Amazon Grocery Store Plan: Will It Help Or Hurt Retail?

Amazon recently announced a plan to expand into the retail grocery channel beyond their current presence resulting from their acquisition of Whole Foods. Many people know that the internet shopping giant bought Whole Foods for about $14 billion in June 2017, which provided them with a foothold into the grocery business.

The image of Whole Foods from the consumer standpoint is that it is an expensive, almost elitist place to shop for groceries that many in the general public feel they can get a better value at a mainstream grocery chain. Amazon attempted to alter this consumer sentiment around Whole Foods, but when those were unsuccessful, this could have at least contributed to their decision to enter into the retail grocery business in a way that will reach a wider gamut of consumer demographics.

The plan is to open stores in targeted U.S. markets with just a few outlets in each market to test out the concept. The first Amazon grocery store of this type will open in Los Angeles as soon as the end of 2019, if everything goes as planned.

Then, the concept would be rolled out to ten or twelve strategic geographic areas throughout the country. The new grocery brand would sell less expensive products than Whole Foods, would carry a large selection of Amazon’s private label brands, and would carry national brands that are precluded from the Whole Foods shelves based on the food product standards set by that chain.

The decision to carry those national brands would open up a pathway for Amazon to benefit from the huge amounts of money that those companies spend for shelf space and advertising at Point of Purchase type of campaigns. The new grocery brand would also provide Amazon with a way to enroll more people in Prime memberships with some sort of promotional incentive either at the point of enrollment, or for future shopping trips.

Currently, Amazon provides a 10% discount for Prime members when they shop at Whole Foods store locations. This will serve as a model for the new grocery brand in order to incentivize memberships to their Prime service. Amazon will also be able to cross-promote more items from their website during an in-store shopping experience.

Furthermore, Amazon announced in the plans for this new grocery brand that they will have a service that allows shoppers to select the items on the website and set it up for pick-up in the store location, creating what Amazon believes will be the new way that the consumer purchases groceries.

The decision will have a gigantic ripple effect on the grocery industry. The established retail grocery chains are going to have to lower their overhead costs prior to Amazon entering their industry space. That could translate into job cutbacks, layoffs, or restructuring the number of full-time workers or hours that are given out by the mainstream grocery players. The one controllable aspect of a low profit margin business such as the grocery channel is the labor cost.

The other significant component to this news by Amazon is that they are looking to lease spaces that also allow them to sell beauty and personal care products. Those types of products generally have a higher profit margin, and Amazon has their own private label brands which allow for excellent cost control.

My past writing on the food industry and the retail shopping changes that have taken place over the years have centered more on certain chains going bankrupt or discontinuing a product due to a recall or sluggish sales. This situation is rare: a new player actually joining the brick and mortar segment of the retail landscape.

The timing for Amazon is advantageous too because of the amount of large retail spaces that are vacant now with the end of Sears, Toys R Us, and a slew of regional grocery chains. The speculation is that Amazon could lease some of the former Sears locations for this new grocery store concept.

In the Northeast and Mid-Atlantic states, the amount of retail space left from the demise of regional grocery chains such as A&P and Pathmark, create a huge opportunity for Amazon to get an advantageous lease term. Then, they can reach a huge variety of demographics in that part of the country which is so densely populated.

The industry data on the grocery business in America is compelling and certainly has been on the radar screen for Amazon for a while now. The U.S. grocery business is estimated at $830 billion and between Whole Foods and Amazon’s other online business they have a 4% market share. Wal Mart has a 21% market share of the grocery business, and Amazon is looking to grow their share and get in front of mainstream consumers with their private label brands.

The competition will face some very difficult pricing pressures from Amazon entering this part of the industry, should the concept launch be successful. There are many people both in the consumer public and on Wall Street that believe that the competition will be good for the grocery industry.

Amazon entering that mainstream grocery retail space will force other grocery chains to innovate and provide new and better value propositions to their customers. The consumer stands to benefit from that standpoint.

The success of this venture will be evaluated by Amazon in the test markets that they have announced: LA, Chicago, Philadelphia, and others. The full rollout of a new grocery chain from Amazon would help solve for some of the unoccupied retail space in shopping centers around the country. It would bring brick and mortar business back within the context of a changing consumer landscape.

