Ramblings on the Future Part I: Amazon, Whole Foods, and the D2A Shift

For the last 72 hours, speculation has run wild about Amazon’s $13.7 Billion cash offer to buy Whole Foods. Many claim that the acquisition if approved by shareholders, would be catastrophic for large brick-and-mortar grocery– when this was written, Kroger stock was still trading off 25% from its pre-announcement price. However, when we look a bit closer, the acquisition sheds light on three very important realities:

1) The Whole Foods acquisition reinforces the idea that the innovations of the next 30 years will be Digital-to-Analog (D2A) in nature. Our digital world will be interacting more and more with our analog world (e.g. our real lives);

2) Despite the speculation, offline grocery will likely survive especially the chains that serve markets where Amazon is not focusing (suburban, rural, and lower-income), at least for now; but

3) To survive long-term, brick-and-mortar retail must embrace this D2A shift regardless of what that means for store format, necessary channel partnerships and the role that those “bricks” play. If they don’t, the end will be neigh.

The D2A shift

Amazon’s offer to buy Whole Foods fits at the center of what I call the Digital-to-Analog (D2A) shift. This shift is in stark contrast to the last 30 years of innovations, which have been Digital-to-Digital (D2D) in nature. The most transformational technologies of the last 30 years (email, social networking, ecommerce etc.) have improved the efficiency or effectiveness of an activity by moving it online.

Conversely, the next 30 years will (and are already beginning to) take the form of D2A innovations — innovations that bring the online world offline. D2A represents the ability for software to improve our offline lives in real and direct ways. From autonomous driving, virtual and augmented reality’s impact on learning and job training, to the overlay of ecommerce with offline distribution (and now retail), we are experiencing the interface between “digital”, some software layer (and in some cases hardware), and “analog”, the real world.

This shift won’t be seamless and it won’t be all positive. Our society’s social contracts, regulations, and infrastructure has been created for an analog world — a world that is not established to support a D2A interaction. Regulators realized this quickly when Lyft, Uber, and Airbnb took major cities by storm. It’s likely that consumers will also realize the cost of this shift when they set foot into an Amazon-owned store and experience guardrails around their shopping experience that made sense on a website, but don’t fit into our schema of ‘offline shopping’ (Amazon’s patent to curb price comparisons is a prime example of this mismatch).

Offline is dead. Long live offline.

For the last decade, analysts and journalists have been predicting the end of offline retail. And in many channels, they aren’t wrong. According to US Census figures, in the first quarter of 2017, ecommerce represented 8.5% of total retail sales in the US, up from 6.6% in the first quarter of 2016.

And while this trend has been exacerbated by the rise of mobile commerce (which has now surpassed 20% of all digital spend according to Cowen and Company), it’s generally contained to consumer discretionary and to settings like shopping malls. Some of the pain being felt in brick-and-mortar can be attributed to the over-expansion of malls as an asset class, with the US boasting more than five times the per-capita square footage of any European country.

However, brick-and-mortar grocery shopping remains the lifeblood of the vast majority of Americans and likely will continue to be in some capacity for the foreseeable future. According to Statistica, some 98% of Americans continue to grocery shop offline despite many having access to online grocery options. Additionally, Amazon’s most efficient coverage is predominantly urban and affluent). According to Bloomberg, the 77 million customers who can access Amazon Prime Now are all in a similar geography as Whole Foods’ stores. That doesn’t mean Walmart, Costco, and Kroger shouldn’t be worried. It just means they have time to adapt. Additionally, growing urbanization (which Amazon is banking on), may also be a tailwind supporting brick-and-mortar retail. The jury is still out.

A brick by any other name

There may still be hope for Kroger, Walmart, Costco, and the long tail of grocery retailers who woke up this morning hoping that the Amazon news was just a bad dream (or an even worse Onion article). In the short run, this doesn’t mean a whole lot — most Americans treat grocery shopping as a sacred weekly pilgrimage. However, make no mistake: the Whole Foods acquisition has the potential to be the first step in a massive disruption of the grocery channel. Ignoring it could deem fatal.

To ward off such a disruption, retailers must be open to embracing the D2A shift. Moving in-store availability online, collaborating with the likes of Instacart and others, using machine learning to improve and target product assortment, and being more creative with respect to merchandising have the potential to help. However, there’s an argument that the very premise of what a grocery store looks like will change. Hybrid store formats in which a store plays the role of both a retail outlet and a distribution may be the future face of brick-and-mortar.

The D2A shift is here. Whoever is left standing when the dust settles will be the players who define the future, not who react to it.