Amazon.com, Inc.: Driving Disruptive Change in the US Grocery Market
Case Code: BSTR536
Case Length: 14 Pages
Pub Date: 2018
Teaching Note: Available
Organization: Amazon.com, Inc
Industry: Grocery Market
Themes: Business Strategy, Corporate Strategy
Abstract Case Intro 1 Case Intro 2 Excerpts
Amazon's Entry into Grocery
Groceries, though the second largest category of retail sales after general merchandise in the US, represented one of the largest and most under-penetrated markets for Amazon. According to a 2016 Euromonitor study, aggregate sales in the US grocery market were US$781.5 billion. However, grocery was a heavily capital intensive business with intense competition and tight margins. Despite the challenges, Bezos wanted Amazon to establish its presence in the grocery sector as he sought to make his company the ‘everything store’. Amazon forayed into the grocery business in 2007 by launching AmazonFresh, an online grocery delivery service that allowed customers to order fresh produce and groceries online. Customers could order from more than 500,000 items for same-day and early morning delivery. The AmazonFresh service was available exclusively to Prime members in select cities in the US for an additional monthly membership fee of US$14.99...
From Clicks to Bricks
According to analysts, Amazon was unable to entice shoppers to buy groceries online the same way they bought other items. “The grocery space in general is something of a quagmire, beset by thin margins and complicated operations, and many of Amazon’s efforts remain experimental,” remarked Daphne Howland, a contributing editor for Retail Dive...
Amazonfresh Store Pickup Services
In the US, curbside pickup options were facing problems such as subpar produce and long wait times for pickup. Considering those issues, in March 2017, Amazon opened its first ‘click and collect’ grocery pick-up stores exclusively for its Prime members at two locations in Seattle. Called AmazonFresh Pickup, the stores allowed its Prime customers to place the order online and to drive in and pick up groceries from the pickup locations at a chosen time. Orders were bagged in as little as 15 minutes after they were placed. There was no order minimum and the service was free for Prime members...
Amazon Acquires Whole Foods
Whole Foods pioneered the organic food movement in the US with emphasis on high-quality and pricey organic offerings. As of 2016, Whole Foods accounted for 1.2% of the US food and grocery market share (See Exhibit IV). Since the beginning of 2016, the organic retail chain had been facing declining sales, stiff competition, and increasingly price-conscious consumers. Whole Foods was also struggling to shed its “too pricey” image at a time when customers wanted more natural foods at more affordable prices. In February 2017, the retailer reported sales decline at its stores for seven consecutive quarters (4Q 2015-1Q 2017), and was under pressure to put itself up for sale (See Exhibit V and VI)...
Amazon Set to Disrupt the US Grocery Market
According to some analysts, Amazon’s acquisition of Whole Foods would disrupt three different markets – grocery stores, online shopping, and food delivery. The e-tailer would dramatically change the grocery landscape and threaten its larger rivals. It would eventually drive cost out of the supply chain at Whole Foods and lower prices to undercut rivals, they said. This in turn could force other big players in the market such as Walmart, Kroger, Costco, and Target to cut prices in order to survive. Analysts expected the partnership to kick off a wave of consolidations within the grocery space and leave other grocers under more pressure to compete...
However, some analysts were skeptical about the possibility of Amazon dominating the grocery sector as they felt that Amazon was still in an early stage of physical retail. They felt that traditional retailers would still have an upper hand over Amazon in the physical retail market given its lack of experience managing brick-and-mortar locations. According to them, the grocery business was highly competitive with survival driven by repeat business. The margins were thin, the product was highly perishable, and the supply chain expensive and complex...
According to some analysts, one of the biggest challenges for Amazon would be to operate its stores well as it was not an experienced brick-and-mortar retailer. Amazon would face some operational hiccups along the way as it transited its business model from an online pure-play to an integrated brick-and mortar offering, they added. The company might struggle with assortment and merchandising strategies in the physical locations, and with maintaining a balance with online integration...
The Road Ahead
In its second quarter ended June 30, 2017, Amazon’s net sales increased 25% to US$38 billion compared with US$30.4 billion in second quarter of 2016. One Click Retail estimated that Amazon’s total grocery sales in Q1 2017 was US$350 million, up 30% year-over-year, partly driven by the growing adoption of Amazon Prime. AmazonFresh sales increased to US$10 million in the first quarter of 2017. According to a report from the Food Marketing Institute and Nielsen Online, the US grocery sector could grow five-fold with consumers spending upward of US$100 billion by 2025...
Exhibit I:Amazon Inc.: Consoliated Statement of Operations
Exhibit II: Survey: Why Don’t You Shop Online for Groceries?
Exhibit III: What Consumers Think about Amazon Go
Exhibit IV: Top Food and Beverage Retailers
Exhibit V: Whole Foods Market Inc: Consoliated Statement of Operations (Fiscal years ended September 25, 2016, September 27, 2015 and September 28, 2014)
Exhibit VI: Whole Foods’ Quarterly Revenue Growth
Exhibit VII: Stock Price Changes of Some Major Grocers in the US
Exhibit VIII: Whole Foods Stores in North America
Exhibit IX: US Grocery Sales
Exhibit X: Amazon’s Grocery Growth
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