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A Fresh Approach

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Amazon’s new tech-enabled supermarket concept offers seamless omnichannel grocery shopping. But dominating the brick-and-mortar space may not be the goal.

When Amazon first started selling groceries online 15 years ago, our industry responded with a collective shrug. When it followed that up with the debut of Amazon Go, a cashierless c-store-type outlet, a decade later, traditional supermarket operators were largely indifferent. The chain’s acquisition of Whole Foods shortly thereafter was met with a bit more concern, but again, retailers that don’t compete in the natural channel didn’t view it as a direct threat. And then came Amazon Fresh. That got everyone’s attention.

The first Amazon Fresh debuted in Woodland Hills, Calif., last September. Since then, the company has opened 17 more, primarily in affluent suburbs outside Los Angeles, Seattle, Chicago, Washington, D.C. and, most recently, Philadelphia. The e-commerce giant is notoriously tight-lipped about its future plans, but the folks at Barrington, Ill.-based Brick Meets Click (BMC), which has studied the new format extensively, have identified approximately 80 additional sites that have either already been confirmed or appear likely to become Amazon Fresh stores in the near future. However, says chief architect Bill Bishop, “If you look at demographics and empty store space in areas that make sense, there are another 350 sites that could be characterized as low-hanging fruit.”

While that figure is likely to give competitor’s pause, industry observers say it’s too soon to panic. Though it’s certainly closer to mainstream than Whole Foods, Amazon Fresh isn’t for everyone, says Bishop. It’s most likely to appeal to busy young professionals with above-average incomes who appreciate a small, tech-enabled format that allows them to get in and out quickly. That cohort is also just as interested in carryout meals as they are in cooking from scratch, hence the comparatively high percentage of space dedicated to prepared foods. But that doesn’t mean they don’t like a good value.

Based on BMC’s analysis of Amazon Fresh market basket data, “They’re not trying to compete with discounters, but they do a pretty good job undercutting traditional high-low retailers,” says Bishop, who describes the chain’s approach as hybrid EDLP. While there are some hot deals on select items, “Price promotion doesn’t play a particularly important role,” he explains. However, the “tremendous number” of price changes observed by BMC during the past nine months suggests Amazon Fresh is experimenting with price elasticity and KVIs in each store. “If they’re able to understand pricing at the individual store level and then [use that to] optimize sales and margin for individual customers, well, that would be a radical breakthrough,” says Bishop. “But Amazon is not short of bold ambition.”

AMAZON FRESH STORES SUPPORT OMNICHANNEL EXPERIENCE

That much is clear, based on Amazon’s decision to move into the brick-and-mortar grocery space in the first place. Which begs the question: Why? In a nutshell, because that’s what shoppers want — particularly from food sellers. “The majority of consumers have made the transition to viewing shopping as an omnichannel experience,” say Perry Kramer and Ryan Grogman, managing partners at Boston-based Retail Consulting Partners (RCP). “They expect retailers to offer seamless integration between physical stores and online shopping, including purchase history, accurate inventory counts and relevant, customer-specific offers.”

E-commerce is great and all, but “Amazon Fresh stores give consumers the ability to shop a physical location where they can see, touch and smell certain products prior to purchase, which removes a huge barrier, especially in fresh,” they explain.

When customers see and discover products in-store, it increases the likelihood they’ll eventually feel comfortable purchasing those same items online, adds Don Stuart, managing partner at Wilton, Conn.-based Cadent Consulting. “Thus, the best online retailers actually will use a hybrid model of in-store and online.”

It may not seem important, continues Bishop, “but having a physical presence reminds people that Amazon is in the grocery business.” Because the chain started in the digital world and is now seeking to create a physical presence, its task is easier than that of brick-and-mortar supermarkets trying to build an e-commerce business from scratch, he adds, hinting at the other reason Amazon is building stores.

“They needed a market-centered delivery hub to support their strategy to gain share in delivery,” says Bishop, who notes that online order pickers often outnumber shoppers in stores he’s visited. “While other retailers are still struggling to figure out how best to provide delivery,” he continues, “Amazon is more concerned about building its delivery platform.” So in areas where Amazon Fresh operates, “It will likely end up being the dominant grocery delivery option.” The good news for competitors, at least in the short-term: “The chain is really not competing for the walk-in grocery market,” says Bishop. “The Amazon Fresh offer isn’t comparable — it’s not a typical supermarket. But they are using it to build loyalty to Amazon as a whole among shoppers in those geographies.”

OK, but what about the 500+ Whole Foods stores Amazon already owns? Weren’t they supposed to provide the brick-and-mortar presence the company needs to build its omnichannel grocery empire? That may have been the goal at one point, according to the experts, but Whole Foods’ appeal is just too limited. “It’s primarily a fill-in store,” explains Bishop, who says fewer than 10% of Whole Foods customers do the majority of their grocery shopping there.

