When Amazon announced it was acquiring Whole Foods, Jim Kramer called it a “disruption of society.” That might be an exaggeration, but the move does signal how serious Amazon is about extending its retail dominance into the food industry.
Whether Amazon is successful or not, the grocery store status quo has been challenged, and the potential disruption is a golden opportunity for a burgeoning direct to consumer local foods movement. Direct to consumer sales of food have more than doubled over the last 20 years, and the continued relaxation of regulations, growing consumer demand, and the low overhead for effective digital and social D2C marketing all point to continued growth. Still, there are a few things small scale local producers need to do to maximize market share and avoid becoming casualties in the changing food landscape.
1.) Keep focused on product and process
Amazon’s strategy is sending strong signals to anyone watching that it doesn’t just want to become an online version of a Super-Walmart or Costco. Instead, it’s working hard to emphasize the quality of its food, even over convenience and price. The name “Amazon Fresh,” its online grocery marketplace, is clearly designed to assure consumers that shopping on Amazon is not a compromise on produce freshness. And its “local marketplace” is an attempt to move the supply chain conscious farmer’s market model online and back it with Amazon’s powerful distribution network. Even the acquisition of Whole Foods, an upscale chain with an emphasis on quality over price and an outspoken CEO who preaches “conscious” capitalism, echoes this same positioning.
Based on its strategy so far, Amazon will definitely be seeking partnerships with smaller local producers. The challenge for smaller producers will come when larger brands with various levels of product and sourcing quality begin to position themselves as quality local producers. Consumer demand for a particular product is based on perception of the product, and as demand for “local,” “organic,” and other buzzword products and processes increase, larger players with larger distribution networks will be constantly attempting to influence customer perception of their brands. This is already happening in traditional grocery stores, where commercial farms 300 miles away from the store are positioning their products as “local.”
To combat this, smaller, local producers need to consistently market the story of their food and continue to frequent in person marketplaces that allow them to cultivate a loyal, local customer base. While Amazon has the potential to provide an incredible direct to consumer marketplace for local food, small producers need to be wary of losing their brand ethic or allowing the authentic processes behind their product to become forgotten. If they engage in a race to bottom or make supply chain decisions that promise short term gains in efficiency at the expense of their products and process, they are giving away their primary competitive advantage.
2.) Take advantage of the window of disruption
In all likelihood, Amazon’s moves will lead to tremendous pressure on traditional brick and mortar grocery stores. Some will adapt and see success while others will fold, possibly in large numbers. At the same time, Amazon, or whoever emerges under the new model of food fulfillment, will be experiencing some of the growing pains that go along with entering a new industry.
That period of disruption, and it may be relatively short, is the time that local producers must act to grow their customer base. Consumption is heavily habit based, and the moments when consumers make conscious choices and adjust their shopping habits are too few and far between. As they become aware that the grocery game is changing, local producers need to actively assert themselves into the mix and let consumers know they are a viable and consistent food supply option. They need to sell their product and process as superior to the other options, and they need to do it before consumers are locked back into the inevitable convenience of single vendor shopping.
3.) Tap into the rebirth of the marketplace mentality
Less than two centuries ago, food sales were dominated by marketplaces where many different producers brought their products, and consumers made a variety of separate purchases to fill their needs. Supermarkets moved consumers away from this process, but Amazon has once again moved them back into this way of thinking with a convenient, one checkout marketplace with multiple third party vendors. This is a boon for direct to consumer producers because it opens consumers to the idea that they might buy their meat from one seller, vegetables from another, and berries from a third.
While Amazon seems to be attempting to mimic the distribution methods of a traditional grocery story by fulfilling most of its products itself, I think they will eventually find a hybrid model most successful. That is, they will offer products in their marketplace that they themselves source and fulfill, but they will also offer products that are directly fulfilled by third party vendors. These products will most likely be local, specialty, and/or low volume because Amazon will dominate the non-perishable, high volume standard grocery store fare. But consumers have already conceptualized Amazon as a marketplace for a variety of sellers, and this third party space is where local producers can really take advantage. While small scale local producers will never be able to match Amazon’s shipping speed or cost for long distance, high volume distribution due to their small scale, their local sourcing should enable to them to be very competitive for local fulfillment, and broad exposure to online consumers should allow niche products to do enough volume to be successful. Even if small scale producers elect not to join the Amazon marketplace, there will be plenty of other mimic marketplaces and multi-channel integration systems that will enable them to leverage the concept in their own targeted areas to make a greater number of local and niche consumers aware of their products.
4.) Understand the power of consumer-centric supply chains
Amazon is incredibly good at predicting and responding to fluctuations in consumer demand. That’s a big reason it got to where it is today. In the perishable grocery business, this responsiveness to demand is even more important, as any mistakes lead to massive markdowns and flat out product loss.
Amazon’s involvement, regardless of their level of domination, will make the food supply chain even more consumer centric and responsive. There will be ever-increasing data about consumer purchasing habits, and I expect to see producers tasked with making faster and faster adjustments to demand. If Amazon could invent on-demand broccoli printing, they would. I certainly expect that some company, maybe not Amazon, will introduce transparent dynamic grocery pricing. At that point, consumers will come to expect to be able to adjust buying habits to respond instantly to surpluses in supply and producers will find smaller and smaller lucrative windows to force the production of specific high demand goods into.
In this environment, small scale producers are uniquely situated to take advantage of market dynamics. Their supply chains are shorter, their volume is lower, and there are less mechanized pieces to their operation, all of which favor quick, low overhead switches. This does mean that they can’t be married to a single crop and they need to be knowledgeable about a variety of production methods, but it does present an increased opportunity for getting the kind of premium prices they need to compete with the scale of larger producers.