Executive Insights Volume XX, Issue 31

Digital Grocery Lessons From Amazon’s Acquisition

of Whole Foods
They call it the “Amazon effect” — the goods, electronics, home furnishings, clothing — even health
and personal care. But the gap is rapidly closing (see Figure 1). By
disruption that happens when the Seattle 2022, ecommerce’s share of food and beverage sales will have
ecommerce behemoth enters a new corner of significantly increased from 2017 (see Table 1).
retail. Somehow, though, the grocery business We estimate that online sales will account for as much as 20% of
always seemed immune. the overall food and beverage market by 2025 (see Figure 2). If
the share of internet sales does reach 20% — a tenfold increase
All that ended on June 16, 2017, when Amazon announced its over 2016 — that additional 18% share will come at the expense
acquisition of Whole Foods Market, a grocer with more than 460 of other distribution channels. In the $800 billion food and
brick-and-mortar stores. The $13.7 billion deal sent shock waves beverage market, that amounts to $140 billion to $150 billion
through a sector already struggling with razor-thin margins and shifting away from brick-and-mortar retail. And shelf-stable foods
cutthroat competition. will be the first to go.

In this Executive Insights, we unpack what Amazon’s foray into But grocers won’t give up without a fight. They’ll strike back with
stores means for the grocery market. We’ll look at what the Whole fresh, fresh-prepared and even frozen offerings — in other words,
Foods acquisition reveals about Amazon’s strategies in the grocery the categories least suited to Amazon-style supply chains. Already,
industry, how changing consumer preferences are reshaping the grocers are extending the convenience and instant gratification of
grocery landscape and the ways that ecommerce retailers are fresh foods into last-mile delivery, another area where Amazon is
responding. We’ll also go over some of the implications of these more challenged to compete.
trends for traditional brick-and-mortar grocers.
More on that later. First let’s look at the current state of the
Before we get into that, however, let’s review where digital market that Amazon has entered, and what we know so far
grocery sales stand today. about how Amazon fits in.

Cleared for takeoff The online land grab

As of 2017, the $800 billion food and beverage retail sector Traditional grocery stores. Competition among grocery retailers
claimed only about 2% of online sales. Its ecommerce penetration had been escalating well before Whole Foods joined the Amazon
is dwarfed by other consumer sectors such as media, sporting portfolio. For decades, typical net profits have hovered in the

Digital Grocery Lessons From Amazon’s Acquisition of Whole Foods was written by Rob Wilson, Manny Picciola
and Maria Steingoltz, Managing Directors in L.E.K. Consulting’s Food & Beverage practice. Rob, Manny and Maria
are based in Chicago.
For more information, contact consumerproducts@[Link].
 Executive Insights

Figure 1
Share of U.S. retail sales (value) attributable to ecommerce, by selected categories (2000-2022F)

50
Sporting goods, hobby,
musical instruments and books

Electronics and appliances

40
Percentage of total retail sales

Furniture and home furnishings

Clothing and clothing accessories
30

20

Food and beverage

Health and personal care
10

0
04 06 08 10 12 14 16 18F 20F 22F

Source: U.S. Census, L.E.K. research and analysis

low single digits. Now traditional grocery stores are feeling the With Whole Foods, Amazon gained hundreds of potential
pressure of “food everywhere” as other retailers — discounters, distribution hubs. And their locations are relatively dense. Of all
convenience stores, drugstores and dollar stores among them — U.S. households, 33 million are within 5 miles of a Whole Foods
turn to fresh and processed foods as a way to drive traffic. store. Among households with income over $100,000 a year,
33% are within 3 miles of a store.
Against this backdrop, grocery investors did not take kindly to the
news of Amazon’s Whole Foods acquisition. While Amazon’s own
stock price stayed about the same, the stock prices of five other Table 1
retailers — Walmart, Costco, Sprouts, SuperValu and Kroger — Forecast share of U.S. retail sales (value) attributable
fell an average of 15% over the next two days. Two months later, to ecommerce, by selected categories
on Aug. 24, Amazon and Whole Foods announced an immediate
markdown in prices on a range of items — and stock prices Percentage point change
among the five fell again.
2012-2017F 2017F-2022F
Consumers, on the other hand, liked what they heard. According Sporting goods, hobby,
to a recent L.E.K. Consulting survey, 83% of consumers who had 13 13
musical instruments and books
used Amazon offerings knew about the Whole Foods acquisition,
and most of them felt positive about it (see Figure 3). Electronics and appliances 12 11

