Channel Rationalization: The Impact of Amazon & Whole Foods

Transformation

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June 16, 2017

The macro-retail environment will always play a significant role in shaping business change. With the recent industry-shifting announcement of Amazon’s plan to acquire Whole Foods, it is critical for retailers to ensure they are maximizing the channels they use to reach their customers. The visible move towards omni-channel retailing is a clear manifestation of this.

Today’s news continues to illustrate that online retailers are moving into the physical retail space while traditional retailers, such as Walmart, are strengthening their online presence. The Whole Foods Purchase by Amazon enhances Amazon’s frictionless purchase process of Amazon Go and Amazon Prime. It really is a marriage of e-commerce and bricks-and-mortar. Of significant importance is Amazon’s unique perspective of customer first and shareholder second. This allows them to write many of their own rules and even design their own game – a challenging position for most legacy grocers who tend to be encumbered by quarterly Wall Street expectations, capital constraints, and excruciatingly slow decision-making.

E-commerce’s promise of a low barrier to entry provides opportunity (which is likely why Amazon started its grocery endeavors on its own first). There is no need to rent real estate upfront, centralized inventories give way to lean logistics and most technology isn’t patented – making the creation of e-commerce services relatively cheap. A wide range of new players have entered the market and been able to thrive, without the weight of reshaping legacy infrastructure.

This has sparked greater competition and in turn deeper innovation. Organizations such as BirchBox and Graze have used subscription models to disrupt the beauty and health food markets. Furthermore, online retailers have experimented with consumer-led innovations. For example, Google’s pop-up store for their Pixel phone release provided consumers with an immersive physical experience[1]. The reaction of traditional retailers has been diverse. Marks and Spencer opened a multi-channel superstore whereas Bebe[2] have had to close all their stores to focus on online sales[3].

However, e-commerce’s promise of a low barrier to entry comes at a price; it sits juxtaposed against the high cost of sustaining and profitably growing a business online. Online retailers spend years investing to grow their market share before returning stable profits. While Amazon’s 2016 earnings report[4]  shows a return on their investment, the time it took Amazon to reach a position of stable growth unmasks the potential cost of entering the online market. Lean logistics and centralized inventories can lead to higher shipping costs[5] – plainly, fulfillment centers are expensive[6]. Therefore, businesses must consider how to respond to this driver of channel rationalization. For traditional retailers, there is the opportunity to use stores as distribution centers for the fulfillment of orders.

Physical stores are often seen as the antithesis of commerce’s future state. In the first quarter of 2017 the number of retail store closures had overtaken the number of stores closed in 2008. While an increase in online sales has been a contributing factor, it cannot be the only explanation. According to the Census Bureau, brick and mortar sales made up 92.3% of retail sales in 2016 Q1, however only 0.8% of sales shifted from offline to online[7]. The decline in retail real estate value is partly due to unsustainable growth. Between 1970 and 2015 the number of shopping malls grew twice as fast as the population[8]. However, the retail real estate bubble has burst. Companies that own and manage retail real estate have seen a drop in their – retail REITs are down 23% since 2016[9]. In response, businesses are making reactionary changes to their portfolio of stores.

External drivers have accelerated the process and purpose, of channel rationalization. The response of retailers differs based on their market position, business model and the severity with which given external drivers have influenced them. Today, the grocery sector was rocked by Amazon’s announcement, a true market disrupting event.  Which sector will be next and how will those retailers respond? Given the external factors impacting retailers today it is becoming increasingly evident channels cannot be treated as distinct, discrete entities for fulfillment, but should be employed in unison[10].


[1] https://www.theverge.com/2016/10/20/13346950/google-pop-up-shop-new-york-city-pixel-daydream-vr
[2] https://www.bloomberg.com/news/articles/2017-03-21/bebe-said-to-plan-to-shut-its-stores-in-brick-and-mortar-retreat
[3] Such as their wholesale business
[4] https://www.theverge.com/2016/7/28/12313526/amazon-q2-2016-earnings-report-aws-cloud-profit
[5] https://www.forbes.com/sites/stevendennis/2017/03/17/the-inconvenient-truth-about-e-commerce/#3e478ba91bb2
[6] https://hbr.org/2014/08/online-shopping-isnt-as-profitable-as-you-think
[7] Census Bureau
[8] http://www.zerohedge.com/news/2017-04-22/retail-bubble-has-now-burst-record-8640-stores-are-closing-2017
[9] https://www.ft.com/content/f00e6eca-3a4a-11e7-ac89-b01cc67cfeec?mhq5j=e2
[10] https://hbr.org/2016/05/the-best-retailers-combine-bricks-and-clicks

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