The outcome of this new venture is uncertain, but one thing is clear: all eyes are again on Amazon to see if they can put their stamp on a new way for consumers to shop for groceries.

(Some background information courtesy of Forbes and The Wall Street Journal)

Food Commodity Prices Drop

The average shopper in America has probably noticed the changes in price for several commodity items in recent months. The falling prices are due to a combination of factors such as decreased costs of fuel and product packaging materials. Some other areas such as with meat and eggs, those commodities are in a cost reduction due to some external factors surrounding supply and demand.

The egg market segment has seen prices drop about 50% according to industry sources. The price of eggs, as many consumers will recall, increased sharply due to the avian flu epidemic. I recall going to my local grocery store and the signs that were hung just about everywhere in the cases surrounding the eggs and dairy products regarding the shortage of eggs due to the rampant spread of that illness.

The price of eggs had to adjust and correct itself when the supply levels returned back to normal levels with the increased number of hens into the system. That is the rationale behind the drop in prices for eggs as well as the shift in overall global demand for the product. The demand curve surrounding eggs in China and other parts of Asia has flattened, it has decreased over the past several months which creates a supply abundance and consequently lower prices.

The pricing shift on meat is a similar scenario. The cattle population in the U.S. had some issues between disease and other factors which impacted the population and created a supply issue. This lead to an increase in beef prices that many of us remember between the grocery store butcher department and the menus of our local restaurants.

The supply of cattle has increased over time and the supply for beef as a commodity is oversaturated due to current market demand factors. Some of this is driven by the healthier eating trends of Americans where red meat is more limited than at other points. The industry experts have reported that the supply levels of beef are so high compared to the demand that the prices will remain low until 2019.

The price points of other food products have come down in relation to supply, lower delivery costs, and a host of other scenarios. The timing on the price changes as we head into the Thanksgiving/Christmas/ Holiday Season is fortuitous for the food product suppliers, the distributors, and the retail grocery as well as club store channels.

The retail grocery channel is a low margin business structure to begin with and these price fluctuations over the past few years on certain commodities have cut into those profit margins even further. The ability for them to turn around and sell these products at the holidays is going to help their revenue forecast to close out the year.

The price points on so many other products and services are going up, I thought it would be comforting to note that our food prices are coming down, and considering the necessity of food, that is some welcome good news heading into the holiday season.

Gender Based Marketing

The concept of gender based marketing is not a new strategy to sell products or develop new business but it is now being utilized with greater effectiveness. The enhancements to this marketing principle are driven largely by the incredible amount of data which can be populated to provide businesses with very accurate trend analysis.

 

It does not take a marketing genius to figure out that most businesses will craft a product message based on the target gender market: beer commercials tend to skew toward men, while most cleaning products tend to be geared toward a female consumer target. The role of gender bias has been a hot button topic in our societal discourse as well, whether some of these product campaigns are based on preconceived notions about the role of men and women respectively in Western society.

 

However, I will be focusing on the changing patterns of the gender based marketing strategic concept as it relates to the shifting demographics in the United States. In particular focus is the impact of the economic recession and the evolving job market which caused a scenario where American society now has more female business travelers than at any other point in history.

 

The recessionary economic activity caused businesses to react by cutting costs to maximize profit margins. The easiest way to achieve this profit retention is to cut jobs and close facilities or office branch locations and consolidate your respective cost factors. In some business types, that included cutting the jobs of higher salaried employees in order to protect profitability during the economic downturn.

 

Gender Wage Gap

 

All of these cost cutting maneuvers in the business world created conditions where many men found themselves out of work, and women found themselves in the role of primary financial providers for their respective families. This shift brought the issue of the gender wage gap back front-and-center to the American national consciousness. The “equal pay for equal work” debate sprang up on the national media news outlets, and still is a largely unresolved issue facing our society.

 

The labor market is slowly starting to rebound, but even in the current conditions, the months of economic stagnation and stubborn job creation has changed the American family dynamic. I have read several studies which demonstrate that the stereotypical gender roles have changed with men taking on more of the domestic duties of grocery shopping and child care.

 

Meanwhile, the woman’s role in the family unit has shifted and the business travel industry and the hotel industry have made certain marketing program changes to appeal more to the increase in female business travelers. The major hotel chains have made adjustments to their floor plans, bathroom layouts, and other amenities to cater to an influx in female business executives.

