Since its founding as an online bookstore in 1994, Amazon.com Inc. has increasingly expanded its reach in a quest to sell the full spectrum of goods from A to Z. Now, as a $136-billion-a-year company, Amazon offers everything from wristwatches to tires to blenders to fresh produce, and, of course, books. The announcement last Friday that Amazon would buy upscale grocery chain Whole Foods Markets, Inc., for $13.7 billion cash set off waves of speculation about what this acquisition means for the two retail giants – and what it portends more broadly for e-commerce and grocery retail. In 2016, Whole Foods reported sales of $16 billion and a retail footprint of 460 stores in the United States, Canada and the United Kingdom, so the merger would establish Amazon’s strong presence in physical stores in dramatic and immediate fashion.
We asked some of NAIOP’s Distinguished Fellows – an elite group of academic thought leaders from real estate programs at top universities – for their perspectives on Amazon’s purchase of Whole Foods, the advantages and challenges of Amazon’s expansion into brick-and-mortar grocery space, and what the future holds for commercial real estate retail.
“First, the deal is not approved yet so we need to see what happens during the antitrust process. But, if it does go through, it immediately gives Amazon a large retail presence in a large geography. This is a much more efficient way for Amazon to implement a move into the brick-and-sticks side of retail – it’s instant. It will be interesting to see if they can effectively merge the two businesses and their cultures to make Amazon a more impactful market participant. The acquisition certainly puts pressure on the grocery segment to look at their business models.
Overall, I don’t see Amazon as demolishing the grocery business – this is not about buying paper towels or toilet paper because there are still things people like to hold in their hand and choose like fruit, vegetables and meat. It might alter shopping but that’s already happened. One certain outcome for commercial real estate: This purchase will make landlords with Whole Foods as tenants happy.”
Executive Director, Master of Real Estate Development, Fred E. Taylor Professor in Real Estate, W.P. Carey School of Business, Arizona State University
“Amazon’s purchase of this retail footprint of physical stores makes them an immediate triple threat. Brick-and-mortar grocery is not going away, but market share is being displaced by e-commerce. Amazon already dominates e-commerce; now, they have a solid brick-and-mortar platform. Amazon/Whole Foods customers will likely end up with three shopping options: 1. Traditional in-store shopping in ideal locations; 2. Buy online and have groceries delivered to your door via the world’s premier online retailer (potentially the same day); or 3. Do all of your shopping online, pay online, and pick up your groceries, already bagged, at a Whole Foods location, which happens to be in a key retail location already. No other grocers – not even Walmart – can currently compete at this level.
Amazon operates on margins that are thinner than the already thin margins of grocery stores. Traditional grocers will likely have to tighten margins further to compete, which would cause significant disruption. Like the majority of shoppers, I prefer to select my own produce, cuts of meat, etc. But market share will continue to shift in the direction of e-commerce at the expense of traditional brick-and-mortar, which means fewer or smaller grocery stores, or even the expansion of smaller specialty stores such as produce vendors or butchers (items people like to see before they buy). This will certainly be felt more acutely by owners of grocer-anchored centers. Look for fringe or marginal centers to struggle first. Well-located/high-performing centers should continue to do well, and depending on circumstances, could benefit in some cases.”
Danny Wall, MS, MAI, CCIM, CRE
Associate Professor of Finance, Director of the Master of Real Estate Development Program, The David Eccles School of Business, University of Utah
Salt Lake City, Utah
“The physical grocery footprint gives Amazon a number of advantages. First, it gives the company the opportunity to learn more about the physical realities of the grocery business. Second, it enables quick experimentation using combinations of digital, physical, and delivery retail approaches. Amazon is known for innovation and that innovation often involves a cycle of idea formulation, experimentation, assessing learning, and refinement or abandonment of the initial idea. Third, when combined with Amazon’s analytical capabilities and online marketing skills the purchase may provide Amazon with new ways to create value for customers by supplying real-time menu suggestions, recipes, nutrition information, pricing information, product location within stores, and many others. Finally, it provides a way for Amazon to provide non-grocery product pick-up and at the same time capture grocery business at these physical locations.
While Amazon has contributed to challenges for physical retailers, these problems are more complex than simply Amazon. Amazon has been gaining market share because of pricing and value creation. The company essentially has trained customers to build the two-day shipping time into their purchase decisions just as FedEx changed mindsets with regard to how quickly and reliably items needed to be shipped. Many of the SKUs in a traditional grocery store have been available from Amazon for some time. This purchase moves Amazon more firmly into the fresh food arena and, potentially, into the meal-in-a-box market that includes fresh ingredients. For the retail grocery CRE segment, stores may become smaller and have a greater concentration on fresh food items and service. People often overlook the fact that Amazon’s ability to provide recommendations, reviews, and detailed product information in a digital format often creates a better shopping experience and more customer value than understaffed, essentially self-service physical stores.
Doing anything on the scale that Amazon does it is a challenge. One such challenge for this acquisition is determining what the Whole Foods brand represents and how the brand must change. Implicit in these branding decisions are strategic considerations as to which markets and consumers Amazon wants Whole Foods to serve and what value it can create for those segments. For example, what pricing strategy will Whole Foods employ? What product lines will be carried? Will prepared foods expand or contract? But, Amazon is skilled in experimenting and building offerings that create value for customers and demand for Amazon’s services and offerings. While Walmart is the obvious competitor for Amazon, the impact of this acquisition on regional and national general and boutique grocers will be interesting to watch. It will be surprising if Amazon does not redefine per square foot sales for grocery stores significantly upward. Who will be innovative enough to compete with Amazon?”
Larry Wofford, Ph.D.
Davis D. Bovaird Endowed Chair of Entrepreneurial Studies, University of Tulsa