Managing procurement for three vastly different retail models.
Amazon recently announced that they will open a “traditional” grocery chain. This is in addition to their 2017 acquisition of Whole Foods and their experimentation with Amazon Go, a fully automated (i.e. cashier-less) convenience store-style market. All three will meet a similar kind of consumer need, just in a different way. This will likely result in the creation of three completely different cost models and profitability rates – not to mention three very different procurement and supply chain operations.
For years, Whole Foods (lovingly derided as “Whole Paycheck”) has defied the low margins commonly seen in grocery retail by employing an operational strategy that merges brand reputation, consumer identity and high-quality products in justification of higher prices. Although they have been successful, Whole Foods has found it difficult to expand their market share beyond their existing customer base. They have never professed to be the supermarket for all shoppers, or even for most shoppers. They choose their markets carefully, making sure that the demographics in each area fit their business model. Although Whole Foods procurement is less myopically focused on driving down prices than their counterparts in traditional grocery retail, you can bet that their responsibilities with regard to supplier reputation, diversity and sustainability are more than a full time job.
With just a handful of locations, Amazon Go is effectively still in test mode, but the company has plans to expand the number of locations significantly over the next few years. And it is no wonder – despite the costs required to open these high-tech convenience stores in expensive retail markets, they are far more profitable than their conventional counterparts. As recently reported in a Motley Fool article, Amazon Go generates more revenue than traditional convenience stores no matter how you slice the numbers. While a traditional convenience store would realize $1M in annual revenue, Amazon Go locations make $1.5M. Amazon Go also wins by square foot, making $2,700 in sales per square foot compared to $1,300. The cost management objectives of such a chain likely have a lot to do with optimizing purchase rates for individual items against their profitability rate, perishability and in-store placement. That must create an analytics optimization challenge big enough to take a full time data team, as well as high expectations for suppliers around replenishment rates.
On March 4th, Amazon announced that they would open dozens of traditional grocery stores (translation: less expensive and less “feel good” than Whole Foods). It is too early to know exactly what the chains will be like, although it seems reasonable to expect an emphasis on online ordering with in-store pickup or home delivery. The procurement challenge associated with this new chain is unlikely to even be at Amazon. Existing grocery chains will likely be the ones to take the hit. Shares of Kroger stock (the largest U.S. based grocery chain by revenue) took a 4% hit the day Amazon made the announcement. Who else will be affected? Consumer packaged goods providers (think P&G, Kraft, Nabisco). In other words, the supply chain that feeds the existing grocery retail market. These companies haven’t had an easy time as of late, with consumer preferences moving towards fresher foods and continued downward pressure on prices from large chains such as Wal-Mart and Target. This will become an important dynamic to watch as the online retailer’s intentions in this space are revealed.
It is intriguing to think that all three of these chains may have their own procurement team, despite the fact that they are all part of the same enterprise. Of course, the only scarier possibility might be that one procurement team would negotiate the deals for all three. With that level of leverage and Amazon’s existing distribution capabilities, the effect would make trends like the Wal-Mart effect look like nothing more than a ripple.
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