Amazon is entering the grocery delivery business with its bid to buy Whole Foods Market Inc. for $13.7 billion but industry insiders say that it’s going to be a long and costly process for Amazon to revolutionize grocery delivery the way they revolutionized online retailing.
Not As Much Warehouse Space As Wal-Mart
Even though Amazon is well known for having a large amount of warehouse space, one key challenge that Amazon faces is the relative scale of its warehousing for the Whole Foods business. According to logistics consulting firm MWPVL International Inc., for example, Amazon has 3 million square feet of U.S. warehousing dedicated to its Amazon Fresh and Prime Pantry grocery programs. This is only one-tenth of the warehouse space that Wal-Mart has for specialized food distribution.
This has led some former Amazon Fresh employees and logistics experts to conclude that Amazon will need to significantly grow its network of specialized grocery distribution warehouses in order to compete with Wal-Mart.
Fresh Food Different To Parcels
Another challenge for Amazon is that even though it has warehouses strategically located throughout America, along with 100 million square feet of fulfillment and data centers equipped with the latest robotics, warehouse facilities for fresh food distribution are far different to (and more complicated than) ordinary warehouses.
A single facility may need more than six different temperature settings to store products from ice cream to fruits. Some facilities may require certification from the US Food and Drugs Administration. There are also additional maintenance and cleanliness factors to be addressed e.g. for pest control and to avoid food contamination.
Big Investment Needed
All of these factors have led industry commentators to conclude that Amazon will need to invest a very significant amount of money into its fresh grocery business in a short space of time if it wants to become a serious competitor to Wal-Mart.
For example, Industry analysts predict that Amazon will have to add 12 or more warehouses if it wants to supply Whole Food stores, as well as running its normal home delivery operation.
It is thought that Amazon will likely to use United Natural Foods Inc. to supply Whole Foods with hard-to-source products, but even if Amazon uses Whole Foods stores to provide food for delivery, many of their outlets lack space to handle thousands of online orders.
What Does This Mean For Your Business?
Amazon has grown and diversified at an incredible rate in recent years, blurring the traditional retail dividing lines between e-commerce and brick-and-mortar. Its move to revolutionize US grocery delivery business and take on the entrenched might and experience of Wal-Mart through the acquisition of Whole Foods Market Inc could seriously disrupt the U.S. grocery sector, but this will clearly require a lot more investment from Amazon if it is to be successful.
Even though there are significant challenges ahead for Amazon in terms of the type and number of warehouses needed to handle fresh groceries, many commentators agree that Amazon’s size, financial might and track record of entering news markets mean that it could well succeed.
The worry is that, if Amazon is successful in revolutionizing the fresh grocery market in the US, it could use this experience to set up a similar operation in the UK. This would pose a serious threat to UK grocery retailers. It could also, however, provide new opportunities to fresh grocery producers in the UK.