Unpacking Amazon’s Multifaceted Grocery Strategy

Amazon.com took the grocery industry by storm in 2017 when it acquired Whole Foods for $13.7 billion. Now, the world’s largest reseller aims to broaden its reach into the market. The Wall Street Journal reported that Amazon is planning to open new grocery stores in strategic locations across the U.S. The first may open in late 2019, with “dozens” more to follow in 2020 and beyond.

Rather than opening new Whole Foods locations, the new line of stores are expected to be branded entirely differently, offering a broader product range which could include health and beauty items. The stores would likely offer highly discounted prices, helping create greater differentiation between Amazon’s two grocery chains. Sources say that Amazon is also considering the option of purchasing regional grocery chains to accelerate the new grocery brand’s launch and market reach.

In addition to Amazon’s two brick-and-mortar grocery operations, the company also offers a grocery delivery service. It’s possible that the new chain will take advantage of this offering as well, utilizing the company’s highly efficient “grab and go” cash-less purchasing technology. Competitors such as Walmart have been working to offer similar online and pickup services for their grocery products. Through its new grocery locations, Amazon will gain a number of new delivery points as well as a wider offering of products to sell.

The Implications

The grocery industry is still working to understand how Amazon will roll out the new stores, and how broadly. A lot of questions have yet to be answered. However, it’s clear that part of Amazon’s ambition to grow grocery market share is about further embedding the business in our daily lives and our data.

With its Whole Foods purchase, Amazon was really getting another avenue to its best customers, Prime Members. However, with the proposed move into the discount grocery sector, it would tap into another treasure trove of household data it may not have today.

The new grocery chain also serves as another very effective vehicle for Amazon to move its high-margin private-label goods, and perhaps drive even higher adoption of Prime subscriptions. Though Kroger and Walmart experienced temporary hits when the news was announced, the real immediate threat is not to grocery stores but rather to CPGs, which now have one more channel to connect to their customers owned by the beast that's trying to kill them.

This move will likely light a fire under many CPGs which were on the fence about direct-to-consumer (DTC) sales. We can also expect a crush of new CPG-to-consumer connection attempts. Ironically, Amazon moving into discount grocery will further squeeze the already very competitive talent market for e-commerce professionals, as CPGs look to shore up their defenses to this new front.

There’s Money in Advertising

The new grocery store chain will also give Amazon a greater market share of trade spend, as more brands will collaborate on in-store, customer-facing promotions, boosting Amazon's quickly growing advertising business. Piper Jaffray predicts that Amazon’s ad revenue will more than triple by 2021. In fact, the analyst firm believes that ad revenues will soon exceed its highly successful Amazon Web Services (AWS) offering, topping $16 billion.

In the long term, Amazon’s new data-driven avenue to reach consumers could also be a threat to Google. In the future, even more product searches will start on Amazon instead of Google. This could present increased competition to the highly successful search engine leader, which saw its paid ad revenues leap 62 percent over the prior year.

The Road Ahead

Amazon knows that when it comes to food, the brand is the experience and the experience is the brand. We’re at the very beginning of what may be an entirely new era for both grocery retailers and CPG brands. Amazon’s ability to use data from both in-store and online behavior will likely drive highly personalized experiences that haven't yet been delivered in a grocery store environment. Furthermore, CPG companies will need to find a way to work with Amazon or find new avenues to reach consumers on their own.

Jon Reily is vice president and global commerce strategy lead for Publicis Sapient, a digital business transformation partner.