More on Amazon’s coming assault on retail using Whole Foods as its brick and mortar extension

As I wrote in today’s newsletter, the New York Times’ take on Amazon’s recent announcement about grocery deliveries at Whole Foods is all wrong. Their take was that Amazon was playing ‘catch-up’ for once. And they focused only on the grocery business.

Those aren’t the issues. What’s happening is that grocery delivery is a test case, a beach head, for the wider Amazon assault on same-day delivery of a full complement of Amazon merchandise. And so, Whole Foods will become the brick and mortar extension of Amazon.

The grocery announcement

Six months ago, Amazon launched Prime delivery with a two-hour window. Now the online retail chain is saying it can offer thirty-minute pickups in Sacramento and Virginia Beach stores. And the plan is to expand this service across the US later in the year. For now, customers will pay a $4.99 fee for 30-minute pickup, while the one-hour option is free. Whole Foods will reserve parking spots for curbside pickup customers. Note, you have to be an Amazon Prime customer to take advantage of this service. And that now costs $119 per year per household, up from $99.

Notice the incremental moves. That’s typical of Amazon; they wade into a market and incrementally add selection and features based on customer feedback and improved execution capabilities as they become familiar with the new market. We should expect Amazon to add more and more capabilities to this service over time.

It’s not about groceries, folks

Now, Whole Foods is a small player in the US grocery sector. It accounts for just 2% market share. So why would you focus on that? The New York Times headline was “Playing Catch-Up With Walmart, Amazon Offers Digital Grocery Pickup at Whole Foods”. And here’s a bit of what they had to say.

Amazon has found itself in the rare position of playing catch-up with its rivals…

The latest move comes as Amazon and Walmart vie head-to-head for dominance of America’s shifting retail landscape. Amazon continues to rule pure online shopping, but Walmart has been making inroads by incorporating digital shopping with its vast network of super centers. Fresh food is where the competition is perhaps the most fierce because customers shop for it so frequently.

Retailers may be doubling down on their online grocery offerings, but is this what consumers want?

Apparently not. A recent research report by analysts at Morgan Stanley says retailers still haven’t quite convinced shoppers of the merits of online grocery shopping…

For Amazon, new services like online grocery pickup are a test of whether it can integrate its digital prowess with its recently acquired brick-and-mortar network of Whole Foods.

But Amazon has a long way to go in denting Walmart’s dominance. With a 23 percent share of grocery spending, Walmart sold more than twice as much food as the second largest national grocer, Kroger, over the last three months. Whole Foods captured just 2 percent of grocery spending, according to Morgan Stanley.

The only thing of value in all of that is the next to last paragraph. I highlighted it in bold.

The Whole Foods beachhead

Think of Whole Foods as ‘Brick and Mortar Amazon’. Amazon has the online shopping experience down. It’s best-in-class. But, the problem with Amazon has always been that ordering something online can be cumbersome and it takes time. Yes, Amazon has streamlined the process and even patented it’s one-click ordering process. But you still have to wait for your order to arrive.

And sometimes, it’s not what you want. So you have to go through the rigmarole of repacking it, shipping it back, waiting for Amazon to receive your package and refund your money, before you can get a new item. That’s a lot more cumbersome than doing stuff face-to-face in a brick and mortar store.

Plus, people often complain about not getting packages and hold Amazon responsible. Was the package even delivered? Maybe it was stolen. You can’t know for sure. So, recently, Amazon started to have its delivery people take a picture of the delivered package and upload it to the delivery announcement you receive. That way they don’t get blamed if you don’t get the package.

So Amazon one-click purchasing and delivery is great when it works. But this whole process can be a hassle. And if your package gets stolen, it’s a nightmare.

Whole Foods can solve that problem. The goal is to use Whole Foods as a way of delivering immediately and securely storing items for pickup and return. The future is one in which you drive up to Whole Foods and 75% of what you ordered on Amazon is available for pickup within 30 minutes. All you need to do is drive by.

And if you need to return an, item, no problem. Just go back to Whole Foods. I actually live within a mile of three different Whole Foods stores if you can believe it. And I can securely return an Amazon package to an ‘Amazon Locker’ at any of the three plus a 7-11 store about half a mile away.

So that’s the future Amazon is trying to build here. It’s not just about groceries. It’s about closing the gap between the online shopping experience and the in-person shopping experience to induce people to buy more at Amazon and less at some other retail outlet.

Amazon as a service

Notice something else here. The grocery delivery is only available to Amazon Prime users. That’s because Amazon is now looking to make a ton of money as a service provider, not just a retailer.

When 2018 ends, Amazon will have over 100 million people paying it $119 a year for the option of getting free delivery, some music and videos and some other services Amazon sells. That’s $12 billion of high margin revenue, quite a bit different than the grocery or retail business. That’s where Amazon is increasingly headed.

The goal is to subsume more and more stuff into Amazon Prime to make it an indispensable service that people are willing to pay for.

Back in 2005, Amazon started Amazon Prime as free two-day shipping service within the United States for a flat annual fee of $79. But since that time, fully in accordance with Amazon’s incremental approach, it has added a panoply of services:

• Prime Music:  unlimited, ad-free streaming of over a million songs
• Prime Photos: unlimited photo storage
• Twitch Prime: ad-free live-streaming access with video game and add-on content offers to boost
• Wickedly Prime: private-label food and beverage line
• Prime Exclusive Phone: discounted phones form the likes of Nokia, Samsung, LG and Motorola

And on and on

Now add the grocery delivery to that mix.

The fee has increased because the services on offer have increased. I think it’s reasonable to expect 150 million prime subscribers at $149 a pop within the next three years. That’s $22.5 billion of free cash flow to plow back into Amazon’s retail expansion and capital expenditures in media and technology.

This is what the Whole Foods announcement was about. It’s about Amazon’s coming full-scale assault on brick and mortar retail outlets where they live and breathe.