Inside Amazon's Grand Plan to Control How You Eat
Amazon didn't see immediate successThere's plenty of money for the taking for the company that successfully figures out how to disrupt the food system. The global food industry is a lucrative market with more than $7 trillion on the line, according to William Rosenzweig, dean and executive director of The Food Business School at The Culinary Institute of America. Global food retail sales alone account for $4 trillion.
Amazon is simply making what is an obvious strategic move. "They have been very vocal," says Darren Seifer, food & beverage industry analyst for The NPD Group. "They've said publicly that for them to hit their growth target, they feel the best way to do it is to get into food and beverage. It's a huge part of consumer spending every single year." According to a 2016 Pew Charitable Trusts analysis, food accounts for 10% of a family's income, the second-largest expenditure after housing.
It all started In 2007 with the Seattle launch of AmazonFresh, where the company delivered groceries to customers' homes for same-day and next-day delivery. From the get-go, its prospects have been mixed. What began with predictions that AmazonFresh would quickly take over online grocery shopping turned into slow growth. AmazonFresh didn't expand to other cities until 2013 and, when it did, that came with a $299 annual membership fee, generating plenty of skepticism that the program could ever take off at such a high price point.
But Amazon wasn't deterred by those early hiccups, and the past couple of years have brought a flurry of food-related activity. In late 2015, Amazon started offering restaurant delivery through Prime Now, and then expanded it to more than 20 cities. Last year, it rolled out a private food label called Wickedly Prime hawking everything from Amazon-branded popcorn to tortilla chips. It also partnered with Tyson Foods and Martha & Marley Spoon to deliver their home-cooked meal kits. While Martha & Marley Spoon uses the partnership as a supplement to its regular subscription service, Tyson's meal kits are available exclusively through AmazonFresh. In a big push forward, the retailer dropped the AmazonFresh fee to $14.99 per month for Prime members last fall, which Recode noted proves that "Amazon is indeed very serious about this business."
Amazon also seems very serious about reconfiguring its operations. In December, Amazon announced that it's testing Amazon Go, a checkout-free convenience store selling grocery items as well as ready-to-eat foods and its own "chef-designed Amazon Meal Kits." GeekWire uncovered a still-secretive drive-in grocery store in Seattle linked to Amazon with capacities for picking up and ordering items. And earlier this year, Amazon announced it will begin accepting food stamps for online groceries in a new pilot program. The company is also making big hires to help propel the brand's food-world domination plans: Bloomberg reported late last month that Amazon is wooing executives from major food brands to persuade them to redesign their packaging and operations to prepare items for shipping directly to online shoppers rather than to sit on supermarket shelves.
"All retailers should see this as a shot across the bow," Forrester analyst Brendan Witcher told CNBC of Amazon's packaging pitch to the likes of General Mills and Mondelez, the parent companies behind brands like Oreo, Cadbury, and Chips Ahoy. "Anyone who is paying attention can see that Amazon is building a 'grocery-to-home' ecosystem not unlike what Apple did for the music industry."
Amazon's success in the food and beverage category is by no means predestined, but the online retailer does have a lot working in its favor. While online grocery shopping has seriously lagged behind other goods, recent studies indicate that the online market is poised to grow.
In January, the Food Marketing Institute and Nielsen released preliminary findings from a joint report indicating that, by 2025, online grocery shopping could reach $100 billion annually, or about 20% of the market share. It currently accounts for 4.3% of food and beverage sales. "The grocery business truly is at a digital tipping point," said Nielsen's president of US Buy, Chris Morley, in a press release urging traditional grocery retailers to invest in understanding digital shoppers.
by 2025, online grocery shopping could reach $100 billion annually.
Traditional retailers are heeding Morley's advice and are also looking to compete in the online grocery space. Erik Thoresen, a principal at foodservice research firm Technomic, points out that "there's a lot of blur now" as traditional grocers like Kroger invest in online ordering while Amazon experiments with brick-and-mortar locations. So, he notes, players on each side "are crossing what once were traditional boundaries."
But Amazon has an edge online. According to The NPD Group survey, the third category of consumers most likely to shop online are Amazon Prime members -- and Seifer says that one in four American households has a member who subscribes to Amazon Prime. The company has an enormous built-in customer base if it can figure out how to jump over hurdles like the AmazonFresh subscription fee.
Seifer believes that Amazon could be poised to drive some of the success in online grocery if it can convince manufacturers like General Mills to reorient themselves toward online retail by swapping out designer packaging -- meant to draw the consumer's eye in the grocery aisle -- for something sturdier and more shippable. "It took me a little bit of a leap to think of them as a music provider, as a movie streamer," Seifer says. "But they've done it before. They just might be able to do it one more time."
