The Grocery Industry is Heating Up for a Battle of Tolkienesque Scope and Drama.
By Mike Smith
Amazon’s purchase of Whole Foods for almost $14 billion has the grocery industry scrambling to prepare for battle. And there’s good reason for that. Amazon has a history of disrupting industries. Remember what happened to bookstores? And electronics stores? Those were mature industries each with entrenched opponents making periodic attacks on a known and Thwell-matched enemy. Opponents held similar rules of engagement and techniques. Amazon deployed unfamiliar strengths and tools to defeat outsized rivals in those industries.
What the industry is facing now reminds me of the battle of five armies from J.R.R. Tolkien’s “The Hobbit”, where a standoff between bickering, but familiar enemies of Men, Dwarves, and Elves became a total toss-up as a set of armies each with different codes of war, strategies, and weaponry, arrived around the battlefield to claim the vast treasure of a slain dragon. The Men, Dwarves, and Elves choose to unite to counter the greater threat of the more unpredictable enemies of Goblins, Wolves, Bats, Orcs and Wargs. How the hell do you counter a Warg?
In this case the treasure is the $800 billion US grocery market.
Amazon may be a relatively new combatant, but they aren’t the only one. Aldi, though still a small player in the US market, is making bold maneuvers. They’ve promised to invest billions of dollars in expanding their presence in the United States, growing to 2,500 stores from their current 1,600, and upgrading existing stores. They’re preparing for a different kind of fight that may be difficult for incumbents to counter. And yet another, Lidl, is preparing a landing on US shores, also ready to bring new strengths to the coming battle. Aldi and Lidl have already shaken up the industry in Europe and could do the same here.
I suspect we can learn as much about what’s going to happen next by looking to learn from the epic battle of five armies in “The Hobbit” as we can from industry knowledge. Here are some plot points to look for:
Current opponents will ally to counter new threats.
The last couple decades of the grocery industry has seen consolidation as a key strategy. Many family and regional players were acquired. Perhaps moving forward we’ll see more like what played out in the battle of the five armies, when not only did former foes ally in terms of fighting a common enemy, they collaborated by taking advantage of complimentary strengths while still each fighting in their own elements on the field. Could we see collaboration in grocery that looks more like shared supply chain or fulfillment that doesn’t just rely on acquisition and merger?
The battle will be no-holds-barred.
On the battlefield in “The Hobbit” many didn’t expect to survive through the day. This gave them a boldness that we don’t often see in a battle for a stalemate, to repel an enemy, or trigger a retreat. I think we’re already seeing this begin as a price war of epic proportions. Companies appear to be willing to sacrifice margins for market share. Walmart is testing lower prices in parts of the country in an effort to undercut Aldi (who claims prices 20% lower). Lidl has claimed to be able to go lower still (50%). And Amazon might not even look for any profit in grocery and instead use it as a loss leader to further their goal of selling all the things their customers could want.
A halfling will survive, heroes will die.
Who would have guessed Bilbo Baggins would have survived the battle? Instacart, who currently partners with Whole Foods as an digital order and fulfillment partner, looks to be in a similar position, and may yet be left out in the cold after Amazon decides how to integrate with its new acquisition. But I suspect this sets them up nicely to partner with many other industry players, or become a more attractive acquisition target. And the grocery industry is already littered with the bodies of fallen heroes. That’s not likely to end now.
The battle will be used to test new weaponry.
The crucible of battle drives innovation in strategy, tools, and techniques. Just as Thorin Oakenshield first wields his sword in the battle of the five armies, the industry stands to test out new ways to market, merchandising, discount, operating stores, and design products and experiences for customers.
We’ll likely see a prioritization of data gathering that leads to more personalized retail. Amazon’s current brick and mortar experiments in bookstores look to me like they’re more about data gathering and customer intelligences than a profit center. Delivery could be a strong differentiator. Amazon is essentially in the delivery business (for both services and products), but others are making bold moves too. Walmart’s recent purchase of Jet.com could be instrumental. And they’re even testing delivery using sales associates to make home deliveries. Sure that’s just a test, but they claim 90% of the US population lives within a 10 mile radius of a Walmart store. However, Amazon may have already solved the last mile problem — the reality that the final mile to a customer’s door accounts for half the costs of delivery — by bundling food with all the Amazon boxes they ARE ALREADY delivering to Prime customer homes today. We’ll likely see store brands become increasingly important to maintain margins. In fact some think consumer packaged goods manufacturers like P&G feel as threatened by Amazon as the grocery stores.
The remaining armies will be smaller, but stronger.
Following the battle each of the five armies sustained heavy losses. The remaining combatants, though smaller in number, were more unified, battle-hardened, and resolute than at the start. For industry victors, business fundamentals at the end of this campaign will likely be in a better place than at the onset.
One example of these shifting fundamentals in play: we may see the the industry trend of super-sizing store footprints turn around. Aldi, and Trader Joe’s (owned by the same parent company) already have considerably smaller store footprints — 20,000 square feet vs. 45,000 for the average super store a few years ago. The resulting simplified distribution networks, and a smaller set of products in the store give additional ability to be profitable, even at a smaller size.
A surprise entry of reinforcements from above may turn the tide.
In the battle of the five armies, just as things were looking bleak, eagles arrive, and fight back the mounting enemies. We may have other entrants into the current fight we don’t even know about that may partner, reinforce, or otherwise turn the tide of this mounting battle.
How’s the grocery battle really going to unfold? At the start of the battle of the five armies, the outcome is unclear. It’s unclear if Amazon will have the same disruptive effect in an industry already adept at operating at razor thin margins. The smaller forces of Aldi, and even newer Lidl will take time to rally troops. And It would be a mistake to discount the assets of the incumbents. I think the only thing that’s certain is at the end of this campaign we’ll have a grand story worthy of a Hollywood trilogy. Let’s get Peter Jackson on this one too.