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Amazon's Food Offensive Forcing Supermarkets Into 21st Century

Published on .

Credit: Bloomberg News
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Walk into a grocery store 10 years from now, and you'll see more prepared meals, personalized recommendations and perhaps even an in-house restaurant.

What you probably won't see is a random stockpile of food and a long line at the register.

Time-consuming trips and a cumbersome checkout process are some of the top challenges that grocery stores aim to tackle in coming years, and the stakes are high. Online delivery services and deep-discount chains are threatening to upend supermarkets' long-held perch in the food landscape.

The push to modernize grocery stores is under even more pressure following Amazon's agreement to buy Whole Foods Market Inc. for $13.7 billion last week. The deal creates a hybrid retailer -- with brick-and-mortar and online offerings -- that could serve customers more efficiently than traditional stores.

"Grocers that are customer-centric are going to win," said Shannon Warner, VP of Capgemini Consulting's consumer products and retail practice in North America. That means "leveraging all of the data they have about the customer to personalize experiences and make them more relevant."

Physical stores aren't going away -- delivering food to customers' homes remains a costly process, especially for produce and other fresh items -- but tomorrow's brick-and-mortar stores will have to know their customers very well. And the weaker competitors will either fall by the wayside or get scooped up by larger rivals.

Merger wave?
Warner sees Amazon's Whole Foods deal as the first of many mergers for grocers as they grapple with this shake-up. The supermarkets that remain will cater to individual customers and market to them based on key characteristics -- such as a vegan diet or a peanut allergy -- to shape the entire shopping experience. That means grocery stores will already know what you like, dislike and plan to buy before you step into the store.

The results may look like this: Your favorite grocery store's app sends you promotions on your most-purchased items every Wednesday (since it knows you shop on Wednesday nights) and offers recipe suggestions based on what you've bought in the past. You also get meal delivery offers when it's rainy (since the store remembers you seldom venture out when the weather is bad) and a reminder when your laundry detergent is probably running low.

Grocery stores will have to find ways to leverage the vast amounts of data that customers produce and use it in a way that makes shopping more convenient and less of a burden. Analysts predict that this will help stores form personalized marketing messages, recommendations and digital coupons. Amazon, with a sophisticated data-gathering operation, already has a leg up in this area.

'Snail's pace'
The rest of the $800 billion grocery industry has been slower to modernize.

"Innovation at grocery stores is happening at a snail's space," said Allen Adamson, founder of Brand Simple Consulting. For companies competing in both physical retail and e-commerce, the "winners will be those who can figure out how to live in both worlds," he said.

That's the goal with Amazon's Whole Foods takeover, which is slated to be completed in the second half of the year. Whole Foods Chief Executive Officer John Mackey has said that the deal will make the chain more "customer-centric," but it's still unclear how exactly the integration will work.

Separately, Amazon has been testing no-checkout technology at a convenience store in Seattle. The "Amazon Go," concept lets people pay with smartphones -- without having to see a cashier or going to a checkout kiosk.

There's a broader push to speed "starved-for-time" shoppers through physical stores, said Murali Gokki, a managing director at AlixPartners. Gokki says the effort will force grocery stores to make the shopping process more pleasant and efficient.

The Amazon deal may help show how it's possible to blend a powerful back-room operation with a showroom grocery experience. Ideally, shoppers will go into stores only to find the produce that they want to see, smell and touch before buying. The rest of the products they want will be delivered.

For the traditional retailers who fail to embrace this vision and make sweeping changes, time may be running out, Warner said.

"Retailers who don't accelerate how they innovate will be forced to liquidate," she said.

-- Bloomberg News

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