Amazon has big plans beyond groceryBeyond grocery shopping, there's plenty of potential for Amazon's multi-pronged approach to food, too. Innovations in growing markets like restaurant delivery and meal kits could help set Amazon apart from the competition -- even those who got to market first.
For example, while Seamless, Grubhub, and others have long dominated restaurant delivery, Seifer points out that Amazon has the advantage of being better-known and more powerful. And DC restaurateur Daisuke Utagawa says Amazon offers a good deal to customers and restaurants alike. Bantam King, his popular ramen restaurant, recently began delivering through Amazon. Utagawa says consumers pay less since there are no delivery fees (though you do have to be an Amazon Prime member and meet the $20 order minimum). While Amazon has been dinged for taking a bigger cut of restaurant profits than competitors like Seamless, Utagawa says it's still less than many other competitors. "I have no idea how they make this work," he says. But the advantages to consumers could help drive out competitors.
Amazon has the advantage of being better-known and more powerful.
Meanwhile, Blue Apron has become the standard-bearer for the still relatively tiny meal kit sector. But Amazon's partnerships with Tyson Foods and Martha & Marley Spoon (which is itself a partnership with Martha Stewart) offer consumers a new deal on meal kits: Rather than commit to a subscription, users can purchase an AmazonFresh membership to access meal kits, which they can buy in as many quantities as they like and even add on any other grocery items they might need. These partnerships help Amazon mitigate the fact that consumers don't associate it with delicious home-cooked meals; they certainly do make that connection with Martha Stewart. "This could be another way that Amazon could change the dynamic of the market given how big they are," Seifer says.
Amazon makes meal kit companies stand out in the marketplace, too. Anjali Grover, managing director of marketing at Marley Spoon, says the partnership helps woo reluctant consumers. "It's really low commitment when you try a meal kit like this," she says. "There's no questioning whether you should jump into it because of the subscription factor; you order your milk, your strawberries, your eggs, and you can get dinner for two for three nights." Instead of paying Marley Spoon's weekly $48 subscription fee (which includes two meal kits), consumers can hop online and buy one meal kit for $24. The one drawback is that the recipe offerings are more limited on Amazon, but Grover expects them to grow as the partnership expands.
Amazon will change the entire food systemIt's too soon to offer any real prognosis of Amazon's potential in the restaurant delivery or meal kit market. Technomic's Thoresen says consumers don't shift over to a new service all at once. They try it out and, if they like it, gradually add on more products. That's why Amazon offers incentives like Amazon Pantry credit for choosing a slower shipping option. "I think a lot of these platforms are similar to the iPhone in a way," Thoresen says. Consumers may find these are the services they never knew they needed.
Assuming Amazon does succeed, it could significantly change the food system. "I think it's pretty safe to say when Amazon enters a business, it does disrupt what the traditional business model is," Thoresen says. "I imagine we'll see some of that disruption happen." This has implications for the entire supply chain, including traditional food businesses and the unabating mechanization of the American workforce.
Some of that is already changing. Thoresen argues that distribution and logistics have to change before any of this digital food revolution can be feasible -- and that Amazon has already set up networks in big markets as it slowly rolls out AmazonFresh, Amazon Restaurants, and presumably the forthcoming Amazon Go. The Wall Street Journal recently reported that these networks have created booming local job markets and more opportunities for smaller shipping companies. Many of these jobs are in the emerging gig economy; Amazon Flex is one element of the company's delivering network, relying upon independent contractors to deliver packages, groceries, and orders from local restaurants.
Workers in traditional retail jobs also fear what might happen to their jobs as the possibility of automated grocery stores like Amazon Go looms. Those jobs might indeed change, Thoresen says. But he points out that online retail has created jobs in the past. When Kroger launched online ordering, for example, the grocer needed more people to fill the orders.
Kroger and its ilk are testing their own online platforms because the ground is going to shift beneath them as well. "The biggest challenge for retailers right now is awareness of what is to come," Thoresen says. It can be hard for a retailer in suburban Minnesota to gauge when Amazon is going to invade the local market. But Thoresen doesn't think it's a do-or-die scenario. "There's certainly room for both the traditional brick-and-mortar market to exist as well as online business," he says.
But the rise of restaurant delivery and meal kits also puts the squeeze on traditional retailers, says Rosenzweig. He argues that the continued rise in delivery has flattened restaurant sales, while meal kits are eating into grocery stores. Grocers have responded with grab-and-go "grocerants," he says -- but Amazon Go would disrupt this model, too.
