It’s official. Amazon is opening its own grocery store, separate from the Whole Foods banner it acquired two years ago.
The tech giant will open a supermarket in the Woodland Hills neighborhood of Los Angeles next year. The announcement was made after Amazon posted job openings on its website. The news was first reported by CNET.
The store will allow Amazon to carry products such as Coca-Cola that are banned at Whole Foods because of its ingredient standards and to sell products at lower prices than Whole Foods.
Amazon divulged a few details on the new store, noting that it will not use the “Just Walk Out” technology from Amazon Go stores. The company’s ambitions to break into the $800 billion U.S. grocery industry have been apparent for a while. Amazon launched its Fresh grocery delivery service in 2007, expanding it to more than a dozen cities before it acquired Whole Foods in 2017. Two weeks ago, Amazon announced free grocery delivery for Prime members in more than 100 cities across the country, and it opened grocery pickup stations in its hometown of Seattle.
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Despite its ambition, the company’s ability to break through and become a major player in groceries, in the way it’s disrupted so many other industries, is anything but a given.
Amazon faces intense competition in this low-margin business from entrenched operators such as Walmart, Kroger and Costcothat have thousands of stores across the country and finely tuned supply chains to go with them. Those companies will go to great lengths to defend their market share from Amazon, as they’ve demonstrated with programs such as online grocery pickup and free two-day shipping.
Amazon’s biggest challenge in groceries isn’t competition or its own lack of stores or experience. It’s the company’s reputation among suppliers. Trust from suppliers will be critical for launching a nationwide brick-and-mortar supermarket chain.
Throwing its weight around
Amazon is known for its high levels of customer satisfaction, but as a customer itself, Amazon has left more than a few of its vendors less than pleased.
In perhaps the most famous case, Amazon angered book publishers when it priced e-book titles for $10, less than the prices publishers prefer to set. Publishers usually set prices closer to $15, which they claim is necessary to make the book business sustainable. Amazon was happy to take a loss on some e-book sales to grow market share and eliminate competition, knowing customers prefer lower prices, and went as far as to discourage buying from one publisher, Hachette, by delaying shipments and removing a preorder button. Amazon had to make some concessions, but it became clear that the company’s clout in book sales was a problem for publishers.
More commonly, Amazon learns from its suppliers, then copies them when it sees certain products sell well. In 2013, Amazon set up shop at Procter & Gamble warehouses, so the e-commerce company could easily and conveniently ship orders of products such as Tide detergent and Gillette razors. The special treatment gave Amazon an edge over competitors, but a few years later, Amazon had become one of P&G’s biggest competitors, at least online. Amazon launched a slew of household product brands, including Amazon Elements and Mama Bear, that gave it a significant share of the online market in core P&G categories. In diapers, Amazon held 15% online market share by 2017, according to Recode.
Amazon has done the same thing with smaller suppliers, taking hot products such as laptop stands, as a Bloomberg report detailed, and essentially copying and underpricing them. As it pushes further into private-label products, Amazon has become a direct competitor with more of its third-party merchants. Since Amazon controls half the country’s online sales through its website and app, it has a unique ability to promote its own products over competitors’, giving it an additional advantage.
Difficult to replicate
The difference between Amazon’s marketplace and its fledgling supermarket chain is that these third-party sellers need to be on Amazon because that is the source of so many of their sales.
That’s not the case with an Amazon supermarket. In many ways it’s the opposite. As the company tries to build a brick-and-mortar supermarket chain from scratch, it lacks the scale of an established leader such as Walmart or Kroger that suppliers can count on for high-volume sales. Because of the size of the company and its reputation for low prices, Amazon could try to strong-arm suppliers as if it were one of the industry giants.
That’s likely to be a tough sell for industry suppliers, especially given Amazon’s history with other vendors. Though Amazon offers the promise of growth, it could come at the cost of margins being squeezed and products being copied.
As Amazon launches its chain, keep an eye on how suppliers big and small react. Without their buy-in, the chain is unlikely to succeed.