5 Years Later: Amazon’s Whole Foods Buy A Study In Hubris And Determination

Amazon's attempts to unite brick-and-mortar grocery with its hulking e-commerce operation might have struck fear into the industry when it announced its acquisition of Whole Foods five years ago Thursday, but it has been a bit of a shaky marriage so far.

Since that 2017 buy — and amid redoubled attempts at securing an omnichannel grocery foothold with newer brand Amazon Fresh — the company is learning the hard way that chucking a package of toilet paper onto a stoop is far easier than delivering an insulated bag of raw chicken and fragile produce, and that building customer loyalty can’t be solved with technology and its name alone.

Amazon is throwing everything it has at the stable, lucrative grocery market, according to retail analysts. But as Amazon Fresh stores open more slowly than expected and Whole Foods struggles to find its post-acquisition footing, the company might need to put in a lot more legwork to land a permanent place in physical retail.

"Amazon is really good at bits, but not so good at atoms," David Bishop, a retail analyst and partner at Brick Meets Click, told Bisnow. "The digital space and the physical space are very distinct, for various obvious reasons. When they made the announcement [that they acquired Whole Foods], it was a little surprising."

Amazon purchased Austin-based Whole Foods Market in 2017 for $13.7B, instantly acquiring 460 stores in the U.S., Canada and England and helping grow the company’s headcount 77% year-over-year by the third quarter of 2017. 

In the aftermath of the sale, many predicted Amazon would quickly dominate grocery sales both online and off. Instead, it spurred terrified competitors to up their game, especially after the onset of the pandemic. While Amazon still leads all rivals in online grocery, according to a May Coresight Research Study, it faces stiffening competition from the likes of Walmart, Target and Costco. Meanwhile, its physical-store sales, including Whole Foods, have stagnated, not moving far from the $17B mark since 2018 and it has significantly scaled back plans for Amazon Fresh, once slated for 280 stores by the end of this year.

Yet with e-commerce faltering as the impacts of the pandemic let up, analysts like Bishop say Amazon is determined to make grocery work. That’s little wonder since grocery purchases represent one-third of all retail sales, while revenue from physical stores, mostly Whole Foods, represented one of the only highlights of Amazon’s disappointing first-quarter results. The company, which declined several requests for comment on its grocery business, reported a loss of more than $3.8. But grocery sales were up 17% to $4.59B.

Amazon Fresh, Amazon's own e-commerce and physical grocery arm, opened its first location in 2020 in Woodland Hills, in Los Angeles. The brand offers grocery delivery through most of the U.S. and now counts nearly 30 physical stores, largely in California and Illinois, offering national pre-packaged brands, Amazon Fresh-brand items, produce, meat, seafood and 365 by Whole Foods Market organic items. The company has also launched several dozen Amazon Go convenience stores to capture customers at all tiers of the market.

Early indications suggest the multi-pronged strategy is gaining some traction. February data from Placer.ai shows foot traffic grew at Amazon Fresh stores between the second and fourth quarters of 2021, even after dipping slightly after initial zeal for the new stores wore off. The report also showed Amazon Fresh shoppers are not also visiting Whole Foods, instead doing their other grocery shopping at Ralphs and Aldi, indicating there isn't much overlap between the two customer bases.

"While Amazon Fresh is positioning itself as a value grocer, whose primary competition comes from grocers such as Ralphs and Aldi, Whole Foods is positioned as a premium supermarket chain that appeals to a whole different consumer base," the Placer.ai report states.

Placer.ai Vice President of Marketing Ethan Chernofsky said Amazon is in the grocery business for the long haul and expects it will find particular success in the budget offerings at Amazon Fresh.

“I think what’s fascinating about Amazon Fresh is that there appears to be a really strong play into that value lane, what you expect Amazon’s grocery presence to look like,” Chernofsky said. “Now, they basically have Go, which is their urban convenience-oriented channel, Fresh, which is kind of their value lane. [Now], do we see Whole Foods become more value-oriented, more Amazon-ish in Amazon’s core? Or do we see Whole Foods start to look more like Whole Foods of old? I think it’s going to be really interesting to see.”

Several analysts noted that traditional grocers have options to drive foot traffic into stores and hand-curate products for specific markets. Many live or die on the backs of dedicated brand devotees, like H-E-B in Texas and Publix in Florida, specialize in cult products and friendly customer service like Trader Joe’s, or eschew frills to drive down prices like Aldi.

For all its imposing market share and iron grip on e-commerce, Amazon has none of those advantages — and a spotty record establishing physical retail footholds, to boot, having significantly scaled back multiple store chains, including Amazon Books, 4-Star and Pop Up stores.  

