Amazon’s recent foray into the much anticipated grocery space has got all the attention from the world. It is refreshingly old school — a supermarket that looks just like any other competitor except for a few omnichannel quirks that can pass off as innovation. The big question however is WHY? Why did Amazon finally have to open a supermarket store?
Before digging our heels into the why, it is good to explore what exactly did Amazon do for the grocery shopper by opening its first Fresh store at Woodland Hills in the affluent LA suburb? The answer lies somewhere between an excited yelp and a boring yawn! In order for a customer to not mistakenly enter the store and consider it as just another good supermarket, an option among several others available to them in a locality, Amazon took care to add in some great and not-so-great omnichannel offerings. Let’s take a look at them.
The bananas you pick up, the Cheerios box you toss into your cart, and pretty much every thing else you expect from a regular shopping experience in a good supermarket is all there in the Fresh store too. The Dash Cart is great but not impressive. Most importantly, it is not new. Hence, I reluctantly place it in the not-so-happy cart. There are always going to be consumers who love to zip in and out of a store and the Dash Cart with its image recognizing super intelligence will be appreciated.
The value of a checkout counter with its sometimes long wait time, customers checking each other’s product selection, the friendly conversations with a sometimes friendly cashier, the last-minute deals that were somehow missed but got to be added to the cart, have all been undervalued over the years — the reason I suspect, is less to do with consumer choice as much as it is about reducing cost of store operations through labor efficiency.
Amazon.com package pickup is placed in the happy cart, but would trend more closely in the bottom section as there is nothing exciting or useful about coming to a supermarket to pickup my Amazon order when it can arrive at my doorstep with a lot of convenience added to it. “Package-less” returns may sound like a great favor to customers by long-time Amazon employees in Seattle, but that is pretty much how customers would like to returns products in the real world. Nevertheless, it is a good catch and it is great that returns are allowed in a store!
In general, one can summarize that Amazon has done a great job of making things look easy and valuable for the impatient and jittery affluent customer who is somehow forced to go grocery shopping in a store!
If everything about opening up a supermarket store is so predictable and mundane, why then did Amazon take all the trouble in opening up a physical store and make it sound important by using the “invitation-only” gimmick to invite select affluent customers among an already affluent community? Maybe it is because:
- Amazon can do it, so they went ahead and did it.
- See below.
Amazon runs experiments, at scale, at speed, and learns directly from its customers on what works and what doesn’t. In other words, it doesn’t worry about what the experts think or the competition does. In this context, it would be good to understand what exactly was Amazon thinking about experimenting with. As one can see, the Amazon Fresh store has a little something for everyone which means that the data collection for experiments will kick in to test a series of hypotheses following which a decision to go or not go with an offering will ensue. Maybe, this is what Amazon could be trying to better understand from its customers:
With an average differentiation in the market on the product offering front and a meaningful proposition that is difficult to replicate for outsiders on the customer experience front, it seems like Amazon is rather trying its best to answer its own challenges that has baffled it over the years.
For a company that diligently figures out what the customer needs are and then launch products and services at lightning speed that in turn decimate the incumbents, grocery has been a challenge that has forced the company to just be an also-ran player for way too long. One year gone not knowing how to dominate the market is the equivalent of five ‘amazon-years’! (just making it up here). Amazon has grown old trying to figure what to do best in grocery. It however isn’t a laggard by any sense and in markets like India where it started with more hindsight and wisdom, it has certainly pushed food delivery with a lot more focus. However, Indians for some reason tend to buy more mobile phones and bluetooth headsets online today and it will take a while before online grocery purchase becomes mainstream.
What is in a Location?
Amazon could have opened up its first store anywhere in the US. It could have opened one very close to its global headquarters. I think there is something important to learn from the choice of location — Woodland Hills — that Amazon has made to launch a test store from where it can conduct a lot of omnichannel experiments to finally get the combination right.
- Diverse demographic makeup
- Multiple supermarket competitors
- Affinity for PRIME offerings
Let us look quickly at how they matter.
- Woodland Hills is an affluent community. Quoting from Wikipedia: “The 2008 Los Angeles Times- “Mapping L.A.” project supplied these Woodland Hills neighborhood statistics: population: 59,661; median household income: $93,720. The Times said the latter figure was “high for the city of Los Angeles and high for the county.” An affluent customer base could be the target for Amazon’s Prime benefits to kick in better along with the customers being more receptive to the technology-induced ominchannel offerings, the likes of Alexa and Dash Cart, which Amazon may want to test.
