Food Fight

By announcing the acquisition of Whole Foods, Amazon just spat sustainably sourced, organic sweet potato puree in the face of the industry.  The food fight is on! 

As the dominant force in online sales and delivery, it would appear that Amazon is pre-destined to win the battle for grocery sales.  The industry is reacting as if it is fait accompli.  But I believe the fight over online grocery sales is just beginning, and in the final round, it will be structural distribution advantages that determine the winner. Here’s why.

The everything-store wants you to buy your fresh foods and produce online, along with everything else.  The Whole Foods acquisition gives Amazon 450 new fulfillment centers, mostly in large metropolitan areas, for fresh foods and produce—both of which spoil quickly and require fast and cheap delivery.  Because this category is also plagued by low margins, little to no differentiation amongst products and high costs for shipping due to the extra packaging required to keep food chilled, closeness to customers is an advantage.

Compare Whole Foods’ 450 stores to Walmart’s decentralized network of more than 4,500 retail locations, which puts a Walmart within 10 miles of 90 percent of the US population.  Safeway, Kroger and other national grocers have thousands of retail locations from which fresh foods and produce can also be delivered quickly to customers.  And it won’t stop there: discount European chains Aldi and Lidl plan to quickly add more than 1,000 stores each them in the US over the next 5 years and scores of meal kit delivery providers are currently duking it out to replace grocery shopping a few meals at a time.

The fresh food segment is both crowded and highly competitive, and established retailers with deep pockets are slashing prices to keep competitors out.  In order to win in this category, Amazon will have to lower Whole Food’s notoriously high prices, streamline operations and expand the retail footprint—and all in the name of market share, not profits.  It’s a tall order, and one that distracts from the real prize in online grocery sales.

With its highly effective centralized distribution infrastructure already in place, Amazon would be better off skipping the fresh craze and doubling down on the delivery of non-perishable and shelf-stable foods.  In this segment, Amazon has the structural cost advantage to come out on top in this food fight.

Amazon should let the rest of the market worry about produce.  The majority of customers will continue to patronize local retailers or farmer’s market for fresh foods where they can touch and pick their own produce.  But they’re also more than happy to get everything else delivered to their door in a great big box with a smile on it.