It also suffers from an overreliance on speed, technology and limited lines at stores, Bishop said, instead of the customer service and cooking advice that customers may expect from a brick-and-mortar grocer. 

It's hubris on Amazon's part, he said.

"That's the art of selling groceries as opposed to the science of selling groceries," Bishop said. "[Amazon Fresh] is a work in progress because there clearly are huge opportunities for them to improve the experience … every time I've been in the store, there have been more staff shopping for online orders than actual customers shopping in the aisles themselves."

Chernofsky stressed Amazon’s foray into grocery is very much one of constant reinvention. The initial years of an Amazon-influenced Whole Foods saw more budget offerings, as an attempt was made to shed the "Whole Paycheck" joke aimed at the chain’s pricey products. The Amazon Prime ethos bled into the store, with Prime members receiving free Whole Foods products delivery, a perk that was removed this year. And though it tested flashier Amazon signage several years ago, Whole Foods customers now only glimpse the swooping Amazon arrow logo in small print to demonstrate sale prices for Prime customers. 

Amazon is, he said, a technology company, not a real estate or retail company, and it will think like one, meaning it will toss around and throw away different strategies, like its Just Walk Out cashierless checkout.

"Amazon is in a constant state of pursuit of optimization," Chernofsky said. "OK, so it rolls out grocery and ends up shutting down some stores … that's not an end state, that is a constant pursuit of the ideal reach."

Grocery real estate is a particularly stable part of the retail economy that draws customers two and even three times a week. Consumer spending is about 33% food, and with the pandemic panic winding down, is a task many prefer doing in person.

"People do like wandering around the grocery [store], they like picking out their own produce,” Similarweb Senior Director of Research and Analytics Seema Shah said, explaining Amazon’s interest in physical grocery stores. “It's kind of a pain, [a delivery worker] texting you every five minutes, 'They don't have Diet Coke, do you want Diet Coke without caffeine?'"

According to Marc Wulfraat, founder and president of logistics consulting company MWPVL, if Amazon expects to grow outside of its current e-commerce chokehold, grocery is the next big get. That’s especially true as Amazon readjusts its logistics and industrial real estate as it sheds swollen warehouse leases.

"You're always looking for the next big growth opportunity," Wulfraat said, adding Amazon Fresh stores might also serve as a distribution point for local grocery delivery. He theorizes that Amazon could set up its own distribution network of automated grocers, with up to seven distribution centers throughout the U.S. 

That was Walmart's expansion strategy, and many believe it's Walmart, not grocers like Albertsons or Kroger, that Amazon is trying to compete with.

"If you look at the markets where Amazon has been developing the Fresh format, at this point in time, they've really been developing it more as a network of micro-fulfillment centers to cover that last mile, than [building] a traditional retail mode,” Riverbend Retail Consulting principal Louis Scudere said. “I don't think it disappoints them when they get street traffic, but what I've seen to this point, street traffic is not what they're really shooting at." 

So far, Amazon has opened far fewer of its Fresh stores than projected. When the pandemic hit, the company announced that it would cut its store projects by 30%, according to Insider, with an Amazon employee telling the publication Amazon’s grocery outlook had been "way too rosy" and expressing doubt it could transform into a bricks-and-mortar force to be reckoned with. Amazon closed its physical bookstores earlier this year.

"I'm somewhat surprised by how slowly they are rolling these stores out,” Scudere said. “I've got an Amazon Fresh that is almost ready to open just on the south of me, here in Chicago. It's taken them almost two years to develop this property.”

Scudere said supply chain hiccups for new construction are likely delaying new stores, though some of it is the chain finding its feet in physical retail.

"I can't help but believe, as data-oriented as that organization is, that there isn't some skunkwork someplace within Amazon that's trying to crack that nut and figure out the best way to go forward," Scudere said. “If you start to hear announcements that they are going to start to self-distribute groceries, particularly perishables, and things along those lines, then you can anticipate that they feel like they've solved the puzzle to the point that they want to get into the actual distribution.”

Despite some of its bricks-and-mortar offerings shuttering, new ones are opening. Amazon launched its first apparel store, Amazon Style, last month. Every success and failure is teaching Amazon, a technology company, to be nimbler in the future, Chernofsky said.

"Even if Whole Foods has been an utter failure and shuts down tomorrow — which it's not — it doesn't mean it was a bad move by Amazon to learn a space," Chernofsky said. "I think we're seeing a really sophisticated company with a lot of capital and a lot of power make very strategic steps to understand what they want to be with the grocery store."