• EconAfterHours

Why are online retail giants caving into brick and mortar retailing?

Updated: Mar 11, 2020

By Sehaj Bhatti

Remember that time when the future of retail was online?

As the online retail space becomes more crowded and expensive, e-commerce giants are leading the way to the old fashioned brick and mortar retail. Google plunged into retail space by opening its first-ever shop in London to sell Android phones, Chromebook laptops and other gadgets. In the last few years, some 20 online companies in the US have launched a physical presence to better market their goods and expand customer relations. This recent trend can be understood by analysing Amazon’s acquisition of Whole Foods.

In a move that surprised many, Amazon announced its intention to purchase Whole Foods Market Inc. for a staggering 13.5 billion dollars in August. When the world’s biggest e-commerce company purchases one of USA’s biggest brick-and-mortar chain, an in-depth scrutiny of the move becomes indispensable.

Critics of the move saw it as a sign that Amazon had finally caved in and made a huge investment into physical stores in order to grow. The e-tailer had been dabbling with the concept of physical stores ever since the rollout of a few Amazon bookstores and Amazon Go, a grocery format. However, many industry analysts believe that there is a bigger picture. So what are e-commerce companies upto?

The 13.7 billion dollar deal is a bombshell that will catapult Amazon into hundreds of physical stores all over USA. It is also in alignment with the company’s long time goal of selling more groceries. As an immediate effect, grocery chains plunged with Walmart’s shares falling as much as 7.1%.

It is being speculated that in true Amazon fashion, CEO Jeff Bezos will try to recast Whole Food’s ailing business by upgrading technology, in much the same way as he has transformed bookselling and retailing. Some have interpreted that Amazon’s true interest lies in the vast amount of data that will be at its disposal due to this acquisition.

Grocery buying habits, preferences and correlations — the storehouse of data collected from the Whole Foods shoppers will enable Amazon to tailor the grocery shopping experience to the individual level. The e-giant is already a master of the art of up-selling, that is, offering additional items to go with the item that the consumer wants to buy. With something as habitual and frequent as groceries, Amazon could very well offer goods at the right time and increase its profits.

Also, being an organic grocery store has enabled Whole Foods to collect “rich” data, quite literally. Business Insider states that the typical Whole Foods customer has over 1000$ in disposable income. This equates to higher margin upset opportunities for Amazon.

In alignment with Amazon’s strategy of becoming a more vertically integrated firm, Whole Foods has an extensive private label base of about 365 brand labels which ensures product differentiation. This creates a reason for the consumer to buy their products as compared to a national product that will be available from other channels.

The most direct competitive effect will fall on the other grocery stores like Best Buy, Walmart, Kroger and Safeway. While few people buy groceries online right now, it is expected to experience a positive shift in the near future. Amazon’s delivery of fresh prepared meals etc. can add to the convenience of consumers. This deal opens up avenues for Whole Foods to compete against customers in the direct-to-consumer delivery space.

It will also heavily impact the meal-kit business. Amazon is already testing food delivery through Amazon Fresh and having the largest organic retailer on its side will help Whole Foods to spread its footprints faster. The stocks of meal-kit companies like Blue Apron have fallen drastically due to this.

While Amazon’s purchase of Whole Foods enables them to add an incredible amount of data to their coffers, the true test lies in the company’s mastery of using this to understand customer needs and predict shopping behaviour in order to generate longevity with their loyal customer base.

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