Amazon’s (NASDAQ: AMZN) grocery growth has been remarkable and part of that is thanks to leveraging the Whole Foods brands and store infrastructure. However, that growth has been to the detriment of stores, many of which are now effectively mini-fulfillment centers crammed full of pickers walking the aisles and shops and restaurants — once a calling card for stores — turned into packing areas.
Whole Foods lost market share in 2020. In-store grocery sales at most other retailers — from specialists like Kroger and Sprouts to generalists like Walmart and Target — were up (a lot) in 2020. Overall, grocery spending has been up between 15% and 25% since the pandemic began in March. Whole Foods is an expectation and its stores have not performed well throughout the pandemic. Admittedly, some of this is a deliberate part of Amazon’s efforts to shift sales online, but there’s more to the story.
In 2020, Amazon saw sales from brick-and-mortar stores — mostly Whole Foods — decline 8%, but Amazon’s 46% sales growth confirms huge online gains, presumably at Whole Foods, as well.
It’s been more than three and a half years since Amazon acquired Whole Foods. When the deal was announced, the fear was that in its quest for retail domination, Amazon would strip everything that made the Austin, Texas-based natural foods pioneer so special, turning its ~500 stores into little more than mini-fulfillment centers for Amazon grocery. While many of the worst fears haven’t come to pass, many of the expected improvements haven’t materialized either.
For example, although the online shopping experience is “second to none,” according to Craig Rosenblum, VP of industry transformation at Inmar Intelligence, “shopping in stores has become a nightmare due to the overwhelming number of workers picking online orders. It’s hard to get up and down the aisles,” Rosenblum told Frozen & Refrigerated Buyer.
Service. The in-store experience that attracted many to the store has been sacrificed in exchange for efficient online fulfillment. Target has been able to avoid this problem so far for two reasons: First, the sheer size of its stores enables pickers to navigate the store without encroaching on in-store shoppers; and second, Target’s ability to manage inventory has kept shelves stocked and customers happy.
But Whole Foods has not figured out how to leverage its smaller store footprints for e-commerce fulfillment while also maintaining positive unique customer experiences. At Whole Foods, in-store pickers are in a losing position. Its proposition to customers is in part a highly trained and knowledgeable employee base to help guide customers through a more encompassing (and more expensive) shopping experience. But pickers inherently don’t have time for customers. Like Amazon warehouse workers, pickers have demanding quotas often requiring them to pick and pack 100 items in a given hour. If a customer stops a picker for assistance, the picker’s metrics are damaged and the picker is reprimanded. Inherently, the focus on fulfillment sacrifices utility elsewhere. For Whole Foods, the sacrifice is a foundational piece to its success — service.
Additionally, Whole Foods was very late to the game when it comes to another major service offering for online groceries: curbside pickup. Whole Foods didn’t roll out curbside pickup nationwide until October. For a brand so highly focused on building up its online presence, this seems unconscionable and almost certainly had a hand in Whole Foods’ market share loss. For context, Target saw curbside pickup demand explode 500% yoy in December.
The reluctance to implement curbside is even more confounding when considering Amazon has invested in creating more modern, spacious stores with restaurants and additional fresh food areas. “But because shops are also being used to fulfill online orders, they seem more crowded and cluttered,” said Neil Saunders, managing director of retail at GlobalData.
Product. Another common fear about Amazon’s acquisition was it might sell out by loosening Whole Foods’ strict standards for assortment. Fortunately for the fortunate, this has not come to pass, and the chain remains committed to its very high standards around unacceptable ingredients, sustainability, traceability, etc.
While high standards have remained intact, Whole Foods’ reputation as a leader in discovering and bringing new items to market has taken a hit. “Whole Foods should be in the vanguard of innovation,” said Saunders. “Sadly, it isn’t. In fact, it’s something of a laggard. Regional chains like Wegmans and Publix do a better job. Even Target has stepped up its innovation game.”
One manufacturer partner, who believes the company’s focus on private label offerings seem to be consuming much of its energy, said, “Whole Foods has become a lot less nimble in terms of bringing on new products nationally.” Sound familiar? It should. Amazon is notorious for scooping up data from its sellers to develop competing proprietary offerings.
Even before the acquisition, a shift to centralized buying was seen as leaving less space for local and regional brands. While the company has taken steps over the last year to highlight local foods popular with customers and to balance centralized and regional decision-making, Whole Foods isn’t seen as an innovation leader the way it used to.
Price. Price is the only thing I ever hear people mention regarding Whole Foods. Industry experts hoped Amazon’s acquisition would lower prices and help the chain shed its “whole paycheck” reputation. Amazon has pushed a bevy of discounted prices on key items and more promotions and discounts for Prime members have reduced prices, but only slightly. “But prices were so high to start that it’s still one of the most expensive chains out there,” even on national brand items also sold by competitors, reported Saunders.
So what is Amazon doing?
Lee Peterson, EVP at strategy consultancy WD Partners, said in a RetailWire discussion that he is convinced Amazon believes all grocery sales will be online in 10 years. “Half the shelves are empty, the whole front of the store is a warehouse, the cafe is closed and there are more pickers in the store than customers. Does that sound like they care about the old ‘in-store experience’ factor? There are huge signs when you check out reading “2 Hour Delivery!” in Amazon blue. The writing is literally on the wall.”
Is Whole Foods’ primary role to fulfill online orders now? Jeff Weidauer, principal at SSR Retail, believes Amazon has already begun to transition Whole Foods to an online fulfillment center network. He went as far to say in the RetailWire discussion, “The primary use for stores is to pick local orders; in-person shoppers are an afterthought and a distraction.”
His thesis is backed by Amazon’s move to pivot one Whole Foods location in Brooklyn, New York, to an online-only “dark store.” The company hasn’t announced plans to expand the concept to other areas, but more permanent online-only locations is one way the company can reduce the number of pickers in stores.
Saunders said dark stores will need to be part of the fulfillment mix at Whole Foods, but contended that maintaining them in high-rent districts like Los Angeles or New York City would be costly. The best solution is likely more hybrid stores open to the public with some behind-the-scenes fulfillment automation like Walmart’s local fulfillment centers.
One step at a time? Amazon invigorated Whole Foods’ e-commerce experience and is respected as one of the most customer-obsessed brands in the world. Amazon is renowned for its ability to pinpoint customer pains and relentlessly attack them. If any one company can reverse this course, it’s Amazon with its compulsive focus on customer satisfaction.
Amazon and Whole Foods have many hurdles to overcome as they transform the omnichannel pricing and strategy and centralize processes to drive efficiencies. The end goal for Whole Foods remains unclear. Should it be an extension of the Amazon online grocery beast acting as little more than mini-fulfillment centers? Or should it be the differentiating brand it always has been, allowing Amazon to capture a higher-income customer base? I think it can be both. I think Amazon has the scale, logistics prowess and managerial creativity to get it right. And Amazon will know it’s right because it knows its customers better than anyone.
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