“[The Whole Foods acquisition] gave Amazon a very solid toehold in the food market, which was important as it sought to grow its online business,” continues Neil Saunders, managing director of retail at New York-based GlobalData. “But Whole Foods is still a niche player. Despite some attempts to reduce prices, it is still seen as expensive, and that dissuades a lot of people from visiting or buying more than they already do.” As a result, “Whole Foods is not a great vehicle for Amazon’s expansion in grocery. That’s why the company looked to other concepts to grow its presence.” There’s also something to be said for building something from the ground up.

“Fresh is being enabled with Amazon technology from the get-go,” says Saunders. “It would be much more challenging to upgrade all of the Whole Foods stores.”

‘A PLEASANT PLACE TO SHOP’

So what’s the typical Amazon Fresh store like? Truth be told, says Saunders, other than the technology (more on that in a minute), “There’s nothing all that unique about Amazon Fresh: It’s a store that sells groceries. That’s not to say it’s bad,” he continues. “It isn’t. In fact, compared to many traditional grocery stores plagued by years of underinvestment, Amazon Fresh is a pleasant place to shop.” The signage is good, the energy-efficient cases are all state-of-the-art and, unlike at Whole Foods, the aisles are wide and uncluttered, leaving plenty of room for both shoppers and online order fillers. Consistent with the chain’s pricing strategy, there are noticeably fewer yellow “sale” tags at Amazon Fresh than at other retailers, and the two frozen endcaps we spotted on our last visit were full of regularly priced fare, not deals.

According to BMC, stores are about half the size of a conventional supermarket and carry 55% to 60% of the SKUs. Depending on your point of view, that can be a plus or a minus. Customers looking to get in and out quickly won’t be slowed down by too many choices. But those looking for specific brands, sizes or flavors may be disappointed.

Still, says Saunders, the range is solid and well-curated. Most shoppers will find what they need, though not necessarily the brand they want. In frozen veggies, for example, there’s plenty of Birds Eye and a few SKUs of Green Giant, as well as Amazon’s own brands Happy Belly and 365. But second-tier and regional brands such as Pictsweet, Hanover and Seabrook Farms are nowhere to be found. And there’s not a lot of duplication. If you want organic chopped spinach, it’s the 365 brand or nothing.

Observers say own brands are clearly a priority for Amazon. In fact, BMC counted 17 different private labels throughout the store, including national brand equivalent Happy Belly, natural and organic 365 and premium-tier Aplenty in frozen and refrigerated as well as the Fresh brand in meats and Amazon Kitchen in prepared foods. But many of the chain’s own brand items feature unique attributes not offered by national brands on the shelf. So instead of offering an alternative to a similar branded product, they’re used to fill a gap in the assortment.

“Amazon entered the [grocery] market by pricing low but they’re modifying that approach at Amazon Fresh where private brands are often higher priced but more attribute-driven — low sugar, unique flavors, gluten-free, etc.,” explains Stuart. Of course, the upscale Aplenty program is full of unique items (think Butternut Squash Dal in single-serve entrees and Ultimate Chocolate Lava Cake in frozen desserts). But even Happy Belly (frozen Blackeyed Peas and 18-count Cage-Free Eggs) and 365 (Berry Chantilly Cake, Almond-milk pints and Organic Sliced Peaches) offer some distinctive products.

And according to Saunders, in addition to offering excellent quality and taste, the Amazon Kitchen brand includes some truly innovative meal kit-type products. “Some people may turn up their noses at Amazon-branded food,” he says. “But in some ways, Amazon gets more right with its own brands than some more traditional grocery players that have been doing it longer.”

“I think they’re identifying the kinds of attributes customers in a particular store want and instead of finding national brands with those attributes, Amazon is creating private label products to satisfy the core customer’s requirements,” continues Bishop, citing a long-term goal of decreasing dependence on national brands. “We think it’s part of a larger strategy to increase sales per square foot and inventory turns by decreasing the number of SKUs in a particular area and, where possible, satisfying demand with private label.” He adds, “Eventually, there will probably be a frontal attack on the relative importance of brands in Amazon Fresh stores. I think they’re on to the fact that there are real efficiencies associated with marketing an umbrella private label.”

Fortunately for the company, “Amazon has the benefit of deep pockets, which allows them to take a multi-year approach to building recognition of their private brands,” add Kramer and Grogman at RCP. “We expect to see significant cross-selling with Whole Foods in the next few years as well.”

