Amazon Brings Prime Delivery Challenge To Grocery Industry

  • Written by  Glenn Taylor

A long-awaited result of the Amazon-Whole Foods acquisition is finally here: Amazon will start delivering groceries from Whole Foods via its Prime Now one- and two-hour delivery service in select markets, including Austin, Texas; Cincinnati; Dallas; and Virginia Beach, Va. The service is expected to expand into more U.S. markets throughout 2018.

Prime members in these markets can shop thousands of items such as fresh and organic produce, bakery, dairy, meat and seafood and everyday staples sold by Whole Foods.

Competing grocers are surely watching the expansion with a keen eye. Only 16% of consumers purchased groceries on Amazon in 2017, according to the Walker Sands Future of Retail Study. But the closer Amazon gets to integrating Whole Foods into its popular Prime service, the more other food retailers will feel pressured to invest in their e-Grocery offerings and compete on pricing.

Despite Amazon’s market power, selling groceries online is not a slam dunk. Consumers say they would purchase more groceries online if it was less expensive (40%) and if delivery times were more convenient (23%), according to the Walker Sands report. But while Amazon has previously lowered prices on select items at Whole Foods, and has started offering some of the grocer’s private label brands on its web site and via Prime Now, it is unknown how products will be priced through Prime Now going forward.

If Amazon cuts most product prices and leverages dynamic pricing across all channels, traditional grocers would be forced to change prices faster than they’re used to.

“If this sticks, which I imagine they’ll make it stick, I can’t wait to see the response from Kroger and the traditional players,” said Lee Peterson, EVP of Brand, Strategy and Design at WD Partners in a RetailWirediscussion. “It’s not a death knell given the difference in consumer base, but it sure sets a new bar for all grocery to deal with.”

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With Instacart acquiring Unata in January, there’s another online grocery delivery platform that could be a major competitor to Amazon, giving grocers options to mull over as they invest in e-Commerce.

And the Amazon-Whole Foods transition hasn’t exactly gone 100% smoothly in stores, suggesting that the transition to online still will have some kinks to work out. Select consumers have reported instances of inventory shortages in Whole Foods stores since the acquisition. These inventory management issues combined with price cuts could negatively affect the bottom line, and in some instances have damaged employee morale.

The Prime Now integration won’t affect Amazon’s partnership with grocers and restaurants such as Whole Foods rival Sprouts Farmers Market, which also delivers through Prime Now, according to Stephenie Landry, VP of Prime Now/AmazonFresh. But it’s doubtful these retailers will be thrilled with Amazon adding its own subsidiary to the Prime Now ecosystem.

Rural grocers are likely to breathe the largest sigh of relief, since Prime Now services are still located in densely populated areas. In the RetailWire discussion, Jason Goldberg, SVP of Commerce and Content Practice at SapientRazorfish, asked various questions regarding the future of the Whole Foods/Prime Now integration, with one being: “Can Amazon profitably do this for most rural markets?”

“A Prime Now flex driver can have five or more deliveries in their car as they leave the fulfillment center,” Goldberg wrote. “You can’t do that with perishable fresh items (especially with flex drivers using their own vehicles without refrigeration). It’s much more expensive to make one delivery at a time, and hard to believe Amazon is going to subsidize those costs forever.”

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