Amazon’s message for baking

by Josh Sosland
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Josh Sosland
It has been 20 years since Peapod, Webvan and other on-line services burst onto the scene with the promise of revolutionizing how consumers obtain their groceries. While these businesses faded following great initial fanfare, grain-based foods companies have seen e-commerce as a disruptive force for food gradually approaching on the horizon ever since and have grappled to find ways to adapt. This prospective change moved far closer to imminent reality June 16 when Amazon.com announced it would acquire Whole Foods Market, Inc. in a transaction valued at about $13.7 billion.

The announcement was followed by a veritable flood of speculation about what such a transaction would mean for food retailing and distribution as well as the food processing industry. For example, since Whole Foods’ sales index heavily toward store brands, a number of analysts suggested the acquisition would be good news for private label and would spell trouble for branded food companies. Others focused on what kinds of investments, principally technological, Amazon may be expected to make in Whole Foods to enhance efficiency and reignite same-store sales growth.

The truth is that much if not most of what will unfold from an Amazon/Whole Foods combination is impossible to know. What is clear is the seismic change that could emanate from this transaction relates not to Amazon’s interest in brick-and-mortar stores but to probability that the acquisition will hasten the time when many more consumers purchase their groceries on-line. The clear message from the announcement is that Amazon is hell bent on becoming a major force in the budding on-line food business.

In the 10 years since Amazon began seriously pursuing the food business through the launch of AmazonFresh in a community near the company’s Seattle headquarters, executives have acknowledged some of the challenges that stymied the 1990s pioneers. But given Amazon’s dizzying success as an on-line retailer, efforts to become a leader in food sales principally through further building out Whole Foods’ physical stores simply would not make sense. After all, in the 23 years since the company was established Amazon has managed to build a staggering market capitalization of $475 billion, a figure in the realm of Google ($573 billion) and Apple ($762 billion). By contrast, The Kroger Co., arguably the most successful U.S. supermarket chain over the past decade, has a market capitalization of a mere $20 billion. Kroger is not Amazon’s principal target. Instead, success in groceries will be crucial for Amazon as it jousts with Wal-Mart Stores Inc. ($230 billion market capitalization), seeks to offer a more comprehensive portfolio of consumer goods, explores Supplemental Nutrition Assistance Program participation and considers local delivery. It has been suggested that the grocery business will provide Amazon crucial critical mass as the company contemplates final delivery of its products.

How the various pieces of Amazon’s on-line puzzle will fit together remains to be seen. Earlier this year, AmazonFresh was available in 21 metropolitan areas around the United States as well as in Tokyo and London. In 2016, Amazon chief financial officer Brian Olsavsky said, “We continue to believe consumables, groceries are a key part of the offer to customers,” he said. “We are playing with very different models to see which works and for what needs.” Bakers generally have been pleased working with Amazon, particularly the retailer’s no-return policy and the simplicity of warehouse delivery.

At the 2014 annual meeting of the Grocery Manufacturers Association, presenters urged food companies to gain an understanding of the Amazon system. “It is imperative we know how to play with them," said Dan Cooke, general manager of global e-commerce at Kellogg Co. Particular guidance included a suggestion to tap into Amazon’s vendor services and to learn how to market products effectively on Amazon’s web site.

Changes in the mix of products consumers purchase in the future certainly may be shaped by the models that emerge in the explorations of Amazon, Wal-Mart and others. Grain-based foods will be a part of the mix, but innovation and nimbleness will be required to take advantage of the opportunities that will inevitably result from the exciting changes finally at hand.
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