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Amazon’s fans know it as the customer-friendly, highly efficient “Everything Store,” able to have goods miraculously appear on your doorstep with its patented “1-Click” shopping.
Don’t let the stylized “smile” on Amazon’s logo fool you. Fortune described Amazon as a “brass-knuckled battler for every penny of competitive advantage.”
Indeed, Amazon acts much more like its alter ego “Relentless,” the other name CEO/Founder Jeff Bezos considered (relentless.com still links to Amazon’s website).
Amazon forever changed the way America shops, to the detriment of traditional brick-and-mortar retailers. Locally, you can find Amazon’s fingerprints on at least two recent failures, HHGregg (consumer electronics) and Gander Mountain (outdoors). There will be more. In fact, Bespoke Investment Group created its “Death by Amazon” index in 2012 to track 54 retailers it viewed as most vulnerable.
The $800 billion U.S. grocery business is uber-competitive. Families no longer head to the supermarket for the weekly, one-stop shopping trip. Consumers have options outside of traditional supermarkets, which are being attacked from both the deep discounters on the low end, like European chains Lidl (which will operate 100 stores by mid-2018) and Aldi (which will invest $5 billion by 2022 to open 900 new stores and remodel hundreds more) and specialized stores on the upper end (like Whole Foods, online grocer Peapod and meal-kit provider Blue Apron).
Walmart is America’s largest grocer (20 percent market share) and groceries account for more than 50 percent of revenue. In 2015, Walmart signaled its intent to defend its turf at all costs with a three-year plan to slash prices. This has damaged profit margins and pummeled stock prices for No. 2 Kroger (9 percent share) and the entire segment. Restaurants have also been hurt, as the cost difference between cooking at home vs. dining out has widened.
Amazon was on the competitive radar because of its longtime online sales of grocery products and more recent initiatives with grocery pickup/delivery (Amazon Fresh) and physical stores (Amazon Go), but achieving scale was proving difficult.
That changed on June 16 when Amazon announced it was buying Whole Foods (which is also facing margin pressure in its core stores and was compelled to launch a value-store format, 365 by Whole Foods Market) for $13.4 billion. Amazon gets access to Whole Foods’ affluent customer base and data and immediate scale with 460 stores. The stores can become a sales/pickup/delivery platform for everything Amazon sells.
In explaining what The New York Times described as Amazon’s “prodigious tolerance for risk,” Bezos said, “If you’re going to take bold bets, they’re going to be experiments. And if they’re experiments, you don’t know ahead of time if they’re going to work. Experiments are by their very nature prone to failure. But a few big successes compensate for dozens and dozens of things that don’t work.” Regarding competition, he said, “Your margin is my opportunity.”
Amazon wasn’t in cloud computing 10 years ago, but Amazon Web Services is now a rapidly growing $12 billion business. Amazon Prime Video both delivers popular content and creates original content, like the Academy Award winning “Manchester by the Sea.” Enjoy the lower prices, but know that Amazon wants to eat your margin, too.•
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Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC. He can be reached at (812) 376-9444 or mickey@kirrmar.com.
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