Shelving runs out in traditional retail but it's "virtually unlimited" online.
Meanwhile, smaller food retailers and manufacturers may actually benefit from an Amazon-led market. As Seifer points out, shelving runs out in traditional retail but it's "virtually unlimited" online. More niche products -- like your favorite brand of nutritional yeast or vanilla paste -- might find a home in the market. Old-school manufacturers ought to watch out for this, Seifer says, because of, as always: millennials. "We just see evidence left and right that generation gravitates toward [smaller companies]," Seifer says. "Going online actually creates opportunities for companies like that."
Consumers may have the most to gain from Amazon's success. "I think the big sell for consumers is getting time back in their day," Seifer says. He cautions that delivery fees and other costs are currently barriers to online shopping for many consumers. But as Amazon stokes competition, costs could come down to a level that, if not cheaper than brick-and-mortar food shopping, is at least worth the convenience. That competition also could force these online operators to even expand their geographical delivery ranges to serve more customers. "In the end, the consumer wins because the consumer has more options when it comes to how and where they get their food products," Thoresen says.
The convenience might not be worth itBut consumers might also face new responsibilities if Amazon becomes the new food-shopping outlet. Selling food is different than dry goods. "Food inherently is political," Rosenzweig says. Other online food outlets acknowledge that facet of food, he says, citing Blue Apron's recent purchase of BN Ranch to promote its commitment to sustainability. "That's what I'm looking for with Amazon," Rosenzweig says. "Where are they going to add value besides convenience and cost? Are they going to start addressing the underlying issues in the food industry?"
He's not so sure. "I keep looking for signs of soul at Amazon," he says. It's not clear to him whether Amazon actually cares about food or just sees it as another commodity to be moved from place to place.
Amazon could make a profound difference if it chooses to use its powerful logistics system to improve the food system. Though Rosenzweig says Amazon can't be faulted for the shift to an automated workforce, he argues that the company and other Silicon Valley disruptors can and should take responsibility for the workers they displace. "There's a humanitarian responsibility in being a disruptive entrepreneur," he says. He'd also like to see Amazon take responsibility for the externalities of food business -- like rising health-care costs due to unhealthy eating from the various junk foods Amazon sells and the escalation of climate change caused by carbon emissions from its deliveries. "I just worry," he says. "You've got this behemoth of a company... I'm not sure where its ethical rudder is."
"I keep looking for signs of soul at Amazon."
The company does seem interested in addressing food deserts, though. Earlier this year, the US Department of Agriculture announced that Amazon and a handful of other retailers will begin accepting food stamps for online grocery orders as part of a two-year pilot program. "Online purchasing is a potential lifeline for SNAP participants living in urban neighborhoods and rural communities where access to healthy food choices can be limited," USDA Secretary Tom Vilsack said in a press release. Rosenzweig applauds Amazon for its involvement in the pilot. But it's unclear how much Amazon's participation will actually help low-income communities. Consumers cannot apply SNAP benefits toward AmazonFresh membership, which costs $99 a year (for Amazon Prime) plus $14.99 per month. It's hard to know how much food stamps will help consumers access fresh food through a delivery service they might not be able to afford.
But ultimately it might not matter whether Amazon takes a moral stance on sustainability, pay equity, health, and the rest of the food system's thorny issues. That might be up to consumers. Online grocery shopping isn't just growing because it's available; it's available because it is desired. Consumer need and services like AmazonFresh are "kind of helping fuel each other," Seifer says.
"Are we going to trade a future of well-being for this instant gratification?"
Rosenzweig worries those consumers could be seduced by convenience. "Are we going to trade a future of well-being for this instant gratification?" Rosenzweig asks. "I fear that if food is just reduced to a transaction, we're going to lose something really big about being human." On the other hand, Rosenzweig believes there's enough passion among food obsessives to force Amazon and its digital brethren into transparency -- and even shape their future in the food sphere.
"As much as people would like to mechanize the food system, it's still inherently organic," he says. Consumers are increasingly interested in food ethics. And they've flexed their power in recent years, whether by convincing Tyson Foods to invest in plant-based protein or by torpedoing the nomination of fast-food executive Andy Puzder for secretary of labor in the Trump administration. "Companies of the magnitude of Amazon would be well-served to have people that understand food policy, food ethics, food safety and science if they're going to really be a credible long-term player in this rather than an opportunistic one," he says.
We'll have to see what the future brings.