Competing with Amazon in Grocery Just Got a ‘Whole’ Lot Tougher

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Competing With Amazon in Grocery Just Got a ‘Whole’ Lot Tougher

Retailers and CPG manufacturers must think and act like technology companies Viewpoint: Competing With Amazon in Grocery Just Got a ‘Whole’ Lot Tougher Viewpoint: Competing With Amazon in Grocery Just Got a ‘Whole’ Lot Tougher

Competing With Amazon in Grocery Just Got a ‘Whole’ Lot Tougher Retailers and CPG manufacturers must think and act like technology companies

Not that long ago, consumers were loyal, both to brands like Colgate and

Kellogg, and to retailers like Tesco and Kroger. But over the last five to 10

years, that loyalty has faded. Instead, consumers are much more loyal to

their experience, their choice, their convenience and the value that they get.

They are loyal to fundamental values of the relationship they have with the

brands and the retailers and much less to the actual brand itself.

If there is such a thing as loyalty, shoppers are more loyal to Amazon than

to any other retailer in the world. At a time when customer expectations are

changing, Amazon founder and CEO Jeff Bezos has done an extraordinary

job of leveraging technology to create the greatest customer experience for If there is such Amazon customers. a thing as loyalty, shoppers are more loyal to Amazon Once, the path to purchase was relatively simple: a trusted brand was than to any other sold at a trusted retailer at a reasonable price. The consumer visited the retailer in the world. store and purchased it. In today’s mobile world, however, consumers have

infinite choices, via seemingly infinite channels. These countless possibilities

and rapidly-changing price movements make the path to purchase more

challenging. To succeed, both manufacturers and retailers must master this

more complex customer journey.

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Why Amazon Purchased Whole Foods

Over the past 25 years, Amazon has invested in a wide variety of technologies and applied that technology in extraordinary ways to its e-commerce channel. But food and grocery is not the same as fashion, books, or consumer electronics. With food and grocery, so much of the customer’s choice and decision-making is about fresh foods and local assortments.

After trying many different alternatives, Jeff Bezos concluded that, for grocery, he needed a much more integrated model of in-store plus e-commerce plus technology, all of it supported with the best customer experience. And that’s why he bought Whole Foods.

Many people think that Whole Foods does not fit the Amazon model because Amazon is low price and Whole Foods is high price. But Jeff Bezos is looking at things differently. He will follow a much more sophisticated model in terms of assortments and how he will use the 450 Whole Foods stores. Fundamentally, Bezos is a very patient man who believes in trial and error, in making very large technology the best. He’s very good at accepting failure, then learning from it and continuously improving his model until he ultimately gets it right.

The combination of Whole Foods plus the Amazon DNA of a great customer experience will be an extremely disruptive model to the grocery industry. All other retailers and manufacturers need to be better prepared for it. Although it may take three to five years for these changes to happen, directionally this is going to be a very disruptive journey. To compete with Amazon in grocery, manufacturers and retailers will need to accelerate their own internal transformation.

Amazon is not a retailer. It is a technology company that happens to be in retailing. For example, Amazon developed Amazon Web Services (AWS), the most commonly-used cloud platform for computing in the world, to implement its technology for the next generation of retailing, then started selling it to others. Amazon has been very successful in cloud services. It’s very important to realize the implications of this statement. Amazon is a technology company in retailing; it is not a retailer using technology.

Most manufacturers and retailers delegate the technology function to their Amazon is IT department. Instead of thinking of technology as being strategic and not a retailer. central to their business, they focus on merchandising, marketing, store It is a technology operations, and supply chain. That’s about to change. Everyone needs to company that make technology a critical, strategic function for their business. happens to be in retailing.

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How Amazon Defines the Customer Experience

From its beginning 25 years ago, Amazon has been innovative. Today, they are the experts in customer experience. In fact, the simple mission statement for Amazon is “to provide the best customer experience,” regardless of whether they are selling books, food and grocery, or cloud computing. Today, Amazon is leveraging customer intelligence to provide the best end-to-end customer experience from order through to delivery.

To effectively compete with Amazon, traditional retail and grocery brands need To effectively compete to provide the best customer experience, which to Amazon is about a lot of with Amazon, traditional different things. Their competitors must get them all right to really have a retail and grocery compelling customer experience. brands need to provide the best customer Best choice: Amazon offers hundreds of millions of SKUs for customers to experience order, including more than one million food and grocery SKUs and 1.5 million health and beauty SKUs. Most retail grocers may have 15,000 to 60,000 SKUs in their stores depending on the footprint and the nature of the business. If Amazon has millions of SKUs, then to compete with Amazon with an in-store, primarily brick-and-mortar model, a retailer must take a different approach for assortments.

Customer-centric decisions: Amazon has developed technology for capturing the most complete intelligence about its customers, and uses this intelligence to run its business every day. Everything else -- supply chain, assortment, partnership, and marketing decisions -- all come later. Amazon is the most perfect customer-driven, decision-making enterprise anywhere, and certainly within retailing. Therefore, Amazon competitors also need to make customer intelligence a central strategy, a central principle for decision making.

Continuous technology innovation: Imagine a customer waking up in the morning and creating a shopping list for the day. He or she clicks a button on Alexa, and places an Amazon order just as if they were talking to a family member. Inside of Amazon, customer-driven pricing ensures the shopper gets the best deal available while, on the delivery side, Amazon Fresh provides two-hour delivery. The customer doesn’t even have to pick up prepared foods for lunch or dinner any more. All they need to do is place an order verbally in dialogue in Alexa and it shows up. Pretty soon those two hours will become one hour, then 30 minutes because Amazon is continuously improving its offerings.

