Amazon has commenced an overhaul of its grocery business, with a goal of winning over a larger chunk of the USD 1.5 trillion (EUR 1.36 trillion) U.S. market.
Amazon, which operates 515 Whole Foods supermarkets, 45 Amazon Fresh stores, and 23 Amazon Go markets, wants to move from a niche grocer – it operates tech-savvy Amazon Fresh stores and acquired the high-end Whole Foods Market chain in 2017 – to the mainstream, according to Tony Hoggett, who was hired in 2021 as Amazon’s senior vice president of physical stores.
Amazon is planning to merge all of its online grocery offerings into one online portal, and will be revamping stores, investing in automated warehouses, and offering fresh food delivery to customers who aren’t Prime subscribers, Hoggett told Bloomberg.
“We’re serious about grocery,” Hoggett said. “Our plan is on building this really strong grocery relationship with customers over time.”
Amazon is planning to merge its Whole Foods, Amazon Fresh, and Amazon.com online ordering systems and will stock more Whole Foods products in Amazon warehouses, with a rollout occurring through the end of 2023, according to Hoggett. That will allow customers who want to buy junk food from Amazon.com and healthy items from Whole Foods to obtain both in one transaction.
In order to make that work logistically, Amazon will be building new refrigerated sections within its warehouses and adding Whole Foods products at Amazon Fresh distribution hubs. It is also trialing a completely automated fulfillment center in Bethpage, New York, scheduled to open in late 2023 or early 2024.
Additionally, residents in a dozen U.S. cities, including Boston, Phoenix, San Diego, Dallas, and San Francisco, can now order online groceries from Amazon without a Prime subscription, which costs USD 139 (EUR 126) annually. The initiative, which instead charges a delivery fee between USD 7.95 and USD 13.95 (EUR 7.22 and EUR 12.67), will be expanded nationally by 2024 and will eventually include Whole Foods orders as well, Hoggett said.
Hoggett said he plans to more fully integrate Whole Foods into Amazon’s operation and has hired two of his fellow former Tesco executives to help with the effort – Claire Peters, who now leads worldwide strategy for Amazon Fresh, and Peter Bowrey, who heads up store operations.
The initiative is part of a longer-term effort by Amazon to make its grocery business more profitable. Bloomberg said in 2010, the company’s breakeven point on grocery items was USD 115 (EUR 104), and by 2020, it was still USD 100 (EUR 91). Fresh food is a particular problem and has previously been viewed as a means to provide staples customers depend on while encouraging them to other, more profitable items during their shopping experience. It also charges a 13 percent premium on grocery items it sells online to defray the additional costs of that service.
Hoggett said Amazon is considering opening more stores that double as pick-up locations and fulfillment centers for home delivery. It previously undertook a similar effort with its Amazon Fresh and Amazon Go concepts but pulled back as part of a larger cost-cutting move earlier this year. Amazon took a USD 720 million (EUR 654 million) writedown in 2022 from its grocery business, reflecting closures and broken leases due to the pullback.
“We’re very deliberate about growing a big physical store grocery network in the U.S. and around the world,” Hoggett said. “We’re still working out how best to do that. I wouldn’t comment on anything we might do, but we will open more grocery stores.”
Hoggett said the cost-cutting measures were approved by the company in November 2022 and will allow the company to choose its growth opportunities more selectively, with a focus on geographic areas including Illinois, Southern California, Northern Virginia, and Washington state. He said there are plans to add as many as 50 new Whole Foods outlets in the next two years and 50 more in subsequent years. And Amazon will add more Amazon Fresh stores if customers like the changes being made to their design. Amazon might also bid on stores being shed as a result of the merger between Kroger and Albertsons.
Despite the cutbacks, Amazon has been revamping its Fresh stores to include self-checkout lanes and its “Just Walk Out” cashierless technology, as well as adding around 1,500 items to its inventory and repainting the interior of its Fresh stores with bright colors, according to Hoggett.
“All the look and feel and design is very different to our existing Fresh stores. Customers respond to a bit more of a bright and airy and light experience,” Hoggett said. “The customers that enjoy Just Walk Out in the Fresh stores, they really love it. But we also recognize that it’s so new for many, many customers. The whole point for us is everybody’s welcome in our stores.”
Ultimately, Hoggett said he believes Amazon can be one of the last companies standing in a consolidated grocery marketplace.
“We think we can bring that four or five different grocers down to one or two, with Amazon being one of those grocery relationships,” Hoggett said.
Grocery consultancy Brick Meets Click Partner David Bishop told Bloomberg Amazon is putting the right effort into finding a bigger niche in the grocery marketplace. Amazon Fresh, in particular, could be successful if it remains cheaper than mainline full-service grocers like Kroger or Albertsons but more premium than Walmart or Aldi.
Amazon CEO Andy Jassy said his company is seeking a format that differentiates it from its from competitors.
"We're not going to expand the physical Fresh doors until we have that equation with differentiation and economic value that we like, but we're optimistic that we're going to find that in 2023," he said in a results call in February 2023, according to Business Insider. "When we do find that equation, we will expand it more expansively. But I think that we have a very significant opportunity in the grocery segment."
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