Why Amazon Isn't Checking Out of Groceries

"Amazon.com hasn't taken over your refrigerator yet. But the size and importance of the grocery market is precisely what compels the Everything Store to keep trying.

Amazon has been dabbling in groceries for years. It launched its first grocery storefront on its website in 2006 and bought Whole Foods Market for $13.1 billion 11 years later. Soon after, Amazon began opening its own physical stores featuring innovative technology such as Just Walk Out, which senses what shoppers pick up and charges them automatically, and Dash Carts, which let shoppers scan and pay for items as they put them in their carts. The latest development: Amazon One, which allows shoppers to pay with a scan of their palm.

Despite the whiz-bang features, Amazon has barely scratched the surface. The company that now generates nearly $525 billion in annual revenue has just over a 3% share of the U.S. grocery market between its branded stores and Whole Foods, according to the latest data from Numerator. Walmart -- one of only two other public companies on the planet generating more annual revenue than Amazon -- has a 30% share.

Amazon does fine with the kinds of groceries easily sold online. EMarketer estimates that the company accounted for 21% of U.S. digital grocery sales last year. But it has had practice: That first grocery storefront on its website launched in 2006 featured around 14,000 dry goods listed for sale. 

The company was playing to its strengths compared to grocers that had to manage actual shelves for customers to walk around. Jeff Bezos, Amazon's boss at the time, described the approach on an earning call that year: "So we don't just carry a few flavors of Jell-O; we carry all 80."

Still, bricks-and-mortar shops accounted for about 90% of U.S. grocery sales last year, according to estimates from UBS. While the pandemic drove more consumers to shop for groceries online, many have returned to in-person shopping.

That explains why Mr. Bezos' successor is looking to kick things up a notch. Last month, in his second annual letter to shareholders since taking over, Andy Jassy described the grocery business as an $800 billion market segment in the U.S. alone and wrote "we aspire to serve more of our customers' grocery needs than we do today." To do so, the man who led the invention of Amazon's cloud-computing business wrote that "we need a broader physical store footprint."

Whole Foods already has more than 530 locations in North America and the U.K., while Amazon has more than 60 stores in the U.S. operating under its Fresh and Go brands. By comparison, Walmart operates around 5,300 stores in the U.S., including Sam's Club, and Kroger operates about 2,700.

Closing that gap will be time-consuming and expensive if Amazon plans on growing organically. The real-estate market is challenging: Vacancy rates for neighborhood centers, a format applicable to most grocery stores, have been dropping over the past decade, with only a slight bump during the depths of the pandemic, according to data from commercial real-estate firm JLL. It reached 6.1% in the first quarter of this year -- the lowest since 2006.

An acquisition could speed things up. Scott Mushkin, Managing Partner of research firm R5 Capital, says adding a chain like Sprouts Farmers Market into the Whole Foods family would scale up the company's presence in the fresh produce-focused, specialty grocery market. Another possibility is buying up the stores that supermarket giants Kroger and Albertsons would have to divest as part of their proposed combination. In a report last month, analysts at Bernstein estimated they will have to divest up to 550 stores, many of which "are likely in geography that would be attractive to Amazon."

However, the regulatory environment has soured significantly on big tech companies buying their way into new segments. Even Amazon's proposed acquisition of iRobot, the maker of the Roomba, for a price one-eighth what it spent on Whole Foods, is facing enhanced scrutiny. Bernstein's analysts agree this is a major risk but added that Amazon still "might make more sense as a buyer than some of the alternatives."

And now grocery competitors are encroaching on Amazon's digital turf. Walmart surpassed Amazon's market share in online grocery sales in 2020 and eMarketer expects it to keep its number one position this year and next. Soon-to-be-public Instacart also is gaining ground, having surpassed Amazon's online grocery market share in 2021, according to eMarketer.

Don't count Amazon out, though. The company has a long history of solving the thorny problems of getting consumers and their stuff in close proximity. It also has a new boss with a powerful motivation to rejuvenate the company's sales growth, plus an estimated 167 million members of its Prime shipping service in the U.S. alone, according to Consumer Intelligence Research Partners, who are already inclined to concentrate their spending on the company's offerings.

As Mr. Mushkin puts it, successful companies either enhance customers' time, save their time or save them money. Amazon already has what it takes to save them time and money. If the e-commerce pioneer can also enhance the physical shopping experience then bagging the grocery market is possible. That will be no easy feat, but rivals shouldn't assume the company is just going to pack it in." [1]

1. EXCHANGE --- Heard on the Street: Why Amazon Isn't Checking Out of Groceries --- The e-commerce pioneer has hardly made a dent in the grocery business. Success will require a huge push. Gallagher, Dan; Lee, Jinjoo. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 13 May 2023: B.12.