Furniture and home furnishings 13 7

The numbers tell the story. Amazon Prime has more than 100
million paying members worldwide. In the U.S., more than half of Clothing and clothing accessories 9 11
households are Prime members, and our survey indicates that this Health and personal care 3 5
group’s visits to Whole Foods actually increased post-acquisition
(see Figure 4). Food and beverage 1 14

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Figure 2 Figure 3
Online share of the $800 billion food and beverage market U.S. consumer views of Whole Foods acquisition

2016 2025 Rating 1 to 7, where 1 is “Strongly dislike” and 7 is

“Really like” for Amazon users* who were aware of
the acquisition (N=294)
7.0

6.0
5.5
5.3
vs. 5.0

4.0

3.0
Average
2.0
Online share Online share
~2% ~15-20%
1.0
Online Meal Brick and
grocery kits mortar
0.0
Prime members Nonmembers
Note: Online share figures include meal kits; total market figures include food and
beverage sales by ecommerce firms and sales by food and beverage firms *Participants who currently use or previously used Amazon offerings
Source: U.S. Census; Euromonitor; Guggenheim; Nielsen; FMI; L.E.K. analysis Source: L.E.K. consumer survey

Interestingly, Amazon’s price reductions at Whole Foods may grocery players would get caught up in Amazon’s wake as well.
have further extended its reach among the affluent. According to And for good reason. In one fell swoop, Amazon checked rival
research firm Thasos Group, foot traffic at Whole Foods increased delivery services like Peapod and Instacart. It also blocked meal
33% in the week after the acquisition, and these new shoppers kit providers like Blue Apron, Plated and Hello Fresh from direct
included the wealthiest of Walmart, Kroger and Costco customers. access to one of the country’s largest natural-foods retail brands.

Online-offline integration. Amazon’s next move was to integrate This has escalated a pitched battle to control the so-called
Whole Foods with its Prime subscription service. Taking advantage last mile of grocery distribution. Brick-and-mortar grocers, for
of a strong overlap between the two sets of customers (see Figure example, are experimenting with store pickup of online orders.
5), the company began offering to Prime members online orders In 2016 Kroger added more than 420 curbside pickup locations,
of pantry items from the Whole Foods 365 house brand. Later, contributing to a total of 640 today. Walmart, which offers
Amazon announced the rollout of Prime Now one- and two-hour curbside pickup at 900 locations, has added 120 “pickup towers”
grocery order delivery, plus an extension of its 5% cash-back benefit across the country. These are essentially giant vending machines
to Amazon Prime cardholders for purchases at Whole Foods. where customers can collect same-day orders.

As it increased the visibility of Whole Foods online, Amazon In 2018, Kroger made another major push into online grocery
likewise raised its own profile at Whole Foods locations. The with its announcement of a strategic partnership with U.K.-based
stores now have Amazon Lockers, accept voice orders from Ocado, the world’s largest dedicated online grocery retailer, with
Amazon Echo and offer Amazon electronic devices for sale. plans to open a total of 20 warehouses in the next three years.
What’s next is anyone’s guess, but with the launch of the Amazon According to its annual report, Ocado has “transformed the way
Go grocery store in Seattle, the introduction of checkout-free the nation can shop for groceries by developing a unique business
Whole Foods stores seems to be merely a matter of time. model based on highly efficient, fully automated, Customer
Fulfilment Centres (CFCs), flexible and easy-to-use customer
Up-and-coming business models. The integration of Whole software, and friendly and timely last mile delivery.”
Foods with Prime raised speculation that newer, more efficient