 

The major hotel chains have also made changes to their respective restaurant menu offerings to provide more healthy meal options which appeal to women. Even the lighting and the colors of some hotel rooms and suites have been altered to suit this change in the customer demographic for business travel today.

 

The “Mr. Mom” approach

 

The grocery stores and the manufacturers of food and beverage products have all made marketing plan alterations and advertising changes to appeal to the growing prevalence of male shoppers. The study data available varies on the percentage of men identified as the primary shopper for their respective family in the U.S. from 31% to as high as 51%. The larger number was quantified in a survey done by Yahoo! which also studied male shopping trends.

 

The increase in male primary shoppers is driven by a few factors but most notably the increase in the unemployment during the peak of the recession, the increase in underemployed males who are working shift type jobs to replace lost wages, and the increase in the number males who primarily work from home or telecommute.

 

Both the grocery store chains and the food product manufacturers have responded to this shifting demographic by changing the layouts of the stores to grab the attention of the influx of male shoppers who are also prone to impulse buying. Most stores have what is known in the industry as “The Man Aisle” which is filled with all types of products which appeal to male shoppers.

 

The consumer goods product giant, Procter & Gamble, even has a website called “Man of the House” which features products geared toward the male consumer as well as recipes and health tips geared toward helping men in this new shift in their domestic responsibilities.

 

The U.S. Grocery Shopping Trends Study displayed that women shoppers are 12% more likely to produce generic or store brand products than male shoppers. Male shoppers are statistically more likely to be loyal to a particular national brand and will pay more to get that brand even if a comparable product made under another brand is reduced in price.

 

This study also revealed that male shoppers spend $10.00 more on an average shopping trip than a female shopper, and that male shoppers frequently had no shopping list and carried no coupons. More male shoppers use the self-checkout option than female shoppers, but females placed a higher value on customer service than males.

 

Other studies have demonstrated that the words “low calorie” and “diet” do not test favorably at all with male shoppers. This was the driving principle behind the Dr. Pepper Snapple Group launching a line of new diet sodas they decided to call “10” so that it reflected the amount of calories in the beverage but did not emphasize the term “diet” in the labeling or the promotion.

 

In my research I found another case study of a frozen yogurt chain in the Midwest which decided to do a social experiment by promoting a new low fat product. When the male shopper came into the yogurt shops with their wives or girlfriends the ladies would try the low fat product offering and 90% of the males would not try it.

 

The frozen yogurt chain took the same product which was also high in protein, and three weeks later they promoted the same product as “high protein” and close to 90% of the male shoppers tried it and were repeat customers. Many food manufacturers are following the same positioning to appeal to men, developing high protein concepts that are low in fat and promoting them as “high protein”.

 

Many products such as Hamburger Helper have changed their packaging to darker colors with bolder graphics to gain the attention of the increased number of male shoppers. The laundry detergent brand, Tide, has partnered with the NFL and is in the midst of an ongoing promotional campaign to make doing laundry more “macho”.

 

Influencing Change

 

It has been listed in several studies that about 41% of men make the meals at home. The food product manufacturers have taken notice of this but initially had offered quick, processed meal solutions to try to grab market share of this shift in cooking responsibilities.

 

However, those efforts largely failed because several studies show that male shoppers look for rather different elements in their meal purchases than the stereotypes would seem to indicate.

 

In fact, a Pew study recently indicated that 95% of men consider the nutrient values a meal will provide to their family. This study also revealed that 90% of men prefer to use fresh ingredients and that 86% choose to limit the use of processed food in their meal selections.

 

The food companies have quantified all of this data and future food product launches will certainly reflect this criteria. The male shoppers have influenced change in the marketplace.

 

In the end, the change in gender demographics has had a profound impact on not just hotels, the travel industry, food products, or grocery store layouts. It has had a profound effect on our society, on the family unit, and on the gender roles that were once inherent in Western society. We will not know exactly the implications of these changes for many years, but what we do know is that these shifts are here to stay as technologies change and impact both the job market and our society in the years to come.

(Statistics and some background information courtesy of Pew Study, US Grocery Shopping Trends Study, ESPN.com, Yahoo! News, Food Product Design, Specialty Food News, and CBS News)