Friday, June 23, 2017

(The Big Disrupt) Amazon: Why Amazon buying Whole Foods is "awfully scary"











It wasn't that long ago when Netflix founder and CEO Reed Hastings described Amazon as "awfully scary" and with it's recent purchase grocery retailer Whole Foods, nothing but fear and awe was palpable. 

Amazon's acquisition of Whole Foods must have sent shivers of fear down the spines of Rodney McMullen (CEO of Kroger foods),Doug McMillon (CEO of Walmart) and Brian Cornell (CEO of Target) as it most certainty spooked their investors which saw them and other lose $22 billion of their market cap.     

Besides getting slammed every quarter, there are a number of reasons why Walmart, Kroger, Target and others should fear Amazon, number one and two by far being  customer retention and the last mile problemFor obvious reasons, most companies tend to focus on acquiring new customers more than keeping them but grocers has been notorious for eschewing the use of loyalty programs until recently and now find themselves competing directly with a company that has possibly the most impressive loyalty program in history in Amazon prime with an obscenely high customer retention rate of 96%  

No player in the grocery market can compete with this level of customer loyalty and with Amazon almost certain to lower Whole Foods infamously high prices (the company didn't earn its unwanted "whole paycheck" nickname for nothing), offer store and price perks to encourage Whole Foods shoppers to join Prime and over time cut inefficiencies out of Whole Foods business to the point Whole Foods stores become merely highly automated distribution networks in all but name, grocery retailers are going to have real problems, staying in business among them. 

However, what should keep grocery executives across US up at night is that Whole Foods effectively eliminates Amazon's most prominent weakness, it's inability to solve the last mile problem (getting goods from distribution centers to customer's doorsteps)It's no secret that Amazon has had a hard time mastering fresh food delivery but with the purchase of Whole Foods, Amazon now has a distribution system that effectively solves which makes Amazon even more formidable.  

What this means is Amazon now can increase the product range it offers to prime members as well as regular customers online and provide greater click and collect payment options which improves Amazon's already impressive distribution network. Add to that Amazon finally being able to reach customers who like the traditional shopping experience and like to touch and feel fresh food before they buy it,  Amazon 13.7 billion is looking like a bargain already. 

All this is terrible news for grocery retailers but this is nothing compared to why everyone is terrified to compete with Amazon, deflation. As mentioned before, Amazon will almost certainly lower prices at Whole Foods which will force other retailers follow suit which will have a deflationary effect on the price on food which has already been at record lows for years. This is no shock to grocery retailers as groceries is a low margin business but unlike its competitors, Amazon isn't under pressure from Wall street every quarter to make money which means can lower prices and take hits to its bottom line its competitors can't do without billions wiped off their market cap every quarter. 

It's not all bad news as Amazon and Whole Foods currently represent just 0.2 and 1.2 of the grocery market as things stand and market leaders Walmart and Kroger's have much larger distribution networks. Walmart has been especially aggressive in growing its online presence and is growing faster online than Amazon of late and is best placed out of all retailers to compete with the Seattle based  tech giant. 

However, Walmart executives aren't deluded enough to think that Amazon and Whole Foods won't take market share off its competitors as it systematically grows it's distribution network and strips the fat out of it through the use of automation and tracking software dramatically improving Whole Foods supply chain. 

In sum, if Amazon is on a quest for world domination, it took a very large step in the right direction.     

Wednesday, May 17, 2017

(The Big Disrupt) Amazon: Why Walmart are going to lose to Amazon







There are many reasons why Walmart will lose to Amazon but the only reason that matters is that Walmart cannot compete beat never mind beat Amazon's wildly successful Amazon Prime service. 

Walmart has tried to compete with Amazon prime service most notably with it shipping Pass service that offered 2 day shipping for $50, nearly half the price of a prime subscription fee, only to fall flat on their face and do away with Shipping Pass just seven months later. 

What's concerning isn't that Walmart tried compete with Amazon prime membership program and failed miserably but that the company doesn't seem aware of why Amazon Prime is so successful. Everybody knew that Shipping Pass was dead on arrival because it was competing with amazon prime on price alone ignoring the fact amazon prime attracts and, most importantly, keeps customers loyal to amazon by offering other services that come with prime membership such as amazon prime video at a price. 

Prime is why Amazon can enter other markets and can turn them upside down or at the very least be competitive  

For Walmart to even come close to competing with amazon prime, Walmart would have to make sizeable investments in content along with the costs of providing 2 day free shipping which Walmart clearly aren't prepared to do and rightly so. Why Walmart is even attempting to take on Amazon at its own game is makes no sense as its main advantage over Amazon lies in its stores. Walmart can take a bite out of amazon the moment it figures out it's click and collect operation which would put pressure on Amazon to ramp up its plan to build checkout free stores, a business Amazon have yet to master with various media reports . 

Walmart even trying to compete reads to me like a very stupid idea and Walmart is going to pay for it.       

No company is loved by everybody and despite providing low prices and mass employment for many Americans, Walmart are one of the most hated companies in modern America. Almost all companies that dominate their market are hated but everyone seems to have a special place in their hearts when it comes Walmart as Walmart has come to represent everything people don't like about big business. 

While you might wonder why a company so hated is the first port of call for grocery purchases in the US, the answer is quite simple: price. Walmart from the outset has set its stall on providing the lowest prices and has mostly come good on its promise but in an age where Amazon and German discounter Aldi can match or beat Walmart rock bottom prices, Walmart are experiencing pressure on all fronts. 

Walmart, fully aware they can no longer compete purely on price, have realised that they must work on building customer loyalty but with the company often coming dead last among its competitors in customer satisfaction surveys and its aisles and parking lots becoming venues for fights, meth labs and old fashioned murder on an almost weekly basis, saying Walmart has its work cut out is an understatement to say the least. 

However that said, Walmart aren't the world biggest retailer for nothing lack of and with the right strategy can give Amazon a real run for its money but looking at the public statements offered by its management, its insistence to compete on price despite increasingly losing to competitors on it sole brand promises, and it's concerning lack of ability to keep customers, Walmart look like a company that's fighting a battle it knows it's going to lose.  

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