The Amazon Effect   //   April 20, 2023

As Amazon looks to invest in other grocery formats, the future of Whole Foods remains unclear

In its 2022 annual shareholder letter, Amazon hinted at its plans to invest in a mass grocery store model — but suggested that its Whole Foods chain does not serve that need.

Amazon CEO Andy Jassy wrote that Whole Foods is on an “encouraging path,” but to have a more significant impact on physical grocery stores, “we must find a mass grocery format that we believe is worth expanding broadly.”

Historically, Amazon has found it difficult to make sense of the upmarket grocery store Whole Foods Market, which it acquired six years ago. While Whole Foods covers a premium niche in the overall grocery space, consultants and other retail industry executives said the chain doesn’t really serve the mass market in the same way as rivals Kroger or Albertsons. Ultimately, it appears that Amazon is looking for a new grocery format outside of Whole Foods that has mass appeal, cheaper pricing and can ultimately be automated.

Thus, it remains to be seen what role Whole Foods plays in Amazon’s grocery portfolio going forward. However, these experts said that Whole Foods still can fill a need for Amazon by serving the top end of the grocery market.

After acquiring Whole Foods in 2017, Amazon focused its efforts on technological innovation in grocery. The e-commerce giant opened its Go convenience stores in 2018, which eliminated checkout counters. Amazon Go stores introduced shoppers to its Just Walk Out technology which let consumers enter a store, grab what they want, and pay for an item without stopping to check out. Then, Amazon tried its hand at a new grocery store format in 2022 when it opened Amazon Fresh, which now has 42 stores.

“I think what they were alluding to is they’re going to need a slightly different mousetrap to crack mass grocery than trying to turn Whole Foods into that mousetrap,” said Bryan Gildenberg, founder of commerce consultancy Confluence Commerce. “Whether that’s Amazon Fresh or whether it’s something different than that I think is an open question. My guess is that they are going to need a format that just looks a little bit more like a conventional grocery store.”

Finding the right grocery profit model

In addition to Jassy’s letter to shareholders, there are other changes Amazon has made recently that suggest the company is still trying to figure out the right playbook for grocery. Its food delivery service Amazon Fresh recently raised minimum delivery fee to combat slower growth. The company also announced it would close eight Amazon Go convenience stores to drive better profitability. Amazon’s share of grocery sales in estimated to drop from 24.2% in 2017 to 22% in 2024, according to data from eMarketer.

Sean Turner, chief technology officer at grocery tech startup Swiftly, said Jassy’s remarks are the latest sign that Amazon desperately wants to succeed in the grocery market. “Amazon really has to win grocery and there’s a number of reasons why they feel like they need to own it strategically. One of the most obvious is it just drives what’s called frequency of order,” said Turner.

“Amazon is looking for a model where they can have a grocery store that they can use to service the shopper more frequently, as well as more cheaply than they’re able to do in their e-commerce purchases,” he added.

In Gildenberg’s eyes, a mass grocery format might economically be better suited for automation compared to a premium chain like Whole Foods.

“Amazon is not a business necessarily that has a core competency in employing skilled people in thousands of locations to do site specific work. That’s just not what Amazon is good at — Amazon is good at applying technology and systems to things run more efficiently,” Gildenberg said.

Amazon’s shifting moves at grocery comes after a year in which the company has struggled to consistently maintain profitability. In the third quarter, the Seattle tech giant swung to a profit of $2.8 billion compared to a loss of $2 billion in the previous quarter. But that was also slightly below the $3.1 billion in profits clocked in during the third quarter of 2021.

Where Whole Foods succeeds

Both experts agreed that, at a high level, Whole Foods does serve a need as a grocery store for wealthier shoppers. “It’s not a bad idea. It’s a good thing to have in your portfolio,” said Gildenberg.

The most promising aspect of Whole Foods, for Gildenberg, is that it serves as a launch pad for third-party brands in the natural organic market space. And Amazon isn’t done investing in Whole Foods. Recent reports suggest that Amazon is reportedly planning to build off-site kitchens to better serve Whole Foods’ in-store customers who enjoy its food bars for a quick lunch or dinner option.

Gildenberg said the move suggests Amazon wants to distribute fresh food in locations without kitchens. “Specifically, if Amazon wanted to fuel their mass-market groceries with Whole Foods, they could have a central kitchen that’s delivering a chunk of the prepared food to a grocery store that doesn’t have a kitchen. That enhances the proposition of the mass grocery format off of a of a centralized kitchen,” he added.

Turner said these food bars have been a very popular draw in Whole Foods and could help drive delivery volume. He added that Amazon wants to double down on the success of companies like DoorDash and Uber Eats. “There’s a big opportunity there. When you see what’s driving, especially a lot of the delivery volume at DoorDash or Uber Eats, they are food items, quick service items and prepared foods, restaurant meals that you’re able to order for takeout,” said Turner.

Ultimately, Gildenberg said, the average grocery format for Amazon would be one “that would have a broader appeal, and would just be a store that’s just easier to manage. And one that would yield better to automation and repetitive processes as a way to manage it.”