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On the delivery side, grocery stores are pairing with fleet services L.E.K.’s survey, roughly 40% of consumers have used online
at a brisk rate: Kroger and Uber, Walmart and Uber, Walmart and or ecommerce grocery services, and on average they expect to
Instacart, and Aldi and Instacart. Grocers are also eyeing meal kit increase their rate of online purchasing (see Figure 7).
companies like Plated, which Albertson’s snapped up in a 2017
acquisition. But Walmart may be the most ambitious of them all. Personalization and convenience. As ecommerce retailers
Its 2016 acquisition of [Link] and subsequent partnership with abbreviate the path to purchase, online grocery shopping continues
Google reveal intentions to build an ecommerce capability to rival to improve. Consumers gain a personalized, curated shopping
Amazon and resonate with a new generation of food shoppers. experience via loyalty rewards for high-consumption items, one-
click “buy it again” capabilities and preset delivery specifications.
Evolving shopping behavior This digital shelf approach also helps consumers shop more
Penetration of online grocery. That new generation — tech- efficiently (especially if they’re using a mobile device) and makes
savvy, experience-oriented and pressed for time — happens ecommerce baskets stickier than the brick-and-mortar ones.
to signal the future of digital grocery. By 2025, millennials will
The catch? This increased efficiency could lead to less browsing
make up 75% of the U.S. workforce, a trajectory reflected in
by repeat shoppers. It also could reduce the rates at which new
their relative willingness to shop for groceries in whatever format
products are discovered and tried. (Consider that on Amazon.
best suits their lifestyles. That could be any combination of
com, 70% of consumers never click past the first page of search
online delivery, in-store pickup, automatic subscription or virtual
results.) However, digital sales are only part of the equation in
supermarket (see Figure 6).
an integrated online-offline grocery model like Amazon. Grocery
In response, digital grocery will likely continue its rapid expansion. store sales are qualitatively influenced by digital technologies.
Consider that in 2015, according to Morgan Stanley Research,
Crowdsourced dynamic shelf. A key advantage of digital
the share of consumers ordering fresh food online was just
shelves is that they let consumers actively engage with and
8%. It reached 26% just one year later. Today, according to
provide real-time feedback to retailers and manufacturers through
product ratings and reviews, questions and answers, photos, and
Figure 4 other user-generated content.
U.S. change in shopping frequency at Amazon and
Whole Foods post-acquisition
Figure 5
Percentage of Prime members who shopped at Overlap between Whole Foods and Amazon Prime customers
Whole Foods in past 12 months? (N=193)
Less Percentage of U.S. shoppers with an
frequently Amazon Prime membership
100 9%
Less 60
frequently
55
17%
80 50

As often 45
43% As often
37% 40
60
35
Whole
30 Foods
40
25
shoppers
56%
More More 20 All shoppers*
frequently frequently 37%
20 48% 15
46%
10

5
0
Whole Foods Amazon
(grocery shopping) U.S. shoppers

Source: L.E.K. consumer survey *Consists of the total population of U.S. shoppers
Source: Bloomberg; Barclays; Harris Williams, L.E.K. analysis

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Figure 6 Figure 7
Engagement with digital grocery options, by generation U.S. online grocery purchasing rates

Percentage of respondents (N=1,559) Percentage of respondents who have

100
purchased online (N=571)
Percentage
100 of groceries
10%
16% 61-100%
80 12%
80
51% Never 18% 41-60%
61% purchased
63%
groceries 24%
75% online 60
60
23% 21-40%

40
40
14%
Tried 51%
12% 34% <20%
11% purchasing
20
online
20 7% Actively
35% 3% 9% None
27% 26% purchase
0
18% groceries
online Current online Expected online
purchasing purchasing 12
0
N=417 months from now
Millennial Gen X Boomer+ Overall N=555
N=500 N=434 N=385 N=1,559

Source: L.E.K. consumer survey Source: L.E.K. consumer survey

Robust consumer browsing and purchase data is the key to all This has several implications for grocers. One is that, with tools
this, and algorithms put it to good use. They respond to incoming like Amazon’s, they can create trend-forward, private-label
information by adjusting product placement, point-of-sale products and feature them on a digital shelf. Of course, in the
marketing and pricing on the fly. This enables rapid-fire iteration Whole Foods 365 brand, Amazon already has one of the grocery
and a more optimized digital shelf compared with brick-and- business’s most recognizable private labels — one that generated
mortar retail. $1.6 million in its first month of online sales. But Costco (for
instance) also has a strong private-label brand, Kirkland Signature,
Online reviews deserve their own mention because shoppers so which accounts for about a quarter of Costco’s sales. Now
often rely on them to make their purchase decisions. According to Kirkland is available on Instacart. And Walmart recently launched
a PowerReviews study, if reviews are available on an ecommerce its own private-label grocery brand, Uniquely J, on the [Link]
grocery site, then 93% of shoppers will read them at least ecommerce platform.
occasionally. Reviews can also have a halo effect on brick-and-
mortar sales as consumers investigate items on their phones while Another implication is that digital grocers can offer wider brand
in stores. The halo effect isn’t as high for grocery as it is for high- and product assortments than their brick-and-mortar counterparts.
ticket categories like appliances. Even so, shoppers are more likely The incremental cost of carrying one additional SKU is much lower
to purchase something new if the product has reviews. for ecommerce retailers than for brick-and-mortar stores, which
are limited by the physical space they have for shelf and backroom
The imperative to adapt inventory. Compare Amazon’s 1.5 million SKUs with Whole Foods’
Amazon’s online shopping site, along with its Echo and Alexa 20,000. Even Walmart carries only 100,000 SKUs in its stores.
products, uses proprietary data capture and analytical tools. The Instacart is a much smaller operation than Walmart, but it has three
tools track each consumer’s online activity so Amazon can show times as many SKUs because it’s online. Because their selection is so
advertisements, inventory and store layouts that more closely much greater, digital grocers have a long-tail advantage, so called
match the consumer’s preferences. The tools also optimize because they get the shoppers who are looking for smaller brands,
distribution logistics for both supplier and consumer. unique flavors, seasonal items or otherwise hard-to-find items.

