April 14, 2019 San Jose / CA / USA – Whole Foods store displaying an ad for Amazon Prime Membership
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Following reports from the Wall Street Journal on the “Amazonification of Whole Foods,” amid new pilots in which ShopBots (yes, that’s a real term) fetch Pepsi and 3,800-square-foot Amazon Grocery kiosks sell Doritos, Whole Foods Market’s CEO Jason Buechel surprisingly doubled down on the validity of these ideas, via a post on LinkedIn.
In the post, Buechel shared a video of the ShopBot test at a store in Pennsylvania and said, “Whole Foods Market has always taken pride in offering a wide selection of natural and organic products, but we understand customers appreciate the convenience of one-stop shopping. Last week our team introduced a new “store within a store” concept at the Plymouth Meeting, PA location . . . We’ve built a new 10,000-square-foot automated micro-fulfillment center in the store’s back-of-house area at our Pennsylvania location, giving customers the opportunity to add items they can’t find in-store – all in one stop.”
One watch of the above video, and no doubt most readers will agree – Buechel’s vision sure as heck isn’t your grandparents’ Whole Foods anymore. Digital screens showcasing Kraft Mac & Cheese in the pasta aisle? Green and white mini-robots roaming around in what looks like a clean room?
WTF?
The test is so bizarre that one has to ask: why would Buechel publicly get behind it? Because in the opinion of this expert, this idea is dead on arrival.
The Strategic Disconnect
Sure, the appeal of the idea is there, i.e. why should a Whole Foods shopper have to make more than one trip to do his or her grocery shopping? For example, I can almost picture one of the vaunted internal Amazon press releases behind this idea – “Opening Soon: A Whole Foods with all the same great items . . . plus all the sweet name brand indulgences you crave!”
But, here comes the rub.
If the mass market actually wanted organic kale and Pepsi in the same shopping trip, don’t you think the merchant buyers at Walmart, Target, and Kroger would have already figured that out? These are some of the smartest operators in retail, and they’ve had decades to devote more shelf space to natural and organic products.
They haven’t, and the simple reason for that is the mass market hasn’t asked for it. If it were asking for it, you can bet your bottom dollar all three of them would have already done it.
When I was running frozen food at Target, we spent countless hours analyzing category performance, understanding customer shopping patterns, and mapping out assortment strategies. The data tells you pretty quickly what customers want and what they don’t want. And what Amazon seems to be missing here is that Whole Foods customers chose Whole Foods precisely because it wasn’t the average mass market grocery store.
Meanwhile, counter to this trend, Sprouts Farmers Market opened 30 stores in 2023. Whole Foods opened eight. Sprouts is executing on a clear strategy of being a differentiated natural foods retailer, and they’re growing because of it. Whole Foods, on the other hand, is experimenting with robot-fetched Pepsi.
At best, it is either a sign of an Austin-based ayahuasca-induced identity crisis or, at worst, it is a sign that Amazon is completely at a loss in terms of how to crack the grocery market, which leads to my next point.
The Sunk Cost Trap
This next statement may be hard to believe, but there is actually something more troubling in the Journal’s reporting than robots delivering sugar-flavored water. Citing market-research firm Numerator, it stated that Amazon’s market share in grocery still has not moved above 4% since the acquisition of Whole Foods. For comparison, Walmart’s market share is estimated at approximately 25%.
Moreover, according to the Journal again, Whole Foods says that its sales have grown by more than 40% since Amazon took over the chain, but that only amounts to 5% growth per year on average, which is paltry, considering inflation (a big factor on food sales performance) over the same period of time averages out to about 3.6% per year. Or said another way, a 1400 bps spread between inflation and growth is nothing to write home about, and especially when the acquiring company is one of the most formidable e-commerce companies in the world.
Yet, what’s the response amid this backdrop?
Instead of doubling down on what has made Whole Foods special, Amazon is essentially trying to turn it into Amazon Fresh 2.0. Amazon is clearing out coffee shops and seating areas to install convenience store kiosks. It’s hiding robots in the backroom to fetch Tide Pods. All while corporate employees worry about new concepts, like “Amazonification,” and return-to-office mandates.
Talk about a classic case of trying to fit a square peg into a round gluten-free bagel.
