- Amazon Fresh is experimenting with physical Stores, offering the same value proposition as Walmart: Everyday Low Price, Choice and Convenience.
- Fresh Stores however target high income shoppers, setting up shop near Aldi and Trader Joe’s.
- Amazon is taking over real estate from bankrupt retailers with 30K+ Sq. Ft. spaces (e.g. Toys r Us), and will likely force more to close.
- We estimate Amazon Fresh Stores to generated 1.5x Whole Foods’ current sales in 5 years.
The end battle in Amazon’s war against grocery stores has begun: Amazon Fresh is opening brick and mortar locations. Four stores have launched in California, with more coming in Illinois, offering everyday low prices for all customers (not just Prime members). That’s the same value proposition that pushed 95% of U.S. consumers to shop at Walmart.
But Amazon Fresh is not Walmart. It’s aimed at high income consumers that want quality at low price, currently offered by the likes of Aldi or Trader Joe’s, but also desire more product choices as offered at Walmart or Kroger. In essence, Amazon Fresh is filling a gap for young families and professionals that want the Walmart Experience, but can’t shop there for its poor treatment of workers.
Amazon Fresh is also not in a hurry to pick a fight; it’s taking the time to get the formula right. The number of new “Amazon Fresh” related jobs at headquarters has not changed since stores opened in October compared to previous months, indicating they’re still testing waters.
Amazon is nevertheless planning dozens of new Fresh stores across the U.S. according to its Store Career Listings. It’s a sign Amazon Fresh wants to see how different demographics and regions react to its offering. Learn, iterate and perfect before scaling.
I want to shop for food in person, and not spend my whole paycheck
Americans who shop for groceries online mostly do so for convenience and time saving. Those customers however remain a small subset of parents with children and adults with household incomes above $100,000. To them, the added convenience and time savings overcomes the typical barriers to online grocery shopping of high delivery fees and volatile quality of produce.
The fact Amazon Fresh is building stores reflects the fact that overwhelmingly, Americans prefer to get their bananas and milk in store. 81% of Americans have never ordered groceries online according to a Gallup survey done before COVID. Even during COVID times, 62% of consumers still favored buying groceries in person at the store. Product selection, availability, convenience, and low prices are the top factors driving consumers into stores. This means online grocery services like Amazon Fresh or Prime Now have a relatively low plateau, and physical stores are critical if Amazon wants to gain market share in groceries.
Whole Foods is also not the answer. Its products are too expensive to successfully gain market share from rivals. Products from Kroger grocery stores are 12% less expensive than at Whole Foods. Grocery cost overall has also reportedly risen faster than overall inflation in the past 10 years. Considering 30M Americans report not having enough to eat during COVID because of rising cost, price is and will continue to be an important factor to where people decide to shop. Therefore, Amazon needs to sell cheaper groceries if it wants to win over the 70% of Prime members that don’t shop at Whole Foods.
