Slim margins
Profit margins are thin in grocery retail. Consumers are unlikely to pay for shipping and service, especially for someone to pick their apples or tomatoes. Consumers pride themselves in selecting produce. The only way to be competitive in the grocery business is to lower costs and automate processes. And that is where Amazon excels. Where others have failed, Amazon is likely to succeed because of their relentless focus on process innovation and technology to lower operating costs.
So far Amazon has avoided the wheel of retailing, proposed by Harvard business professor Malcolm McNair. Retailers focus on low-cost products to attract customers and undercut more established competitors. They then raise prices to widen margins. And as a result, become more vulnerable to lower-cost competitors. The model has been challenged by discounter Walmart but that could change over the next decade.
Whole Foods has a robust network of 11 distribution centers specializing in perishable foods, in addition to seafood processing plants, kitchens and bakeries that supply prepared food onsite. These centers would be integrated with Amazon’s own network of warehouses with thousands of robots in those facilities. Amazon’s warehouses have become highly specialized.
Amazon’s delivery station distribution network is primarily smaller facilities of 60-100k sf. These are close to market metropolitan cities and often near airports with 386 facilities (143M sq ft) and 76 additional facilities (43M sq ft) planned globally. The company had 351,000 employees at the end of March, up 43 percent from a year earlier with plans to hire another 100,000 new workers over the next 18 months.
Big Challenges
However, there are some challenges. Shoppers at Whole Foods want to talk to the butcher about what cut of meat to buy, explore flower arrangements with the florist and ponder over the freshest head of lettuce with the produce clerk. Amazon will need to find a balance between convenience and experiential shopping to ensure the core value proposition that the Whole Foods customer expects isn’t diluted.
An immediate change will be behind doors in warehouses that customers will never see. Arcus’s research indicates that Amazon sees automation as a key strategic advantage in its overall grocery strategy. They will look to automate distribution quickly- an area where they can bring their expertise into warehouses and reduce costs dramatically. Second, we will see an amazing transformation on store shelves with scaling of their vast Prime retailer base and deployment of grocery initiatives like Amazon Fresh and Prime Pantry.
The United Kingdom’s Intellectual Property Office approved a trademark application for Amazon’s slogan “No Queue, No Checkout. (No, Seriously.)” last week. The slogan is similar to the ones Amazon used when it debuted its Go convenience stores in December in a beta program.
Delivery and Fresh Matter
With quick delivery becoming more important to consumers, no other retailer has the technological expertise, capacity to automate warehouses and deliver products faster to consumers. Amazon has most of its inventory in warehouses within driving distance of urban areas. It is utilizing smaller delivery hubs in cities packed with the kind of products people want quickly, like a phone charger or a toothbrush for a trip.
Amazon has not had the fresh food sales volume to justify a big investment in refrigerated warehouses. However, with Whole Foods, they have an incentive to reinvent how groceries get to your home. The next step will be automated warehouses of about 1 million square feet- designed specifically for the grocery business and large enough to serve both Whole Foods and Amazon’s other grocery initiatives.
Amazon is likely to focus on augmenting its distribution capability to provide customers with fresh produce, vegetables, and meat. The company has been experimenting with a smaller urban convenience store concept in Seattle called AmazonGo that lets shoppers check in with smartphones, grab what they want and leave without going to a cash register. Shoppers are billed automatically based on what they scan on shelves with their smartphones. It is certainly possible that Amazon will consider eliminating cashiers within its long-term grocery strategy.
Harnessing computer vision
A challenge for Amazon will be to adapt their advanced logistics in durable, long-lasting products like books, smartphones and tablets to perishables like apples and steaks that have to be handled differently, stored at highly regulated temperatures and comply with food safety standards. After automating warehouses, Amazon is likely to use Robots to cruise through aisles to check inventory and alert employees when items run low.
An emerging technology will have a big impact on how grocery chains manage their inventories: computer vision. These existing technologies can look at a head of lettuce, recognize browning and accelerate stock rotation to avoid spoilage. Another is product sorting. Amazon has advanced capabilities in this area. Integrating fresh product handling with their sorting technologies with have a significant impact on their capacity to deliver game changing innovations.
Innovate or Fade Away
Retail in Canada has been slow to change. A glaring case in point is Sears- a company that had one of the most loyal customer bases with their catalog business. They failed to respond to the shift online and filed for bankruptcy last week.
Canadian grocery retail has also been asleep at the wheel. The fiasco with the Sobeys-Safeway acquisition speaks volumes about the lack of focus and innovation in technology, product and service. Its going to get worse for Canadian grocery retail companies and fabulous for consumers- unless of course we see a dramatic reset in how companies address evolving drivers of shopper loyalty.
Arcus has identified 385 emerging grocery retail innovations and technology vendors from over 3,000 retail surveys worldwide that can help Canadian Grocery Chains stay ahead of the innovation curve. Computer vision is just one of them. We often share 15 minute reports at weekly management meetings. Contact us for a presentation of the report to your team.