Amazon 5 years out: The path to retail reinvention

The following is an excerpt of analysis available on the TBR, Inc. website.

The long-awaited convergence of bricks and clicks is happening, and the future belongs to Amazon

From Amazon’s (NasdaqGS: AMZN) inception, CEO Jeff Bezos has aimed to disrupt and reinvent commerce. The company’s proposed Whole Foods (NasdaqGS: WFM) acquisition, announced June 15, precipitates another transformation that will roll across additional retail segments in the next five years, a transformation that will generate billions of dollars of opportunity for consulting, technology and services providers.

With the proposed Whole Foods acquisition, Amazon would bring its full panoply of capabilities to an adventurous, urban and largely affluent community of grocery shoppers. The 431 Whole Foods stores across the U.S., Canada, and the U.K. are a physical presence Amazon can power with its person-based data, engagement technologies and supply chain expertise.

Amazon can move from shipping paper towels and new electronics into being the personal assistant or lifestyle coordinator for an entire family.

Amazon is expected to use its “test and learn” approach to extend experiments such as the AmazonFresh grocery delivery and Prime Now restaurant delivery services as well as its Wickedly Prime private food label and home-cook meal kits. The recent Amazon Pop-Up and Amazon Go stores are bolder experiments that refine the possibilities inherent in the combination of a traditional retailer with an online commerce company. Whole Foods provides a premium, fresh-goods value proposition Amazon would augment with its low-cost dry goods, consumer goods, and content businesses.

5 years on: The path to complete retail reinvention

Amazon will need to build multiple paths to monetize the $13.7 billion acquisition price plus additional operations, development, sales and expansion investments. According to a 2016 Pew Charitable Trusts analysis, food accounts for 10% of a family’s income, the largest expenditure after housing. The market landscape is fragmented and is transitioning to a mobile-enabled, online-driven grocery-to-home model.

TBR sees some obvious paths, such as adding more physical lines in premium apparel, electronics or lifestyle goods as well as interconnecting the e-commerce and on-premises experiences. The key to successful monetization is maintaining the growth and engagement of the Whole Foods customer community while supporting them through new and innovative Amazon technologies.

Expand shopping model

• Create online shopping for certified Whole Foods goods
• Enable voice-driven interfaces for real-time and weekly planned shopping
• Enable flexible in-store shopping, pick-up, and delivery options through AmazonFresh and Prime Now
• Enable same-day and planned shopping experiences to better meet daily demand fluctuations
• Integrate existing Amazon Prime and online customers with the Whole Foods experience (e.g., buying goods from a mobile device)

Reinvent Retail

• Connect Whole Foods buyers to the Amazon advertising engine to expose Whole Foods customers to other lifestyle purchases via Amazon
• Connect the demand side to the supply side via IoT and blockchain technologies to provide greater transparency into the food supply chain
• Enable drones, self-driving vehicles and robots to expand the reach and scope of the customer experience
• Reduce dry goods inventory from stores to open up space for perishable grocery and food items
• Support prepackaged meal delivery services based out of Whole Foods stores
• Connect personal shopping services such as Instacart and TaskRabbit to the Amazon ecosystem

5-year opportunity: Completing the ‘everything store’

With a completed acquisition and Amazon’s technologies connected with Whole Foods’ locations and customers, the company could begin to build new relationship-driven marketplaces for retail. Amazon gains insights from its user tracking and purchase data, which it filters into its recommendation engine. By expanding that recommendation engine into serving the daily needs of Amazon users, the company would increase membership value. For example, Amazon can move from shipping paper towels and new electronics into being the personal assistant or lifestyle coordinator for an entire family. Gaining this relationship position affords Amazon immense power in the daily lives of its users.

Wal-Mart is the current leader in the retail market, driving over $482 billion in revenue. However, it does not recognize sales at its regional store sales with its online commerce sales, creating inherent conflict. Amazon would likely not repeat this error and would instead use the Whole Foods locations to measure total engagement at the regional level. This would enable Amazon to add on innumerable services, offers and experiments to design a better store.

The depth of Amazon’s customer profiles would become another source of value, as the company would be able to expand its advertising reach and marketplace power. Amazon Marketplace tracks over 285 million consumer profiles and enables 2 million large and small businesses to sell on the Amazon platform. Amazon Marketplace generates 9% to 12% of Amazon’s total revenue and represents nearly pure profit, since the selling partners use existing Amazon capacity. Amazon could add to and expand its local footprint to enable local commerce partners to better target, interact with and serve their customers.

To complete the reinvention of retail, Amazon needs to build or acquire multiple critical components to deliver at a global scale and to meet enterprise service-level expectations.

• Learn from the Whole Foods experiment and acquire grocers in the U.K. and Europe.
• Master physical merchandising and connect it to the limitless shelves of its online store
• Establish a blockchain-based food supply chain and fulfillment engine for food quality transparency and efficiency
• Develop business practices for food supply partners to sustain the Whole Foods quality reputation
• Establish and interconnect feedback loops to capture the Amazon and Whole Foods customer experience
• Connect the Amazon one-click commerce and Alexa ordering with local Whole Foods inventories
• Connect local inventories back to Amazon fulfillment channels
• Develop an ecosystem of business, advertising, education and food packaging partners

Building a thriving ecosystem of partners that monetize a suite of company assets is an Amazon core competency. TBR believes the combination of Amazon, Whole Foods and additional tools (which Amazon Web Services has the global scale to deliver) can enable the full monetization of the Whole Foods acquisition over the next five years.

Implications to technology providers

Amazon is culturally self-sufficient and prefers to use consultants and technology providers as little as possible. It built its own disruptive business model and the commerce systems, fulfillment platforms and cloud services it relies on to run its business.

The opportunity for business consultants and technology providers is to help the competitors. The acquisition would be a catalyst to transformation, and grocers around the world need to quickly decide how they would respond to the challenge. Firms would need data, business model advisory and reorganization plans, new technologies and systems, as well as a host of new executives to drive the required changes. We estimate this deal alone would accelerate technology spending in the grocery segment and among farsighted retailers. Every new business dollar Amazon potentially would develop through Whole Foods would drive 10 to 20 times as much technology spending across the worldwide ecosystem.

Implications to customers

Maintaining the trust and participation of each Amazon and Whole Foods customer is the greatest risk and potential reward for Amazon in this planned acquisition. Millions of people would rely on Amazon for their daily bread. Amazon had best be prepared for this quantum jump in the level of trust families, communities and suppliers would have in the company.

Amazon has immense power in the daily lives of its users.

Delivering on the promise of high-quality, healthy foods would open additional doors to the company but also pose a risk. Protecting personal data and limiting how it is used would be another key to the relationship between Amazon and customers. If the “everything store” emerges, the focus on the customer as “everything” for Amazon must remain its core principle.

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