TECHNOLOGY ELEVATES BASIC ASSORTMENT

While the store’s compact footprint and curated assortment are key differentiators, it’s the technology that truly sets Amazon Fresh apart. And it starts as soon as you walk in the door. While visitors to the Bellevue, Wash., store can, literally, Just Walk Out using cashierless technology pioneered at Amazon Go (also coming soon to two Whole Foods locations), shoppers at other Amazon Fresh locations can opt for one of its Dash Carts. Available to Amazon account holders who have downloaded the Amazon app, the smart carts scan items as they’re placed directly into the bags inside so there’s no need to go through checkout. The screen at the front of the cart keeps a running tally of products and prices on one side and on the other displays “Deals Near Me,” based on where the customer is in the store. Shoppers can also scan coupons and link to their Alexa shopping list.

The technology isn’t without limitations — customers can only fill two bags and they can’t take the cart to their car to unload it — but “it brings alive what I think younger, tech-savvy target customers will be interested in,” says Bishop. “It’s not a big draw at this point,” he adds, noting that during his visits to Amazon Fresh only about one in 10 shoppers were actually using the cart.

Still, says Saunders, once they try it, consumers could easily get hooked on the convenience. More important, he continues, is the “enormous amount of data” Amazon can collect from Dash Carts. “They can identify every customer, understand how they shop stores, and examine what they buy and what they browse. That information is very valuable.” Eventually, it can be used to create the kinds of customized offers today’s shoppers have come to expect,” he says.

In fact, says Stuart, given Amazon’s technology prowess, “We anticipate Amazon Fresh will take that ‘loyalty card information’ to a whole new level.”

Dash cart screens are important, too, says Saunders, who sees them being used by brands to provide information about or advertise their products, creating a new revenue stream for the chain. Stores already feature large LED screens that offer a mix of promotional and customer support messaging.

WHAT TO DO WHEN AMAZON FRESH COMES TO TOWN

Experts offer a few tips for retailers going head to head with the e-commerce giant’s new supermarket concept.

1.DON’T RESPOND BY DROPPING PRICES.

Amazon Fresh doesn’t compete on price and price isn’t the reason people shop there, so this isn’t a problem you can throw money at. “Knee-jerk price cuts could be a self-inflicted wound,” says Bill Bishop, chief architect at Brick Meets Click, Barrington, Ill. (But when you do run hot deals, promote the heck out of them!)

2.HIGHLIGHT THE ADVANTAGES OF A FULL-LINE SUPERMARKET.

“Most grocers don’t do a great job emphasizing the breadth of their offer,” says Bishop. But in most cases, that’s your biggest advantage over Amazon Fresh.

3.DIFFERENTIATE WITH INNOVATIVE PRODUCTS.

Give shoppers a reason to visit your store over Amazon Fresh with local, private label and exclusive items, including LTOs and seasonal products that create excitement in the aisles, says Neil Saunders, managing partner at New York-based GlobalData.

4.INVEST IN FROZEN AND REFRIGERATED FIXTURES AND DISPLAYS.

Too many retailers have neglected this area for too long, which makes them easy pickings for Amazon, whose state-of-the-art cases are not only energy-efficient but eye-catching, says Saunders. But since displays are practically non-existent, there’s an opportunity for other retailers to stand out.

5.FOCUS ON PREPARED FOODS THAT OFFER CONVENIENCE, VALUE AND GREAT TASTE.

It’s partly a defensive move, says Don Stuart, managing partner at Wilton, Conn.-based Cadent Consulting, citing Amazon’s broad offer in the grab-and-go space. But there are opportunities to do it bigger and better.

6.UTILIZE CUSTOMER LOYALTY PROGRAMS TO BETTER CATER TO CUSTOMERS’ NEEDS.

“Amazon will absolutely be doing this,” says Stuart. But your shoppers are different. Use what you know about them to give them what they want.

“They’re pretty effective,” says Bishop. “Digital signs have been around for a while but no one has done a great job with them in supermarkets.” He’s also a fan of Amazon Fresh’s electronic shelf labels for each facing, which will provide precise control of inventory. “I think it’s one of the most important things they’re doing,” he remarks.

Stores also feature strategically placed Ask Alexa kiosks where consumers can go for help finding products, food pairings, even recipes. In addition, every location doubles as an Amazon hub where consumers can pick up orders, drop off returns or retrieve online grocery orders. And of course, they can always buy the latest devices.

“Amazon Fresh shoppers are tech savvy and are likely [already] frequent Amazon users who want to experience a unique grocery environment while still getting high quality products,” say Kramer and Grogman at RCP. “But Amazon Fresh is a serious competitor for every significant grocery segment…. It has the ability to compete with the largest national grocery chains on selection, delivery and price. The physical store concept offers Amazon the ability to deliver a technology-enabled experience in a physical format they can quickly adapt and modify without the size and cultural limitations that exist in their Whole Foods store.”

As Stuart puts it, “It’s Whole Foods for everyone.” ■

Denise Leathers

Denise Leathers

Denise is the editor of Frozen & Refrigerated Buyer.

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