Amazon’s New Food-Store Rollout

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There is a lack of clarity of details surrounding Amazon\’s upcoming development of a food-store format that will be entirely distinct from its Whole Foods stores. This seems to be Amazon\’s M.O. when it comes to its new initiatives. That such a format is under way comes as no great surprise since Amazon said two years ago it was the beginning of its intentions for brick-and-mortar food stores when it acquired Whole Foods. And we\’ve been waiting.

What we do know is that this new fleet of Amazon food stores will be intended for middle-market suburban shoppers accustomed to paying moderate prices for food, and stores will be located in suburbs. By contrast, Whole Foods stores tend to be in urban areas and feature higher prices for specialty items with a customer base to match.

So, the upcoming stores give Amazon the means to cater to major segments of the food market, from top to center. Amazon wisely plays all the bases and is also deeply into the food-delivery business by way of shipping product from its warehouses directly to customers, or by using Whole Foods stores as fulfillment centers.

Let\’s take an analytical look at some of the details available about this new enterprise, most of which were reported by the Wall Street Journal by revealing new leaseholds in Southern California. Amazon, of course, isn\’t talking.

Likely Expansion

Amazon has leased space in established shopping centers in the Los Angeles areas of Studio City and Woodland Hills, plus Irvine to the south. We\’re predicting Amazon may acquire 10 or more locations in the region before too long. Judging by how other Amazon stores spread from west to east, our bet is that the new Amazon stores will crop up in suburban Chicago, Philadelphia, New York, Boston and elsewhere.

Leases and renovation permits already issued show that the new stores will be about 20,000 to 35,000 square-feet, which will make then substantially smaller than most full-line Southern California supermarkets. Proposed locations will be equipped with kitchens and coffee-making equipment, i.e., set-ups for fresh-prepared food offerings, augmenting a selection of grocery and health and beauty products.

The banner these stores will use is under wraps, but there\’s a pretty good chance they\’ll use their own namesake or possibly \”Amazon Prime.\” Using a well-known brand name might help Amazon escape the unpleasant fate of Fresh and Easy stores, the last attempt at a food-store startup in the Southwest.

Fresh and Easy was started by the U.K. food retailer Tesco in 2006. After two bankruptcy filings, the 150 Fresh and Easy stores in the region were shuttered. Tesco took a financial bath of something like $2 billion. The stores failed because the name wasn\’t well known, locations were poor, customer-actuated checkout systems weren\’t well-received, product selection was uninspired and much more. What we know about Bezos and his attention to detail, this is not a predictable fate for Amazon. In fact, if history has any lessons here, he may end up squeezing out existing stores as he scales up fueled by his endless piles of money.

The Grand Strategy

We\’re going on record here with some predictions about some of the broader strategies behind the new food stores.

  • Practically speaking, the stores could be used to enhance the value of an Amazon Prime membership, as is done with Whole Foods, where steep product discounts are offered to Prime members. The same strategy could play out well at the new stores. Food discounts, along with free shipping and video benefits, make the cost of the annual membership fee of $119 seem nearly negligible.
  • The stores could be used as fulfillment centers for online food orders, plus additional products. Let\’s hope the aisle congestion seen at Whole Foods stores caused by legions of online order pullers can be avoided.
  • The stores may offer opportunities for co-location of its other Amazon physical-store formats (apart from Whole Foods), such as Amazon 4-Star, Amazon Books and even Amazon Go, the cashier-less format. Incidentally, those formats remain underdeveloped and under-realized. None of them have more than a few locations and they don\’t seem to be particularly relevant. Amazon food stores could give these other models a boost.
  • The stores may offer opportunities to scale up the cashier-less Amazon Go technology in a larger store format. However, that would be a big leap. Current Amazon Go stores are very small with perhaps 200 or so SKUs. The new Amazon food stores would have to offer in excess of 15,000 SKUs to be anything like a credible food store. Actually, the small size of proposed stores will make it difficult to offer enough product to compete with traditional supermarkets. Amazon, with its algorithmic and analytics power, can offer a curated product mix, exactly on target for the local neighborhood. No waste and customer satisfaction may be a better outcome than following the established format of stocking everything for everyone.

Amazon Has Its Eyes on Domination

Once Amazon grows deep roots in its food store rollout, think about what might be next for Amazon\’s physical-store ambitions. The sole remaining grocery niche for it to dominate is the deep-discount space primarily occupied by Aldi and to a lesser degree Lidl. It may be just a matter of time.

What\’s the lesson here? Never underestimate Amazon or sell it short. It has massively disrupted retail with its online domination and changing the rules of retail with its ability to reinvent models with tech-enhanced operations, logistics and customer service. Amazon is the behemoth retailers love to hate as they try to beat the clock to stay alive. Food retailers: Buckle up, You\’re in for a bumpy ride.



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