‘When Amazon bought Whole Foods, what they did was they sent the signal to the entire grocery/retail landscape that Amazon was coming.’
Apoorva Mehta, CEO of Instacart, 20176
At the time of writing, one year since the deal was completed, Whole Foods stores don’t look awfully different than they did pre-Amazon. There were some obvious quick wins, as discussed earlier in the book, such as collection lockers and Echo devices taking up physical real estate instore, and the Whole Foods range going live on Amazon’s site. Pricing was sharpened and Prime perks slowly became available instore. But, overall, nothing ground-breaking.
Amazon’s pace of innovation may be relentless – every week they appear to be disrupting a new sector – but when it comes to implementation, Amazon is notoriously methodical. The entire industry is now watching with bated breath to see if the retail colossus can do one of the most fundamental things in retail – operate stores. Amazon will take its time, quietly experimenting and tinkering with various bricks and mortar concepts as it tackles the steep learning curve that is grocery. It could very well be years before we see any major changes rolled out across the store estate.
Whole Foods may not have changed all that drastically since the acquisition, but everyone else sure did. The effect of the deal has been largely psychological. It’s been a wake-up call for incumbent supermarkets, not only to ramp up their own e-commerce capabilities but also to digitally enhance their store base. To do that, most retailers have had to look externally.
Two weeks after the Whole Foods deal, Ocado CEO Tim Steiner was all smiles at the retailer’s half-year results meeting in London. One of their biggest threats was also their biggest opportunity. When asked his thoughts on the Whole Foods deal, Steiner noted that it would simply spur on demand for online grocery, which would ultimately help them to grow their business. ‘Grocery retailing is changing and we are ideally positioned to enable other retailers to achieve their online aspirations.’7 Steiner’s message echoed that of Instacart CEO Apoorva Mehta who, the same year, called the Amazon-Whole Foods deal a ‘blessing in disguise’.8
For years, Ocado had been promising investors it would secure an international partner for its grocery delivery technology, Ocado Smart Platform. After missing its first self-imposed deadline of a 2015 announcement, investors began to lose patience as the months and then years rolled on. Perhaps Ocado’s ambitions to transition from retailer to global technology provider were inflated?
Ocado finally signed its first long-awaited deal with France’s Casino Groupe in 2017 – less than six months after Amazon’s Whole Foods acquisition. The agreement enables Casino to have exclusive rights to use Ocado’s robotics, online technology and delivery software in France. Since then, Ocado has announced a flurry of deals with global retailers including Sobeys (Canada), ICA (Sweden) and, its most notable to date, Kroger in the US. It’s fair to say that Whole Foods was the impetus for these established giants to take action against Amazon.
CASE STUDY Responding to the Amazon Challenge
Brittain Ladd9
The announcement that Amazon was acquiring Whole Foods on June 16, 2017 can best be described as a ‘Pearl Harbor moment’ in terms of the impact on the grocery industry. Grocery executives who had been convinced Amazon would remain focused on pursuing an online grocery strategy were shocked to discover that, sooner rather than later, Amazon would be a head-to-head competitor.
To compete, many executives chose to reach out to the grocery delivery and order fulfilment company, Instacart. Entering into such an agreement solved a short-term problem of needing the ability to offer customers online grocery ordering, fulfilment and last-mile delivery. However, an agreement with Instacart also posed a threat – to utilize Instacart, grocery retailers had to give the provider access to their data, stores and customers. I was among the first to raise the alarm that retailers were in effect teaching Instacart their business and providing Instacart with data identifying their strengths and weaknesses. If Instacart expand their business model to include opening their own retail stores, or if they are acquired by a competitor such as Walmart, Instacart will be able to leverage that data to their advantage.
Kroger, the second largest retailer in the US and the largest grocery retailer, retained my services in 2018 to provide them with a list of strategies to better compete with Amazon.