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What Amazon Brings to Whole Foods

Customer Intelligence: Amazon will integrate all the knowledge about shoppers and customers from Whole Foods, with the extraordinary database of customer intelligence that it already has. They’ll map it by geography, by store, by category, by brand, by product, and more. Soon Whole Foods will be a lot more competitive because it will know much more about their existing customers than they do today. They’ll also know more about the customers who are not shopping at Whole Foods, but are shopping at Kroger or Walmart or somewhere else. This will enable them to come up with better strategies on how to convert those customers into Amazon plus Whole Foods customers.

Loyalty: Secondly, because Whole Foods does not have a loyalty program, Amazon Prime will become the principle loyalty program for Whole Foods, which will enable shoppers to reap all the benefits of Amazon Prime.

New Pricing Strategy: Amazon will change the Whole Foods pricing model to be consistent with the Amazon model. It will do this by reassessing pricing for different categories. For fresh foods, such as meat and fish, where Whole Foods has a significant advantage, Amazon will maintain the Whole Foods premium pricing model. For many other categories where Whole Foods does not have a competitive advantage, Amazon will lower the prices to achieve parity with what’s on the Amazon site.

New Assortment Strategy: Amazon also will move Whole Foods in the direction of store brands, proprietary brands and Amazon brands. This could mean a shift in the Whole Foods assortment strategy from today, where about 40 to 45 percent of revenue comes from proprietary or store brands, to a future 70 to 75 percent of revenue coming from proprietary brands. Manufacturers who sell their branded CPG products into Whole Foods should anticipate significant pressure in terms of the kind of volume or the declining volume that they will be getting from Whole Foods.

Combining the Amazon e-commerce channel with the Whole Foods brick-and-mortar stores, it is likely Amazon will offer three tiers of assortments to its grocery customers.

Tier 1 Tier 2 Tier 3

The first tier, which is The second tier will be The third tier will be around fresh, will be products for their home all the other consumer determined locally and delivery solutions, which packaged goods that are entirely by the Whole will become a bigger part not fresh foods, nor part Foods Management team. of the delivery model. of home solutions. For Amazon will redesign a these products, there will section of the Whole Foods be a very strong push to stores around the 5,000 use the Amazon site. For to 10,000 SKUs critical instance, shoppers inside a to home delivery, and Whole Foods store will be use Amazon technology encouraged to order these to provide the fastest products via their mobile possible delivery from phone. Whether the order order all the way through is being delivered from to the home. an Amazon warehouse or from a Whole Foods distribution center, the delivery process will be 4 seamless. Viewpoint: Competing With Amazon in Grocery Just Got a ‘Whole’ Lot Tougher Viewpoint: Competing With Amazon in Grocery Just Got a ‘Whole’ Lot Tougher

For the first tier, Whole Foods might offer 10,000 or 15,000 SKUs; the number for the home delivery solutions might be 5,000 or 10,000 SKUs. For everything else, it’s the full Amazon inventory; 1 million grocery SKUs climbing every day and 1.5 million health and beauty SKUs climbing every day. And Amazon is going to use the 450 Whole Foods stores as hubs for home delivery. This provides Amazon with more home delivery centers than all other retailers in the US combined. Whole Foods will become a Ultimately, Jeff Bezos will use the Whole Foods system as a laboratory to laboratory to learn learn new technologies that can be deployed to improve the customer new technologies that can be deployed to experience. For instance, he might use some of the ideas that he improve the customer developed in Amazon Go. Or, he may use other ideas that he hasn’t even experience thought about yet inside this ‘laboratory’ called Whole Foods.

Competing with Amazon in Grocery

To compete with Amazon, manufacturers and retailers must think and act like technology companies. Companies that think and act only like a retailer or manufacturer, those who continue to delegate all technology decisions to their IT department, will find themselves in a great deal of trouble five years from now – or much sooner than that. In addition, retailers and brand manufacturers need to significantly increase their investment in technology that improves the customer experience.

Both will need to know their shopper across all retailers. They’ll need to know who the customers are within each retailer and within each store. They can no longer think of marketing as one function -- responsible for CRM and targeted offers -- and merchandising as a second function -- responsible for assortments, pricing and promotions. That’s not true anymore. They will have to think of marketing and merchandising as one integrated set of decisions, all with customer experience at the core. Those who do not integrate the marketing and merchandising functions will lose to Amazon.

CPG manufacturers will need to shift from the normal consumer brand marketing budget to much more targeted, customer-specific, personalized marketing programs. With loyalty declining, customer experience, convenience, choice and value are more important. There needs to be a shift more towards personalized customer experiences through shopper and customer marketing.

For retailers, it will be important to take advantage of geography, the specific neighborhood, the specific store location, in order to compete. Assortment decisions need to move from the national level to more empowered decision-making at a store and community level.

Retailers may also decide to follow the same three-tiered assortment model that Amazon will likely implement with specific assortments focused on fresh foods, and others that are based on the demographics and the people in that community of that store. For instance, a grocer could differentiate on nutritional supplements or assortments for people with diabetes or heart disease. Then for the general-purpose categories, the so-called center-store categories, the grocer will need a model where e-commerce and in-store are fully integrated to provide much more choice. Retailers who adopt the strategies outlined and enable them with technologies like artificial intelligence will have a much better chance of successfully competing with Amazon. 5 Viewpoint Viewpoint: Competing With Amazon in Grocery Just Got a ‘Whole’ Lot Tougher

About Symphony RetaiAI

Symphony RetailAI brings together Symphony EYC’s customer-centric retail insight solutions with the Symphony GOLD unified software for omni-channel retail to solve the toughest marketing, merchandising and supply chain business problems for 15 of the world’s 30 largest retailers, thousands of retail brands, and hundreds of national and regional chains worldwide.

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