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Groceries in general have an advantage over other ecommerce 3. Rethink price pack architecture. Digital grocery offers
products in that purchases are habitual and frequent. These the chance to create “swim lanes” of different product
qualities lend themselves to automated “smart” and voice configurations — multipacks, variety packs and other special
ordering. With the foot traffic data coming in from Whole features — that are attuned to the needs of online shoppers and
Foods’ physical locations — some 8 million customers per week that mask product price comparisons to traditional channels.
worldwide — Amazon may finally have what its algorithms need
4. Package for at-home delivery. Collaboration with leading
to draw consumers away from their local grocery stores.
suppliers is required to develop distinctive, efficient direct-
Meanwhile, consumer packaged goods (CPG) manufacturers to-consumer packaging. This includes rethinking external
and brands can study Amazon’s efforts with Whole Foods to see packaging in ways that are new to many brands. It also
what they can apply to their own digital grocery endeavors. At a involves re-evaluation of boxes, pouches, envelopes,
minimum, firms will need to: and even packing materials in light of the brand and the
consumer’s unboxing experience. Attributes to aim for
1. Develop a comprehensive digital strategy. CPG include small, low-cost and flexible — with an emphasis on
companies will have to strike a balance between what they sustainable materials where possible.
need from their own website (showcase the brand or drive
Much has changed since Amazon’s initial foray into the grocery
sales volume?) and what they need from an e-tail partner
market more than a decade ago. Back then, the company
model as it relates to Amazon (sell through or sell against?).
launched AmazonFresh into a market where shipments had
2. Optimize the digital shelf. Free from the constraints of different challenges from other consumer goods — challenges in
physical space, firms must develop capabilities to manage which stores with real estate seemed to have the advantage.
their digital assets, showcase their products (think 3-D
and CGI images) and stay top-of-mind among consumers Fresh and frozen foods are still in a class of their own. But
(through, for example, loyalty programs and digital technology has changed since 2007, along with Amazon’s
marketing). There’s also the need to manage online reviews willingness to embrace brick-and-mortar retail. Add to this
and feedback, whether through a vendor or an internal team. the wave of innovative business models we’ve seen from new
entrants, and the message for food retail becomes clear: In store
or online, the world of groceries is going digital. It’s time for
brands to get on board.

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About the Authors

Rob Wilson is a Manny Picciola is a Maria Steingoltz is a
Managing Director Managing Director and Managing Director
and Partner in L.E.K. Partner, heads L.E.K. and Partner in L.E.K.
Consulting’s Chicago Consulting’s Chicago Consulting’s Chicago
office. He specializes office, and is a member office. Maria is focused
in the Consumer of L.E.K.’s Americas on the Retail and
Products & Retail sector, Regional Management Consumer Products
with a more specific Committee. Manny is practices, with a
focus in the Food & Beverage practice. primarily focused on consumer products and special focus on food and beverage as
Rob advises clients on a range of critical leads the firm’s Food & Beverage practice. well as on beauty and personal care. She
strategic business issues, including growth He has extensive experience managing advises clients on a range of strategic issues,
strategy, price pack architecture strategy, and directing projects in corporate and including growth strategy, new market entry,
trade spend optimization, M&A support, business unit strategy, channel management, customer-centric strategy, pricing, consumer
profitability enhancement, and organizational consumer segmentation, corporate segmentation and M&A.
transformation. turnaround, and M&A transaction support
across multiple industries.

About L.E.K. Consulting

L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business
leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make
better decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports global
companies that are leaders in their industries — including the largest private- and public-sector organizations, private equity firms, and
emerging entrepreneurial businesses. Founded in 1983, L.E.K. employs more than 1,200 professionals across the Americas, Asia-Pacific
and Europe. For more information, go to [Link].

L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products
and brands mentioned in this document are properties of their respective owners.
© 2018 L.E.K. Consulting LLC

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