One of the most read and quoted books on military strategy and tactics is called The Art of War written by Sun Tzu, a Chinese general, philosopher and military strategist who died in 496 BC. One of Sun Tzu’s most famous observations is that “All warfare is based on deception.” Although not warfare in the traditional sense, the grocery retail landscape in the U.S. is being impacted by a form of deception as the major grocery retailers fight it out over market share and bragging rights. On a near-weekly basis, corporate communications teams from Walmart, Kroger, Albertsons and other grocers release carefully crafted statements touting the virtues of the company and reinforcing to consumers the dedication of executives and associates to meet their needs.
Industry analysts appear on CNBC, Fox and other networks to discuss the grocery industry almost daily and reporters from major publications frequently write articles about grocery retailers. Grocery retailing is a topic that fascinates many people, including me. The challenge is this: Most comments from analysts and most articles written by reporters are rarely based on fact. Instead, the majority of what is said and written is either based on limited information, recycled information or is strictly an opinion. Instead of providing clarity, confusion is increased.
This is especially true when it comes to Amazon and its grocery ambitions since acquiring Whole Foods in June 2017. Due to Amazon’s seemingly unstoppable growth, the assumption among most analysts and grocery executives was that Amazon would have an immediate impact on the grocery industry. The assumption turned out to be false. It’s been nearly two years since Amazon acquired Whole Foods, and the company has little to show for it’s nearly $14 billion acquisition. Many analysts and reporters have begun to openly question if Amazon made a mistake by acquiring Whole Foods. Executives at Walmart, Kroger and other large grocery retailers have gained a level of confidence that Amazon and Whole Foods aren’t as big of a threat as they used to believe.
As for Amazon, they don’t talk much about Whole Foods. In discussions with executives and associates at Amazon and Whole Foods, I detect no level of fear or concern. Why? Because like warfare, all business is based on deception, and no company is better at deception than Amazon.
What Is Amazon Up To?
Amazon CEO Jeff Bezos or Amazon’s CFO Brian Olsavsky could easily provide a detailed blueprint to the press outlining its strategy for groceries. Would doing so be wise? Not according to Sun Tzu:
All warfare is based on deception. Hence, when we are able to attack, we must seem unable; when using our forces, we must appear inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near.
If Amazon publicly articulates its strategy for groceries too early, its competitors will immediately go to work formulating counter strategies to minimize Amazon’s chance of success. By providing as little information as possible, Amazon is ensuring that it’s keeping its future competitors off balance and guessing. Amazon may be a behemoth, but in the grocery industry, Whole Foods only commands two percent market share. For a frame of reference, Kroger controls nine percent and Walmart controls 17 percent of the grocery market. The reality is this: Amazon is at a disadvantage when it comes to groceries. Amazon would be wise to follow Sun Tsu’s wisdom:
If your enemy is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is temperamental, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. Attack him where he is unprepared, appear where you are not expected.
Amazon has no choice but to be deceptive. However, behind the scenes, Amazon is actively evaluating a multitude of options and strategies related to groceries. Amazon didn’t acquire Whole Foods for nearly $14 billion to maintain the status quo. Far from it. Amazon only makes acquisitions or enters categories it can scale. Make no mistake—Amazon can scale Whole Foods. However, can Amazon become a leader in an industry with so many larger competitors? Yes, I think they can, and this is how I believe they are going to do it.
Whole Foods Is the Beginning, Not the End
With 500 stores, Whole Foods is small when compared to Kroger (2,764 stores) and Walmart (4,177 stores). To become a major player in groceries, Amazon will have to add more stores. Most grocery analysts estimate that Amazon will need to operate between 1,500 to 2,500 stores to become the eventual leader in grocery retailing. The problem is this—due to Whole Foods focus on organic products and the retailer’s high prices, Amazon can’t just build more Whole Foods stores. Instead, I estimate that Amazon will scale the Whole Foods brand to include different formats. For example:
Maintain the current business model and assortment of products. Continue to build Whole Foods stores where strategic, while retaining as much of what makes Whole Foods unique, such as the company’s policy not to sell products with unnatural ingredients.
►Whole Foods Plus
Only a small percentage of consumers only eat organic products. Instead, consumers prefer to eat a variety of foods ranging from fruits and vegetables to potato chips, cookies and so on. The Achilles heel of Whole Foods is that since it won’t stock and sell branded CPG (consumer packaged goods) products like Pepsi, Coke, Cheetos and other snack foods, the company has much smaller sales than its larger rivals. I believe the solution for Amazon is to introduce Whole Foods Plus stores that will offer the best in organic products plus stock and sell the leading branded CPG products.
