Amazon’s acquisition of Whole Foods sent shockwaves through the grocery industry and several other sectors last week. Yet experts say traditional grocery chains shouldn’t panic. Instead, they should emphasize their brand purpose and work to build customer loyalty.
Grocery retail experts say old school chains should first take a deep breath. Supermarket analyst and consultant David Livingston of DJL Research notes that "Amazon is causing a lot of disruption to the point that their competitors can’t determine reality from fiction."
"The key thing for competitors to do now is not overreact and assume Amazon knows something no one else does," he explains. "That leads to bad decisions and poor planning, which is what Amazon hopes its competitors will do—like going deeper into debt trying to copycat Amazon or buying up struggling natural and organic stores."
Amazon is likely to put its supply-chain model against Whole Foods in an effort to bring down the grocer’s prices, according to analysts. The upmarket brand, while beloved by its shopping base, has been nicknamed "Whole Paycheck" for inducing sticker shock. In anticipation, supermarkets may be tempted to preemptively lower their prices, but analysts and communications pros say this is the wrong approach.
"The immediate knee-jerk response you’ll see from some competitors, not all, is discounting, promotions, and lower prices," says Larry Light, CEO of marketing consultancy Arcature and former global CMO at McDonald’s. "That is a defensive play. It is not a strategy for sustainable, profitable growth. Those who will survive and the few who will thrive will focus on the value of their experiences."
He explains that Amazon competes on its brand value, driven by price, but also convenience, personalization, and experience. That’s where traditional brands should look first: how they are communicating their value with shoppers, what they want their in-store shopping to be like, and how to better personalize their experiences, both in-store and digitally.
"If the business responds correctly, this is an opportunity for them to look at how they can improve customer loyalty and improve margins," says Light. "They can view this as an opportunity, not a threat."
Eric Hausman, partner and retail practice chair at Carmichael Lynch Relate and a former communications executive at Target, was among those who were initially gobsmacked by Amazon’s play. "My jaw dropped," he recalled. "I just thought, ‘Wow!’"
Although Whole Foods is set to keep its name and operate as a separate unit, it’s likely the two sides will converge. Hausman advises grocers to identify, or re-identify, their brand purpose and communicate it to shoppers so they sand for something more than just price.
"It isn’t about a grocer responding by lowering price or really anything of that nature, but much bigger thinking. It’s about asking themselves how they can create a new customer shopping experience," he explains. "They can use this as an impetus to move quickly and really think about how they are talking to their customers, their vendors, and their employees."
After the ecommerce giant and high-end grocer announced their blockbuster $13.7 billion cash deal last week, the stock prices of both Amazon and Whole Foods jumped. Conversely, the share prices of retailers such as Walmart, Kroger, Target, and Costco plummeted.
Many in the media saw it as a sign of impending doom for traditional grocery retailers. Some articles read almost like obituaries for the likes of Costco. CNBC’s Jim Cramer, the host of Mad Money, declared, "Today is a day that will live in infamy for everyone who sells groceries in this country. I don’t care if you’re Kroger or Wal-Mart or Target or Costco or Supervalu or Dollars General and Tree or the recent German entrants [Aldi and Lidl]. This purchase? It changes everything."
Observers say the deal could be just the start of further consolidation in the sector. Sabrina Horn, managing partner of the technology practice at Finn Partners, says it is possible Amazon will make other acquisitions this year, or another tech giant could scoop up a grocer.
"I think we’ll soon be asking what grocery chain is going to be snapped up next, and by whom," she says. "Typically, grocery stores don’t come top-of-mind in terms of innovation, but I think this is going to spark other sorts of acquisitions like this."
Yet at least one consultant is throwing cold water on the idea that Amazon is leading the pack by acquiring Whole Foods. While it’s fresh in customers’ minds how disruptor brand Amazon upended bookstores and electronics chains, the company’s deal for Whole Foods is "somewhat of a defensive play, as Amazon wants to protect its own home turf against Alibaba, which is its biggest competitor globally," says Jim Okamura, managing partner at Okamura Consulting. He adds that the deal is also a defensive play against Wal-Mart, which launched a curbside grocery service last year.
Okamura warns the Amazon-Whole Foods deal is worrisome for traditional players, less so for the likes of Wal-Mart and Kroger, and more for mid-size regional grocers, who don’t have the same resources as larger competitors. He advises them to leverage their heritage and goodwill, as well as support from consumers who don’t want to give all their shopping dollars to one corporate juggernaut.
"We’ve been emphasizing with some clients who fall into that [midsize] category that there is a history of regional retailers staring down bigger, national players and effectively out-localizing them. I expect we will see some of that positioning of ‘fight the good fight,’" says Okamura. "Shoppers do have a great measure of respect for a brand that is relevant to their hometown or state."