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There has been much speculation around Amazon's grocery game plan since its purchase of Whole Foods last June. As things begin to settle down, retail analyst Neil Saunders takes a levelheaded view of the threat posed by the online giant as it struts on to the turf of traditional supermarkets.

Amazon’s acquisition of Whole Foods sent the retail sector into a frenzy. As one of the most disruptive businesses around, everyone knows Amazon isn’t going to take over an existing retailer without a game plan.

This doesn’t mean Amazon is going to change Whole Foods’ proposition radically, nor does it mean Amazon will shake things up – at least not initially. However, it is inevitable that Amazon will use this new part of its business to develop in the grocery market. In so doing, it will force change on the rest of the sector, much as it has done in other categories.

A strong brand
For Amazon, Whole Foods fulfilled at a stroke its ambition to be a serious player in the grocery market. While Amazon could have built up its presence organically, it would have been both costly and time consuming to bring the business to scale. And if it did so online, it would have suffered from perilously low margins that would have damaged Amazon’s profitability as it grew.

Whole Foods changed that dynamic. It doesn’t alter Amazon’s ambitions in digital or put a stop to innovative experiments such as Amazon Go, but it does put the food business on a different and steeper growth trajectory. In essence, it gives Amazon an established business that it can transform through its technology and supply-chain expertise. It also provides Amazon with a well-known brand that can ultimately be sold across Amazon platforms.

The brand and product benefits should not be underestimated. Through Whole Foods, Amazon gets a well-regarded own-label offering via both Whole Foods’ 365 range and its general brand. Amazon has already started to integrate some of these products into its online offering, quickly exposing Whole Foods’ own-brand to a lot more shoppers.

Interestingly, in the US there is still some resistance to buying own-brand food online. However, Whole Foods’ status and position in the industry means its brands are able to overcome some of these obstacles, especially when it comes to issues such as quality, freshness and trustworthiness. This gives Amazon a powerful own-brand advantage it could not have achieved alone.

Potentially this poses a threat to the national brands of rival CPG companies, much more so than is the case from other online grocery players and their private-label offerings. This threat may be amplified if Amazon prioritizes its own brands in search results and promotes them across its devices such as Echo and Show.

Omnichannel opportunities
Whole Foods provides Amazon with a well-balanced and sensibly distributed physical presence that allows it to offer click-and-collect and other services linked to the rest of its business. Indeed, select Amazon products such as its Echo and tablet devices have already started appearing in Whole Foods stores, as have Amazon lockers where customers can collect their online orders.

At present, relatively few Amazon shoppers buy groceries at Whole Foods, so allowing them to collect from the store is an opportunity to increase footfall and sales. From Amazon’s perspective, all these shops act as new nodes in its already comprehensive delivery network.

Longer term, Amazon will also look to increase the efficiency of stores, perhaps increasing the use of technologies like self-scan. Eventually, the pioneering thinking of Amazon Go’s frictionless shop could even be brought into play.

Although shops remain critical to Whole Foods, there is no doubt Amazon will develop a proper online presence for the brand, which has traditionally relied on third parties such as Instacart for online ordering. Via existing Amazon platforms like Fresh, as well as potentially new initiatives, Whole Foods is set to have a much more significant presence in the digital world.

For other grocers, all of this is worrying. Amazon has now moved squarely on to the turf of traditional supermarkets and poses a significant threat. The only mitigation is that the niche appeal of Whole Foods will, at least for the time being, limit the severity of Amazon’s threat to other players.

You can read the rest of this article in the April issue of The Drum magazine, which for the first time ever is devoted to a single company – Amazon. In it we explore why the company is becoming an increasingly attractive proposition to advertisers, and look at the increasing threat it poses to legacy brands operating in the spaces it might target next.

Neil Saunders is managing director and retail analyst at the retail research agency and consulting firm GlobalData Retail.