Online Grocery

The Online Grocery Industry Just Won Big In Amazon’s Whole Foods Acquisition

POST WRITTEN BY

Jagpreet Singh

Vice president of business operations at Taro Inc., a Silicon Valley startup.

Amazon’s recent $13.7 billion acquisition of Whole Foods will have many pros and cons for the online grocery industry. It will establish Amazon as a clear leader in this space, and the entire online grocery delivery industry will benefit.

One of the challenges in this industry today is low adoption rate. Depending on who you talk to, online sales for food and grocery is 1-2% of this $781 billion market in the U.S. Compare that to e-commerce, which has 10% penetration, and online travel, which has 40%. Whole Foods and Amazon will accelerate online grocery delivery adoption and will allow Amazon and others to figure out solutions to the challenges that will come along the way.

Main Adoption Barriers

Some of the key barriers to adoption have been delivery fee premiums, trust in the source of online grocery, and targeted access to early adopters. The Amazon-Whole Foods deal has elements that will enable consumers to overcome these barriers and allow buyers to get comfortable with the idea of online grocery shopping. These key elements include Whole Foods’ impeccable brand in the grocery industry, its store locations in affluent urban neighborhoods, and Amazon Prime customers.

In Whole Foods We Trust: When buying produce, people want to buy from a source they trust. That’s what led to the birth of Whole Foods, and it has been able to keep building that credibility and trust among its customers. By bringing Whole Foods brands under its umbrella, Amazon has now acquired that trust. Next time Amazon delivers an online grocery order, it just needs to leverage the Whole Foods brand to get first-time buyers more comfortable with the idea of buying tomatoes without actually seeing them.

Delivery Fees: Whole Foods stores are located in more affluent and urban neighborhoods where residents have a need to get their groceries delivered and are willing to pay a premium for the service. The fact that they can get it on-demand from the nearby Whole Foods store will further aid adoption. This was perhaps the reason Whole Foods invested in Instacart. Delivery costs may ultimately come down but the people living in Whole Foods neighborhoods are not going to wait until $2-$3 are knocked off their tabs. They will adopt right now because they have the need right now.

Strength In Numbers: Amazon’s estimated 65 million Prime members represent a segment that has already leaned toward online retail versus brick and mortar. With a little tweak in its AmazonFresh membership, Amazon will leverage this huge customer base to buy more and more groceries online. Once consumers get comfortable with the idea of getting their groceries delivered, they will be willing to pay a premium for these added benefits to their existing membership. As more and more Prime members adopt online grocery delivery, Amazon will be able to generate insights into these customers and apply them to convert more customers.

Of course, Amazon is going to be the biggest beneficiary of this $13 billion purchase. But once consumers adopt the idea of more grocery delivery, the entire industry will benefit. Perhaps we will see Kroger, Safeway and other competitors seek out Instacarts to acquire these early adopters together. Once we start seeing adoption in double digits, then the problem marketers will need to solve is how to keep customers sticking to their platform.

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