime customers, there is a significant opportunity to employ an omnichannel approach for customer acquisition as well. 77 per cent of consumers are estimated to use digital touchpoints like online recipes and blogs to drive brand awareness and find inspiration for their grocery shopping. These shoppers highly value convenience, curation, and integration in their grocery experience. Amazon must employ methods that provide these qualities to break habitual buying patterns.

For example, Whole Foods can create and curate an online platform for recipe-sharing, where customers can build recipes using Whole Foods products. These recipes can be made available through a mobile application that encourages shoppers to purchase ingredients at their closest Whole Foods. At the store, the application will help shoppers navigate through the store’s layout to pick up their ingredients, creating a frictionless and digitally integrated in-store experience. Amazon has already demonstrated its digital integration capabilities, as seen through its ongoing development of technological applications in Amazon Go stores. Customers who use the recipe-sharing service will then be offered a bundling discount on their order, which is made financially feasible by Whole Foods’ store-wide conversion to private label brands.

This initiative makes the shopping experience actively engaging and will break consumers out of their existing grocery routines. Store credit can be awarded for posting popular recipes on the platform, establishing a sustainable community-driven content creation mechanism that produces recipes at a faster pace than Whole Foods’ current digital recipe book.

Recipe visits and purchase logs will be recorded for each customer profile, which Amazon can subsequently use to provide rich, personalized recommendations. This allows Amazon, with its strong loyalty program and data analytics capabilities, to create a point of differentiation for the Whole Foods shopping experience that makes it difficult for other competitors to effectively imitate. It can also enable Amazon’s existing omnichannel infrastructure to create Prime membership conversions. For instance, Amazon can offer to deliver ingredient bundles directly, thus providing a further opportunity to add physical grocery shoppers to its online ecosystem. From a logistics perspective, aggregate data collected on recipe popularity by location can also allow Amazon to successfully project and manage inventory needs, reducing operational challenges and stocking issues.

By shifting its focus to initiatives like the recipe-sharing program that aim to provide convenience, curation, and integration, Amazon can bolster its omnichannel strategy to better serve a customer acquisition role.

Whole Foods Graphic 4 - Omnichannel Strategy

Amazon on the Go

Amazon must broaden its customer base and then integrate those customers across its ecosystem. By becoming more financially accessible, Whole Foods will be able to attract new customers through reaching out with its omnichannel strategy. With the war for retail becoming more intense than ever, competitors such as Walmart are no longer treating e-commerce and brick-and-mortar as mutually exclusive channels. Amazon has the opportunity to use Whole Foods to spread its roots in the brick-and-mortar grocery world, bringing more customers into its ecosystem and expanding its influence over the collective retail market.


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