Applying my knowledge of Amazon and the global grocery industry, I completed an end-to-end assessment of Kroger’s operations and determined that the optimal course of action for Kroger to take would be to acquire Ocado. Kroger operated 42 legacy distribution centres to replenish nearly 2,800 stores, but did not have a supply chain capable of meeting the demands of e-commerce. Acquiring Ocado would give Kroger access to best-in-class grocery fulfilment software capable of transforming their business model. It would also provide them with a competitive advantage. Kroger became convinced through their discussions with Ocado that leveraging Ocado’s Customer Fulfilment Centre (CFC) technology would transform their supply chain. However, with a price tag of nearly US $2 billion, Kroger chose to take a 5 per cent stake in Ocado worth $247 million instead of acquiring the company.
Kroger made the official announcement of their intent with Ocado on May 15, 2018. According to the press release, Ocado will provide Kroger with various systems to help the company manage warehouse operations, introduce automation, and provide Kroger with an advanced solution for logistics and delivery route planning. The focus of Ocado’s efforts will be on helping Kroger more efficiently fulfil online grocery orders and assembling orders for Kroger’s ClickList curbside service. A total of 20 CFCs are scheduled to be built over a three-year period beginning in 2018.
Some analysts and grocery executives believe Ocado’s model isn’t suited to the US market, given the fact much of the US population is dispersed across many towns and suburbs with small populations, whereas the UK is densely populated; ideal conditions for online grocery and last-mile delivery. Outside urban areas, many analysts believe it makes more sense to focus on having customers shop for groceries inside stores instead of building high-tech automated warehouses.
I voiced similar concerns to Kroger’s executive team about Ocado’s effectiveness in the UK vs the realities Ocado will encounter in the US. However, I recommended a solution to Ocado and Kroger that if adopted, will eliminate the obstacles Ocado will face. The solution will also transform Ocado’s business model, allowing the company to expand into a channel they currently do not serve. Instead of Kroger utilizing Ocado’s warehouses, referred to as ‘sheds’, to fulfil online grocery orders, I recommended the following strategy to Kroger and Ocado:
Creating a dual-purpose capability for replenishment and order fulfilment out of each CFC built will greatly reduce Kroger’s total logistics costs, increase profitability, and increase Kroger’s competitive advantage. Another benefit of Kroger entering into an agreement with Ocado is that Kroger will be able to enter many states they do not currently serve, primarily on the East Coast. Kroger can open CFCs in and around such large, densely populated cities as New York, Philadelphia, Pittsburgh, and Miami among others.
Due to their exclusivity agreement with Kroger, other grocery retailers operating in the US will be unable to access Ocado’s technology. I believe grocery retailers will have no choice but to copy Kroger or risk being left behind. CommonSense Robotics – which specializes in building automated grocery distribution facilities that operate in a fashion similar to Ocado’s CFCs – is more than likely the primary beneficiary of Kroger’s agreement with Ocado.
Brittain Ladd is an expert in strategy and supply chain management. Ladd is also a former Amazon executive who holds the distinction of being one of the first individuals to recognize the need for Amazon to expand their business model to include a physical retail presence. In a 2013 research paper titled ‘A Beautiful way to Save Woolworths’, Ladd made the argument that Amazon should acquire either the retailer Whole Foods or the Texas-based regional grocery retailer HEB. Ladd worked for Amazon from 2015 to 2017, leading the worldwide expansion of AmazonFresh, Pantry and Groceries.
Amazon’s grocery onslaught has certainly created strange bedfellows. While buying alliances aren’t unheard of in Europe, it was shocking to see two of the world’s largest food retailers – Tesco and Carrefour – announce such an agreement in 2018. Similarly, while we all expected further consolidation in the UK grocery sector, not many people would have predicted Asda and Sainsbury’s merging to future-proof their businesses against Amazon.
Tech partnerships are now in vogue, with Google and Microsoft in particular leading the anti-Amazon alliances. Retail acquisitions are also ripe, designed to either keep up with or maintain distance from Amazon – think of Target/Shipt, Walmart/Flipkart (India), and Kroger/Home Chef, just to name a few. Everyone is choosing sides before Amazon strikes.