Amazon Fresh Stores Series

Bringing the success of Amazon.com to brick and mortar has been an evolving journey for Amazon over the last five years since they opened an Amazon Books store in Seattle University’s Village mall. At first, customers may have had the potential to end up confused and frustrated by the experience like Jonah Hill's character in 40 Year Old Virgin in the physical eBay storefront. But, since then, Amazon continues to transform the brick and mortar retail. The Fresh Store is a culmination of everything they have learned and proof that Jeff Bezos continues to put the customer first.

Hey Honey, I'm going to the Fresh Store!

Amazon's fourth original foray into American's physical shopping experience opened on August 27th to a limited number of local shoppers in Woodland Hills, California. Amazon's Fresh Store is the company's first of about a dozen, traditional grocery store experiences that it plans to open over the next year in a number of suburban settings across America. To this point we have seen Amazon Books stores, Amazon 4-star stores and, most recently/futuristically, Amazon Go stores. Amazon 4-star stores highlight most non-food items that are "rated 4 stars and above, a top seller, or new & trending on Amazon.com" while Amazon bookstores bring the shopper the newest highly rated books or top-sellers across a number of traditional categories that you would find in your local Barnes & Noble. Amazon Go stores brought shoppers one of and definitely the most written about convenience stores (they have now also opened larger square foot Go Grocery Format), allowing customers to scan into the store using a QR code generated in the Amazon mobile application and then utilizing an extraordinary number of cameras placed around the store and computer vision algorithms to identify what each individual shopper has picked up or put into their basket, bag or carry-all of choice. When the shoppers are done they walk out through the turnstiles and Amazon charges them the cost of the selected goods as they "check-out" of the store.

Hey, what about Whole Foods?

Not to be left out, the step-child of this family is Amazon's $13.7 Billion purchase of Whole Foods' 400+ store network in August of 2017. Coming off the heels of the acquisition announcement, in a company statement, Amazon Consumer Worldwide CEO (who recently announced his retirement in 2021), Jeff Wilke stated:

"Everybody should be able to eat Whole Foods Market quality – we will lower prices without compromising Whole Foods Market’s long-held commitment to the highest standards(.) To get started, we’re going to lower prices beginning Monday on a selection of best-selling grocery staples, including Whole Trade organic bananas, responsibly-farmed salmon, organic large brown eggs, animal-welfare-rated 85% lean ground beef, and more. And this is just the beginning – we will make Amazon Prime the customer rewards program at Whole Foods Market and continuously lower prices as we invent together"

In some cases these price reductions were tangible, but were really just eliminating the markup that Whole Foods shoppers had shown they were willing to pay for in the first place. CNBC Reporter, Lauren Thomas dove into the items that Amazon outlined in their public announcement and came to a similar conclusion:

"Bananas for 49 cents a pound, anyone?

Marked down from 79 cents, that’s more comparable to other supermarket chains..."

With a closer look at the announced items, it becomes clear that the price reductions were focused on items that are known traffic drivers for retailers. Previous to the acquisition, Whole Foods could be viewed as a supplementary shop to the average household’s primary grocer. They would stop at Whole Foods to grab the local beer, keto ice cream or organic sandwich cookies that they liked but were not able to find anywhere else. Don’t get me wrong, they were obviously able to attract households to spend the majority of their grocery budget as well, however the likelihood is that a grocery budget was something that these households were not worried about. Thasos Group, a mobile-based, location data insights platform, released a report (highly recommend opening this link in another tab so you can read the full paper) that showed that this marketing tactic didn't do enough to erase the "Whole Paycheck" moniker for most shoppers. The report showed that most of the new customers that Whole Foods attracted were the wealthiest regular customers from competing stores and more importantly did not influence shoppers to drive longer distances or was it able to draw a lower income demographic shopper to their nearest Whole Foods. Controlling for size of the customer base of their competitors, over the first 3 weeks, defection rates of competitor's customers were highest at similar retailers like Trader Joe's and Sprouts as seen in this chart:

A few other pieces of evidence of the acquisition were Amazon Echo devices appearing in all areas of the store, Amazon pick-up lockers, and additional discounts available on items including free delivery for Amazon Prime Members. All of these advanced an important part of Amazon's long term strategy of more users to their ever-growing ecosystem. As we will see, Amazon is well known for their willingness to test hypotheses about the consumer's behavior.

Ok, so what makes Amazon Fresh Store different?

That question is partly answered in Amazon's Jeff Helbling's, VP of Amazon Fresh Stores, blog post introducing Amazon's Fresh Store. He covers 4 major topics:

1.) Seamless in-store and online shopping (Convenience/Delivery)

Their new physical location offers pick-up (both in-store or drive-up), delivery and in-store shopping as well as the ability to pick up or return anything within the Amazon ecosystem.

2.) Consistently low prices (Price)

Jeff calls out prices for a few products, that at first glance, seem pretty reasonable. In Part 1 of this series, I’ll dive deeper on these prices as well as look for other clues that may signal where Amazon will end up on the EDLP to Hi-Lo pricing spectrum.

3.) Delicious food (Assortment)

Modeling the expectation for your typical grocery store, Amazon Fresh will offer different types of hot and cold prepared foods, a wide variety of National Brands, Private Labels, both those that have been available online as well as introducing new brand lines and arguably the most fascinating mention, “Local Brands.” In Part 3 of this series I will examine whether the customers are getting lip service with the local brand mentions of “Rockenwagner Bakery and Groundwork Coffee” as well as a variety of other topics.

4.) New ways to make grocery shopping more convenient (Dash Cart)

Amazon’s latest technological innovation, the Dash Cart, brings the Amazon Go experience to a grocery cart. In Part 2, Customer Decision Making, the customer and employing technology to influence their behavior will be the at the forefront of the analysis.

These are just a few of the prompts that the next three articles will try to tackle in varying levels of detail in order to see how Amazon’s newest brick and mortar venture has transformed the shopping experience in the grocery industry.

And so here's the overview of how I broke it up:

Part 1 Price: How Amazon is using price points to influence customer behavior and channel of preference, and what this could mean to suppliers in the long term

Part 2 Customer Decision Making: How Amazon has the upper hand in creating a shopper experience that leads to exploration and a lower barrier of "new item adoption"

Part 3 Assortment: Amazon's approach to living up to their "Everything Store" nickname and how they will challenge key competitors in this channel.