In the battle for America's grocery market, there's one clear winner
Amazon's inroads into the grocery space may not be enough to dethrone Wal-Mart, which will benefit from its network of nearly 4,700 U.S. stores in the years ahead.
Andrew Hemingway is director of strategic planning and media with GYK Antler.
When it comes to the world of retail, there’s only one story of competition that really matters - Amazon vs. Wal-Mart. In some areas, particularly apparel and household items, the two giants are fairly evenly matched. Wal-Mart has made some big moves recently to step up its e-commerce game and stay competitive against its rival, with the purchase of Jet.com and millennial-oriented apparel sites, Modcloth and Bonobos.
However, as Amazon works to scale up and overtake Wal-Mart in the $800 billion U.S. grocery market, (of which Wal-Mart currently controls 25%, compared to Amazon’s 0.8%), the race will not be as evenly matched. I believe that for the foreseeable future one will continue to dominate—Wal-Mart.
As the e-commerce wave expands to new markets, the massive American grocery space is coveted not just for it’s size, but for it’s consistency. After all, everyone’s gotta eat. But the practice of selling groceries is riddled with complications—shipping a book is not the same thing as shipping a tomato. Margins are razor thin, as notoriously disloyal grocery shoppers chase lower prices from store to store, and inventory is hard to manage, with perishable foods requiring climate control that make shipping and storage logistics costly and complicated.
When it comes to pure technology, Amazon is probably the world’s most advanced retailer, commanding a high-tech logistics platform that is the envy of every competitor. On top of that, the company’s Subscribe and Save feature and innovative Dash Buttons, lend themselves to repeat purchases. The tech giant recently wowed the press with a prototype of their artificial intelligence-powered convenience store, Amazon Go.
But when it comes to groceries, all the technology in the world still hasn’t put Amazon in command of one of humankind’s oldest challenges - delivering fresh food to people quickly and cheaply enough to make money off it. Amazon’s entry into the grocery delivery world, Amazon Fresh, is still very limited, despite the fact that it began a decade ago and was in beta for six years in Seattle. Today, the service is only available in under a dozen densely populated urban areas.
And despite their foray into the world of same-day shipping of non-perishable items with Prime Now, the company still mostly runs on it’s two-day delivery promise. Two days is a window of time that’s just fine if you’re buying a bathmat, but far too long for those in the market for a pint of ice cream or tonight’s dinner ingredients.
On the other hand, it’s said that 70% of Americans live within five miles of a Wal-Mart. And it’s in that space that Wal-Mart, with 4,672 stores in the US alone (not to mention another 660 Sam’s Club locations) is uniquely positioned to hold onto the title of America’s grocery store.
While the tech-obsessed press was fawning over Amazon’s rise to e-commerce domination, Wal-Mart was slowly building up a traditional physical infrastructure that absolutely dwarfs the 70 fulfilment centers that Amazon runs on. Amazon may be able to reach a certain consumer base with strategic grocery warehouses within dense cities like New York and San Francisco (especially considering Wal-Mart has little to no presence in these areas), but America is a big, spread out country. Wal-Mart is already an outsized presence over the suburban and rural areas that so much of the population lives in.
With Wal-Mart firmly established in nearly every area of the country, they are advancing their e-commerce capabilities in order to enhance their physical locations, for example, through online grocery ordering with in-person pick up. This allows customers to forego the chore of actual grocery shopping, while still getting their orders the same day.
The next logical step for Wal-Mart is local delivery. With an existing network of thousands of grocery stores, trucks and warehouses across the country to send products out from, this will be a far smaller task to pull off than Amazon scaling perishable deliveries from their limited number of fulfillment centers. Brands should focus less on whether Wal-Mart will be able to leverage technology to delivery locally, and more on how they will pivot fast enough to support the change.
Amazon clearly has the brains, the money and the stomach to keep trying to take over the grocery market, but for the moment, they can’t fight nature and they can’t get perishable food across America’s wide open stretches quickly enough to compete with Wal-Mart and their behemoth, old-fashioned real estate portfolio.