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The Amazon Approach to Groceries Won't End Stores

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By Megan McArdle, Bloomberg View
Tuesday, 20 Jun 2017 12:56 PM Current | Bio | Archive

For a certain kind of urban professional, Amazon and Whole Foods are brands that define the consumption of staple goods: the weekly trip to pick up cheese, produce, maybe some pasture-raised organic beef; and the nice UPS man dropping off everything else, from toilet paper to truffle oil. On Friday, those folks learned that they are facing a future of truly one-stop shopping: Amazon.com Inc. plans to acquire Whole Foods Market Inc. for $13.7 billion.

But what about the rest of America? Well, if you happen to work for rival grocery chains, the news is not good. Competitors from Costco to Kroger to Dollar General saw significant chunks knocked off their market capitalization. Other casualties may include Walmart, the $15-an-hour minimum wage (Amazon is aggressively experimenting with cashierless stores), and the rather unique corporate culture that drives Whole Foods.

Some of these predictions are more likely than others. Cashierless grocery stores may well be on the horizon, but -- thanks to trends like, er, $15-an-hour minimum wages -- they were probably going to come whether or not CEO Jeff Bezos decided to buy Whole Foods.

Some of the stores that took big hits on Friday make sense, but others seem like overreactions; the Dollar General customer is, in general, a very, very different kind of person than the folks who regularly shop at Whole Foods, or for that matter, at Amazon.

And while corporate culture is always an issue in any merger, and Amazon’s competitive pressure-cooker style certainly seems like a poor fit for the cooperative, egalitarian climate that Whole Foods has cultivated, it’s worth noting that in at least two acquisitions -- Zappos and the Washington Post -- Bezos seems to have adopted a “let you be you” policy, rather than attempting to turn them into little copies of the mother ship.

But what about the biggest fear of all: that this will turbo-charge Amazon’s rapacious conquest of retail markets, putting Main Street out of business, and forcing the rest of us to rent air from Bezos? I can certainly see why that worries people. But before we start wailing about Amazon’s imperialist retail ambitions, there’s something we should remember about this acquisition: it might not do Amazon all that much good.

Oh, I’m familiar with all the reasons people think this is a smart deal. Amazon, like Sears before it, has been looking to turn a mail-order business into bricks and mortar, and Whole Foods brings the company hundreds of prime locations in affluent areas, along with considerable expertise in grocery operations. Despite the dismal revenue numbers Whole Foods has recently been posting, that expertise is insanely valuable, because groceries are one of the hardest businesses to do well in. Margins are razor-thin, which means that they can easily go from black to red thanks to shrinkage (theft) and spoilage (about what it sounds like).

A few years back, I interviewed an executive at an online grocery retailer. When I asked how concerned they were about competition from Amazon, the answer was “not very”; it’s just too darn hard to make money in the business, so without a lot of long-honed skills at things like inventory management, companies are apt to lose money.

Whole Foods has that expertise, and as Amazon tries to push deeper into the grocery market, it will no doubt make use of it. At the same time, it’s worth noting the reason that Amazon is able to buy Whole Foods in the first place: its facing a lot of tough competition that makes it hard to grow profits.

Whole Foods became a behemoth by giving shoppers a mass-upscale, mass-organic option they hadn’t had before. For a long time, that was a recipe for strong sales and a rising stock price. Unfortunately the revolution that the firm spawned in the grocery market is now eating its own children.

Grocery is a commodity business with few barriers to keep competitors from copying what you do, and maybe even improving on it. Whole Foods now faces pressure on its core business from four places: pure organic competitors, limited-format stores like Trader Joe’s, delivery services like Peapod and Fresh Direct (and, to some extent, Amazon itself), and ordinary supermarkets that have beefed up their offerings of organic produce and exotic cheese. Most supermarket operators could say the same thing: no matter who you are, you’ve got more competition for your customers than you did 20 years ago, when grocers tended to compete more on things like “proximity” than on their fabulous selection of French wine.

Nor can Amazon simply overcome these challenges with the same core competencies that have allowed it to disrupt market after market. Grocery really is fundamentally different from other retail: the food has to be warehoused close to the consumer, who is not going to wait three days for a gallon of milk. Meanwhile, you can’t necessarily wring the kinds of efficiencies out of grocery pickers that Amazon has out of the staff in its warehouses, because if you grab and box groceries too fast, the customer is apt to end up with a delivery full of bruised apples, smashed raspberries, and tortilla chip dust  For the same reason, those boxes have to be delivered with much greater care (and refrigeration) than your typical Amazon package.

If you want to see just how hard this business is, look at Amazon Fresh, which began beta-testing in 2007, and is still available in only a handful of cities. Amazon simply hasn’t been able to disrupt the grocery market as quickly and efficiently as it has battered so many other sectors.

That’s not to say that Amazon won’t wring operational efficiencies out of Whole Foods, nor that the Whole Foods acquisition won’t help Amazon beef up its fledgling delivery service or its prototype for a store without checkout lanes. But even as we say that, we should note that paying someone else to grab your groceries is probably a fundamentally limited market niche, not the inevitable future to which all Americans can look forward.

It makes great sense in dense affluent areas, where there are a whole lot of houses within reasonable distance of your warehouse, and where those houses are filled with people who may not have cars, but do have incomes that allow them to pay a substantial premium for convenience. That describes a lot of neighborhoods in the U.S., many of which have a Whole Foods or two nearby. But it doesn’t describe anything like a majority of neighborhoods. In the rest of the country, traditional grocery retail is going to be the norm for a good long time, because it’s hard to see how Amazon can do to groceries what it has done to so many other businesses: leverage its vast economies of scale to make goods available to consumers more cheaply, even net of delivery costs.

On top of that, you have to add the integration difficulties of a merger, which so often mean that acquisitions destroy, rather than create, value. And even if Bezos manages to negotiate those challenges successfully, and do to grocers what he did to the big box stores, he will probably be confronted with a different sort of problem: the prospect of too much success.

All it has to do is get so big and powerful that the government starts a-fretting about monopoly. When that happens, look for the anti-trust muscles to flex, as they have against so many “unstoppable” giants before, from Standard Oil to Microsoft. If Bezos actually does manage to establish such dominance over so many major retail markets that the rest of us are genuinely at his mercy, then history suggests that the next development will be a long series of anti-trust disputes that sap corporate energy, block further expansions, and hamper the company’s ability to respond to emerging competitive threats. And dominance of a basic necessity like the grocery market seems a likely point at which regulatory trigger fingers would start to itch like a basketful of chiggers.

So while it’s possible that the Whole Foods acquisition is a stroke of strategic genius, it’s also possible that it may, in retrospect, turn out to be a bridge too far. Or more likely that it will turn out to be a mixed bag: costing some management headaches to keep a profit-challenged business going, without making or losing much money; enabling Amazon to get better at grocery delivery without making it strong enough to deliver a knockout blow to the competition. Twenty years from now, it seems likely that many people will be able to order up some groceries from Amazon. But it also seems likely that we’ll still be driving to a nearby grocery store to pick up that forgotten gallon of milk.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success.”

© Copyright 2017 Bloomberg L.P. All Rights Reserved.

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For a certain kind of urban professional, Amazon and Whole Foods are brands that define the consumption of staple goods: the weekly trip to pick up cheese, produce, maybe some pasture-raised organic beef; and the nice UPS man dropping off everything else, from toilet paper...
amazon, groceries, stores, shoppers
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2017-56-20
 

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