- Woodland Hills also has a healthy mix of Hispanic and Asian communities accounting for ~15% of the demographic make up. This makes it a good testing ground for product and service offerings to Fresh customers. Food habits can be studied, purchase patterns can evolve from data collected and Alexa will improve whatever it needs to improve at.
- Southern California is considered a very highly competitive market for grocery. This dated article from LA Times shows how every imaginable competition from Vons (Albertsons), to Ralphs (Kroger), Aldi, Trader Joe’s, Target, Walmart, Costco and even Whole Foods are all crowded within a 10-mile radius from where Amazon Fresh is currently located. Here is what it looks like around the new Amazon Fresh store-
- If I was Albertsons or Kroger, I would take Amazon’s presence in the neighborhood seriously and watch out for what it is doing to serve the customers in that region and beyond.
What should other supermarkets do?
It is a bit early for the fifty and odd grocery stores in that neighborhood to do anything immediately to counter Amazon Fresh. However, the time scale runs the risk of being significantly reduced if Amazon gets enough inputs to figure out what can be done to replicate a particular success nationwide. For Kroger, Walmart, Albertsons, Target and other national retailers with a strong supermarket presence, Amazon is no longer the online player trying to make disruptive changes in its own backyard. It is one among them trying to build an omnichannel juggernaut.
If the human experience is taken into account to understand the grocery shopper, then the following moves need to be made:
- Protect: What moats can you create to sustain your presence? The answer lies in watching Amazon Fresh closely in action and learning and implementing ideas shamelessly from its various moves. Is Amazon making changes to the checkout aisles? If so, watch closely and see if there is anything to do better there in your stores. Amazon is a data-driven organization. Unlike in the past where what Amazon learnt from its customers was hidden behind the closed doors of its virtual world, omnichannel moves are easy to see, although they may be hard to replicate for the smaller players.
- Engage: No grocery player can go wrong when genuinely engaging with its customers. Similar to how employees stick to a job not just for the salary, customers stick to a retailer not just for the low prices. A price war is dangerous and cannot be used to fight against an organized strongman like Amazon. But, how about offering more in-store services to customers? Prepared food is an attractive add-on to the experience of going to an otherwise boring store. Can this be made superior? In a post-covid world, can there be a guaranteed 1-hour delivery service for prepared food with the option to top it up with other grocery purchases?
- Elevate: Can a supermarket serving an affluent customer base elevate the purchasing experience? How about serving gourmet food samples for customers waiting to pick up their orders? What about helping customers whose pickup is delayed by giving a bonus “something” as part of their membership? What service guarantees can be made to customers? How can seasonal foods be specially sourced for your customers? How truly sustainable can you be in your sourcing and business practices? Don’t stop with just the buying customers. Look up and down your value chain. Can you do better with your suppliers? Can you do something good FOR your suppliers rather than squeezing them through price pressure?
There are blind corners to look out for in each of the above areas. Being alert is important. For example, a well designed curbside pickup may be all the motivation that a customer needs to choose one grocery store over the other. The question is how to figure this out? The fun with building omnichannel experiences is that data can be generated by looking at live people performing actions in real life. It starts with a living, breathing customer first and then technology comes next.
What will Amazon do next?
I believe Amazon is not done experimenting with its grocery strategy. The fact that it finally took the plunge and opened a “PHYSICAL STORE” shows that it has made a significant learning about customer behavior and is willing to place some bets on it. In some ways, this is good news for the neighborhood supermarket as it validates its existence and plays down the threat perception of a full online takeover that would decimate offline stores. Amazon will be collecting a lot of data over the next several months and what it does while interpreting the data and actioning on it will be of great value to other retailers.
A Prime membership does not look like a major value add in the grocery space as many of the existing players (Krogers, Safeway et al.) offer free membership that has several benefits already loaded into them like fuel points, digital coupons, cashbacks etc. Restricting select services to only a Prime member will probably be counterproductive although options like expedited delivery within an hour may be useful member benefits. I am not a big fan of paid membership for expedited services as it somehow doesn’t sound genuine. But, I may be wrong.
To repeat myself again, Amazon will be on a wild data collection drive with random experiments done at the store to see what can persist through time. The experiments will certainly include benefits that can be attributed to a Prime membership, the usage of Alexa for enhancing the shopping experience and so on. It is advisable that all competitors make multiple shopping trips to the Fresh store to understand the changing Amazon gameplan.
Amazon’s grocery play over the years has been like performing magic tricks — they are old, almost predictable and once the method is revealed, not so exciting anymore. Nevertheless, they are a delight to watch and always bring in the surprises! It is worth watching how Amazon will bring in the digital learning it has made in the past (Fresh, Prime Now, Home Delivery, Go) to the offline experience through a powerful omnichannel play.