What Made Whole Foods Valuable
Buechel and Amazon are forgetting that Whole Foods has brand equity that it took over 45 years to build. Customers know that when they walk into a Whole Foods, they don’t have to scrutinize every ingredient label. They don’t have to wonder if the products meet certain quality standards. This trust is part of the brand’s entire value proposition.
If you start adding Pepsi and Doritos and Kraft Mac & Cheese to the mix, you’re putting the burden back on the customer. Suddenly customers are standing in the aisle asking themselves, “Wait, do I want this better-for-me version or the regular grocery store version?” That cognitive load matters, and, without that peace of mind, it could erode one of the very things that made Whole Foods special in the first place.
And, as a result, therein also lies the main strategic issue with this strategy..
The Amazonification Fork In The Road
Play it out.
Let’s say for the sake of the argument that this test is successful. Does Amazon then hit the gas pedal on refashioning its Whole Foods stores throughout the country to sell Oreos alongside hemp seed?
Let’s say it does. Then what?
First, Whole Foods becomes less “Whole Foods” and starts to converge to the mean of the average experience of every other grocery store out there. Sprouts picks up the vacated share, and Amazon continues to fight an uphill battle in grocery because the differentiation points, i.e. what made Whole Foods special, are gone.
Second, grocery is a local game, which is the reason why Whole Foods has existed for as long as it has as the beneficiary of a second planned grocery trip. If Amazon starts to play the primary trip game, they will not only have to displace the incumbents (something which many chains have tried to do and failed, including Amazon – see Amazon Fresh 1.0), but Amazon will also have to do it from a place of major strategic disadvantage in terms of store count.
Whole Foods only operates just over 500 stores throughout the U.S. Walmart has over 4,600. Kroger has over 2,700. Aldi has over 2,500. And, let’s not forget Dollar General, which itself is trying to get more into grocery, and its 20,000 plus stores, too.
Barring an acquisition, it could take decades (plural) for Amazon to match the scale required to compete effectively, let alone with what ultimately could feel like nothing more than a me-too grocery experience.
What If There’s No Turning Back?
I asked Amazon ff the robotics proves successful, how does it envision differentiating itself from the rest of the grocery industry in the long-run, and especially if it just begins carrying the same items as everyone else?
To its credit, Amazon’s response was very clear. On no certain terms, they said that items that do not meet Whole Foods Market Quality Standards are not available on the shelves at Whole Foods Market, and that, additionally, the purpose of the automation test is simply to allow customers to continue to shop for their favorite natural and organic products from Whole Foods Market and to get a broader product assortment from Amazon all in one trip or online order, saving them time and money.
Don’t get me wrong. If Amazon wants to lean into the “milk with your electronics” concept that Andrew Jassy mentioned earlier this year by using robotic fulfillment inside of Whole Foods locations for broader Amazon deliveries, I can get behind that strategy. Given where Whole Foods stores are located, often in affluent urban and suburban areas, that could genuinely create value for the overall Amazon ecosystem.
However, that’s a completely different strategy than trying to get Whole Foods shoppers to buy Spicy Sweet Chili Doritos in the lobby, or via digital shelf advertisements in-store. It is a strategy that works when you are talking about online basket building but comes across a little like trying to have your cake and eat it too within the in-store environment.
Moreover, once the genie is out of the bottle, it can get really hard to put her back in.
The Grocery Business Is Also About As Hard As It Gets
All of which brings me to the main point of this article – you can’t force your way into the grocery business.
Whole Foods had something special. It had customers who were willing to pay premium prices because they trusted the brand. It had a culture that attracted passionate employees who believed in the mission, and it had a clear point of differentiation in a crowded marketplace.
Now, sadly, Amazon appears to be on the cusp of systematically dismantling it.
Because all roads here lead to the same place: Whole Foods looking less like customers know it today and more like just another grocery store with no real points of competitive differentiation. When that happens, what exactly then did Amazon pay $13.7 billion for?
Just over 1% annual growth and the long-shot option of displacing local incumbents, which history has shown to be the hardest gamble in retail that there is?
The real answer and the biggest fear, if Amazon continues to pursue this path, is that one day we may all look back and realize that Amazon once paid a premium for Whole Foods’ brand equity and then subsequently gave us all a case study in how to destroy it.