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How Amazon's New Grocery Stores Should Differentiate Themselves

By James Brumley - Jan 9, 2020 at 10:44AM

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Consumer preferences reflective a busier lifestyle and these companies are working to take advantage.

Meal kits shipped directly to your door were almost a great idea. Consumers know they want more convenience and healthier diets, but the reality of the young industry is consumers also want a little more spontaneity and a little less work.

They're now finding that happy medium too, it seems. A recent report from food-service consulting firm Technomic indicates that 66% of consumers buy a prepared-food item from a retailer at least three times per month. That's up from 55% in 2017. The more curious detail of Technomic's survey, however, was that only 59% of those shoppers planned on making a prepared food purchase. The other 41% just decided to when they saw it in the store.

So much for making a shopping list. It's this impulse nuance, in fact, that could quietly become a major draw for the conventional grocery store chain (AMZN 0.25%) says it's planning. Kroger (KR 1.38%), Walmart, and others should at least take note.

Speed and simplicity are key

If the idea rings a bell, it may be because yours truly here made a similar point in November about grab-and-go choices. Most noteworthy at the time was data from the National Association of Convenience Stores indicating that more than half of all Americans buy at least one meal per month from a gasoline station.

Photograph of pre-packaged meal salads in grocery store cooler.

Image Source: Getty Images.

Perhaps more shocking, these gas station quick-meal options are actually pretty good -- good enough to help take a 1.1% bite out of 2018's nationwide grocery spending. Technomic's numbers jibe with the shift that says consumers want fast meal solutions, from whoever can provide them.

To their credit, grocers are getting deeper into the game. Wegmans' Meals 2GO service delivers a nice mix of food ranging from pizza to sushi to sub sandwiches. Kroger sells meal kits from Home Chef, but rather than several being delivered to your home, they can be purchased in a store. The grocer also now sells plenty of small-container, ready-to-heat options like chicken tenders and soups. Indeed, Amazon's convenience stores, known as Amazon Go, drew attention because they're cashierless. Take a closer look at the fare being sold inside these stores, however, and you'll find the core strategy is selling (reasonably) healthy single-meal servings that require little to no prep and can be finished fast.

To that end, the Technomic survey found that 47% of prepared food purchases were eaten immediately, rather than tucked away for a later time. That sounds more like fast food restaurant service and less like a typical trip to the grocery store, and it's increasingly the norm.

Logistics and execution will be the challenge

Assuming this paradigm shift remains in place -- and there's no reason to suspect it won't, as people develop increasingly busier lives -- Amazon would be wise to capitalize on it when it finally moves forward with its plans to build a chain of grocery stores later this year.

The e-commerce giant already has access to one of the most important ingredients it needs to find success in its fairly new project -- scale (or at least the scale that a deep pocketbook can buy).

Selling raw vegetables or butchered meats is fairly straightforward, but portioning ingredients out for grab-and-go or prepared meals involves cutting, packaging, measuring, and sometimes even cooking. Some of that work can be handled by robots, but some of it can't. Some of it can be handled remotely, and some can't. To cover the labor costs of such an operation, it has to be big, but even then there's no guarantee of viability. It took Berlin-based meal kit player HelloFresh years to grow big enough to finally produce a profit early last year, and even then, it's just scraping by. Last quarter's adjusted EBITDA margin for HelloFresh was an alarmingly thin 1.4%. Meal kit competitor Blue Apron may never achieve enough scale to become viable.

Also in regards to scale, Amazon has access to enough vendors who have access to a supply of enough ingredients to stock the shelves of 18 Amazon Go locations. A few dozen grocery stores may be a different story though, let alone a few thousand. In contrast, Kroger has enough vendors to stock fresh foods at nearly 2,800 U.S. locations.

Some suppliers might balk at getting involved with the relatively young newcomer that's taking dead aim at their biggest customer. On the other hand, Amazon has something of a penchant for building highly efficient, large-scale operations that disrupt existing relationships. It would also be short-sighted to overlook how younger consumers are content to embrace the technological convenience an Amazon grocery store would be sure to offer. 

Looking ahead

It admittedly seems like a tiny matter. Grab-and-go, prepared meals, whatever you want to call them, they're still only a small portion of a U.S. grocery market that's worth nearly $700 billion per year. Don't dismiss the potential of non-restaurant meal options though, if not as a market in and of itself, then as a driver of foot traffic to grocery stores.

The lines that used to distinguish between fast-food restaurants, grocers, and even gas stations are being blurred, which sets the stage for plenty of disruption for a brand that's willing to see and respond to the shift. My money's on Amazon in that regard. Fortunately for Kroger, Walmart, and other companies in the food business, Amazon doesn't have the geographic footprint it needs to do a whole lot of damage ... yet.

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