►Whole Foods Express
These would be smaller format stores stocked with a combination of organic, non-organic and branded CPG products. Some locations could have fueling stations. Due to their smaller size, the stores could more easily be opened throughput the U.S.
I like the idea of Amazon leveraging the Whole Foods brand and additional formats to scale its grocery business. However, Amazon doesn’t have to rely on Whole Foods. In fact, Amazon can easily run Whole Foods as a separate company investing capital only where necessary to build more stores.
Another option that Amazon can pursue is to open its own branded grocery stores. For example, Amazon Prime Grocery, Prime Grocery by Amazon, or AmazonFresh branded stores. Amazon does not want to be a grocery retailer. Amazon wants to reimagine the grocery experience. I am convinced that Amazon is going to build its own stores under its own brand name, as doing so will give Amazon complete control over every aspect of the customer experience.
The Store of the Future
In 2013, I wrote a research paper titled, “A Beautiful Way to Save Woolworths,” in which I applied game theory to the global grocery industry. In the paper, I made the argument that Amazon should acquire Whole Foods as most consumers prefer to buy their groceries in a store and not online. My research convinced me that online sales of groceries would only be 15 to 20 percent of total grocery sales by 2025. The world’s leading online retailer, Amazon, would have to evolve and embrace the strategic value of brick and mortar stores if it truly wanted to become a leader in grocery. I posted the paper on LinkedIn in May 2016 (Amazon acquired Whole Foods on June 16, 2017), and the paper became an instant hit.
I also made the argument in “A Beautiful Way to Save Woolworths” that Amazon should build grocery stores utilizing a design unlike any other design in use. To help Amazon see the value of the idea, I described a store capable of meeting the needs of customers through three very distinct methods: A physical grocery store, online grocery ordering and fulfillment, and online grocery ordering and pickup. I coined the term ‘multi-format store’ to describe the intent of the new design. Below is an overview of the design:
- Build the stores between 10,000 to 20,000 square feet;
- On the first floor of the store, sell only meat, milk, eggs, fruits, vegetables, baked goods, dairy products, alcohol;
- Provide customers with cooked meals or prepared meals that customers can take home to heat up;
- Give customers an option to order meals online that will be prepared and delivered by the store; and
- Assign Amazon Flex drivers to make deliveries in an average of 30 minutes to customers that order groceries online.
The focus of the first floor is on fresh products and other groceries that are most personal to consumers. Consumers want to ‘inspect and select’ groceries that are perishable, therefore making quality one of the most important criteria. The multi-format store more than meets the needs of consumers by providing increased square footage to display and sell perishable products.
The most innovative aspect of the store design is that I came up with the idea to create a second level in the store where center store items (paper towels, toilet paper, canned goods, pet food, etc.) would be stored. Since the stores would not be the same size as larger more traditional grocery stores, the total number of products carried in the store would be less. However, the items carried would be the items that generate the most sales. Customers would order center store items utilizing their phone. A micro-fulfillment system that I also designed would automatically fulfill incoming orders. When customers were ready to checkout, the grocery items purchased on the top floor would be lowered automatically to the waiting customer.
Based on discussions I had internally with members of Amazon’s executive team responsible for AmazonFresh and groceries when I worked for Amazon from 2015 to 2017, and as a result of discussions I’ve had recently with executives and associates at Amazon and Whole Foods, I believe the design I created will be built by Amazon. I cannot take credit if Amazon does indeed build the store of the future. I merely presented an idea, but Amazon will make the idea better.
However, I can state that the multi-format store design has generated discussions globally from grocery retailers and designers interested in the idea. A company named Alert Innovation has created animation showing a design for their Novastore which is nearly an exact copy of the design I describe in “A Beautiful Way to Save Woolworths.” I hope Novastores are built.
It’s Bigger Than Groceries
As I stated earlier, Amazon has no desire to be a grocery retailer. Amazon is focused on creating a customer experience in which groceries are part, but not all, of what’s available. This will entail opening physical stores that combine groceries, Amazon’s private label products, branded general merchandise, electronics, health care, pharmacy and I suspect gaming rooms. While Amazon will be expanding its focus on physical stores, Walmart’s long-term strategy is to reduce the amount of retail products in many of its stores by renting space to hospitals, doctors, physical therapists, veterinarians, gyms, restaurants, nutritionist and so on. Why does Walmart want to change its strategy? To fulfill more products online and better compete with Amazon.
