How Amazon Is Expanding Brick and Mortar Presence

October 18, 2017

E-commerce giant Amazon doesn't think brick and mortar retailing is dead, and has been slowly growing a fleet of physical stores. While the company's acquisition of Whole Foods has grabbed headlines, the company's physical footprint has reached beyond grocery sales and these efforts could dramatically shape how retail operates in the very near future.

Whole Foods

In August, Amazon issued a private debt offering to close on a deal to acquire all 437 stores of gourmet grocer Whole Foods for $13.7 billion. According to the Washington Post, Amazon will have a 2 percent share of the American grocery market with the Whole Foods purchase. For comparison, Walmart holds a more than 20 percent market share while Kroger captures 7 percent. The company’s Whole Foods acquisition further reinforces the strategy of mixing online and offline retail, while also being able to adequately compete with Walmart’s reach whose stores are located within 10 miles of about 90% of Americans.

Image: Ennis Davis / Modern Cities

Amazon has long had its sights set on dominating the grocery market, and with good reason- the US retail and food service market generates around $5.32 trillion in annual sales. Although the AmazonFresh service has existed for more than a decade, the business unit has struggled to become profitable in a market where high delivery costs clash with historically lower margin grocery products. While top line sales figures and the average order size of groceries purchased online are both growing at a rapid pace, e-commerce still only represents 1% of the overall U.S. grocery market according to Moody’s. Despite its dominant digital footprint, Amazon only captures 18% of the crowded online grocery market share according to data from Slice Intelligence.

“While Amazon could have built up its presence organically, it would have been both costly and time-consuming to bring the business to scale,” wrote Neil Saunders, managing director of GlobalData retail. “In our view, an online-only operation would also have suffered from perilously low margins and would have damaged Amazon’s profitability as it scaled up.”

Amazon Lockers are being installed in many Whole Foods stores, and Amazon products like the Echo, Alexa and Dash are being added to the in-store product mix. About 62% of Whole Foods shoppers also use Amazon Prime, meaning Amazon now has a large network of distribution centers that will serve as pickup sites for online orders. And just as the other brick and mortar experiments have reinforces the company’s relationship with its Prime members, Amazon will continue to offer special savings and in-store benefits to Prime members at Whole Foods locations.

In regulatory filings, the company has indicated that it plans to open up to 85 additional Whole Foods stores across the US.

Amazon Restaurant

Amazon Restaurants is an online service that delivers food from local restaurants to one's home. Prime members can voice-order their next meal through Amazon Restaurants on their Alexa-enabled devices including the Amazon Echo and Echo Dot by saying, “Alexa, order from Amazon Restaurants.”

Amazon and an online-ordering company Olo have teamed up to expand the Amazon Restaurant service in order to tap into Olo's existing network of over 200 restaurant brands across 40,000 locations. The service is now available to Amazon Prime customers in 20 cites across the US.

Image: Amazon

While some may just shrug this off as Amazon trying to cut into GrubHub's hold on the online food restaurant delivery market, the expansion of this service offers similar parallels to the launch of AmazonFresh- where the company allowed local grocers to participate in Amazon's digital ecosystem, opening up local businesses products to a large collection of loyal shoppers. As AmazonFresh has evolved to include drive-thru storefronts that was further buoyed by the company's acquisition of Whole Foods, and later complemented by the introduction of the Amazon Go format... this Olo partnership may be the canary in the coalmine which signals a broader push into expanding Amazon's physical footprint in the booming restaurant industry- one of a handful of uses finding success in an increasingly challenging retail marketplace.

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