To achieve its goal of operating more stores, Amazon can make additional acquisitions to further increase its physical retail store footprint. Among the options Amazon can pursue are the following:
- Acquire Kohl’s. I was among the first to recommend that Kohl’s and Amazon should partner. Based on what I’ve observed, Amazon would be wise to acquire Kohl’s. Future Amazon/Kohl’s stores could provide an interesting mix of groceries and other merchandise.
- Acquire the do-it-yourself retailer Menards. Amazon trails Home Depot and Lowe’s in the do-it-yourself category. Acquiring Menards would change the equation. Amazon can add groceries to Menards product assortment. A better option would be to locate Whole Foods or Amazon branded stores near Menards locations.
- Acquire Target and open Whole Foods Markets inside Target stores.
- Acquire former Sears store locations and open combined grocery and retail stores.
Having the right amount of retail stores is strategic. Too many retail stores with excess square footage can kill a retailer. All of today’s leading retailers are fighting to reduce the number of stores they operate or explore options for reducing square footage inside their stores to remove products.
A question I am often asked is: Will Amazon ever be a major player in groceries? Based on my experience at Amazon and working as a consultant for the largest grocery retailers globally, I am confident that if Amazon makes the required investment in building/leasing/buying additional stores between 2027 and 2030, Amazon can surpass Kroger. Between 2030 and 2035, Amazon has the potential to surpass Walmart as the leader in grocery sales.
The Deception Continues
Amazon made headlines recently when it announced plans to invest $800 million to evolve the company’s free two-day Prime shipping to free one-day Prime shipping. Competitors of Amazon put on a brave face about how they too will be able to offer one-day shipping to their customers. Industry analysts spoke glowingly of how Amazon once again raised the bar. Here’s the problem with Amazon’s announcement: One-day free shipping isn’t the goal and it never has been. Instead, the goal of Amazon has always been to create the most advanced network of logistics facilities and physical retail locations where inventory can be deployed rapidly and cost-effectively to meet customer demand in minutes, not hours or days.
The ability of Amazon to deceive its competitors will one day be a must-read case study. The strategy utilized by Amazon is eerily like the strategy former President Ronald Reagan used to force the former Soviet Union to spend additional billions of dollars preparing for an attack that never materialized. Reagan’s announcement in 1983 that the U.S. would invest in developing an impenetrable shield, the Strategic Defense Initiative (SDI), to protect the U.S. from a Soviet missile attack, forced the Soviet Union to rethink its entire military strategy. Leaders of the Soviet Union and the military wasted years and billions of dollars trying to create a better strategy. SDI was never deployed, but the deception achieved the desired result, helping accelerate the collapse of the Soviet Union.
Amazon’s competitors will invest heavily and work furiously to achieve FREE one-day shipping. Hint: There is no such thing as free one-day shipping or any day shipping. Walmart will be the first to claim it has once again caught up with Amazon (probably via a tweet), and the company will try and make the argument that its network of stores gives Walmart an “advantage over Amazon.” Walmart’s executive team reminds me of André Maginot, the mastermind behind one of the greatest failures in history, the Maginot Line. According to British historian Ian Ousby:
Time treats few things more cruelly than the futuristic fantasies of past generations, particularly when they are actually realized in concrete and steel. Hindsight makes it abundantly clear that the Maginot Line was a foolish misdirection of energy when it was conceived, a dangerous distraction of time and money when it was built, and a pitiful irrelevance when the German invasion did come in 1940. Most glaringly, it concentrated on the Rhineland and left France’s 400-kilometer border with Belgium unfortified.
Note to Walmart: Your stores do not give you an advantage over Amazon, as Amazon can easily increase the total number of distribution locations greater than your store count and can do so at a fraction of the cost. Feel free to send a tweet if you disagree.
As with all deception, at some point the truth becomes known. I estimate that within three years Amazon will announce the ability of the company to fulfill orders to customers in minutes, including groceries and general merchandise, across most of the U.S. How will Amazon do this? By building the largest and most integrated logistics network in the U.S. By ‘integrated’ I mean that Amazon is implementing a strategy whereby inventory will be held in apartment buildings, hospitals, residential developments, apartment complexes, office parks, specially built fulfillment centers, specially designed Consumables Distribution Centers for groceries, satellite distribution centers, delivery stations, mobile inventory vehicles, airport rapid receive and deploy locations, and so on. Every process within the chain of fulfilling an order will be automated. Amazon will leverage its mastery of data to create a living supply chain that anticipates demand making it easier for Amazon to meet demand.
Executives at Amazon’s competitors will try to put on a brave face, but deep down inside, the truth will be known—Amazon won.