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Amazon takes another run at disrupting the US grocery market

E-commerce giant steps up rollout of fledgling Fresh supermarket chain — among other moves
The Amazon Fresh in Woodland Park, New Jersey, is one of four of the chain's stores that opened in November. (Amazon)
The Amazon Fresh in Woodland Park, New Jersey, is one of four of the chain's stores that opened in November. (Amazon)
CoStar News
December 31, 2024 | 3:16 P.M.

Customers started forming a line at 3:30 a.m. for the grand opening of a long-awaited Amazon Fresh supermarket in Woodland Park, New Jersey. By the time the store debuted about five hours later, an estimated 400 people stood in a queue; the first 100 claiming Amazon gift cards as their reward.

The 59,000-square-foot store at Plaza 46 that opened in November, the largest in the growing grocery chain, was one of four Amazon Fresh stores debuting in various markets on the same day.

Similar scenes have been repeated throughout 2024 as the e-commerce giant accelerates the resumption of building out its brick-and-mortar grocery business. After announcing in February 2023 it was shutting some Amazon Fresh supermarkets and halting the chain's launch to retool the concept, Amazon later last year revamped several Fresh locations in suburban Chicago and Los Angeles into its new airier and brighter iteration — and this year opened more.

At the same time, it is expanding at Whole Foods Market, the chain it bought seven years ago. Combined, the moves turn up the heat in the already fiercely competitive grocery sector.

Amazon already upended the U.S. grocery business with its Prime online grocery-shopping-and-delivery service, and its most recent moves could have that kind of effect again, according to Coresight Research.

People started waiting in line at 3:30 a.m. for the debut of the Amazon Fresh in Woodland Park, New Jersey. (Linda Moss/CoStar)

The research firm points to the chain's grocery initiatives including experimenting by opening a smaller store, Amazon Grocery, at a Whole Foods location in Chicago; piloting a small-format Whole Foods store, called Whole Foods Market Daily Shop, already opened in New York and expected to come to Washington, D.C.; shipping Whole Foods orders from Amazon Fresh fulfillment centers; and conducting a trial in greater Phoenix where customers can shop for grocery items — including fresh food — alongside millions of Amazon.com products and have them delivered together, within hours.

"We expect that Amazon will continue causing market disruption in 2025 as it continues to grow its multichannel grocery model, building on the numerous efforts it has made to bolster its grocery proposition in 2024, including rolling out private-label grocery brands, piloting a new small-format store (Amazon Grocery), and launching revamped Amazon Fresh stores and new grocery delivery subscription services," Coresight said in a recent report on the U.S. grocery industry.

Small player

With its Fresh stores, Amazon is leveraging the benefit of having what is essentially an existing customer base and loyalty club, its more than 200 million paid Prime members worldwide, according to retail analysts.

Despite its huge scale in the e-commerce world, Amazon is still a very small player in the brick-and-mortar segment of the U.S. grocery field, facing formidable and dominant entrenched competitors with thousands of stores such as Walmart, Dollar Tree, Costco, Kroger and Albertsons Cos. That compares to Amazon's roughly 62 Fresh stores and more than 535 Whole Foods locations across the United States, Canada and the United Kingdom, as well as roughly 15 small Amazon Go convenience stores.

A rendering depicts a Whole Foods Market Daily Shop, the small-format store that has opened in New York. (Amazon)

Amazon is also up against new grocer entrants to the states such as Lidl and Aldi, savvy regional brands ShopRite and Wegmans, and fast-growing chains Trader Joe's and Sprouts Farmers Market. What's more, Amazon's track record in physical retail has been spotty: In March 2022 the company pulled the plug on 68 stores representing three chains, namely its Amazon 4-star, Amazon Pop Up and Amazon Books locations in the United States and Great Britain. Then came the Amazon Fresh retreat and revamp.

Amazon said it brings a lot to the table in the grocery sector, even as it acknowledges the challenges of its brick-and-mortar forays in that realm.

“Our goal is to build a best-in-class grocery shopping experience — whether shopping in store or online — where Amazon is the first choice for selection, value and convenience," Amazon spokesman Griffin Buch said in a statement to CoStar News.

"We already have a large online grocery business and millions of products available for fast delivery, and the next step is to continue building out our physical presence — which will require significant innovation and persistence," he said. "We’ll continue to open new Whole Foods Market stores, and will do so selectively with Amazon Fresh as we see results we like. We’re encouraged by early signs of our new store design in Chicago and Southern California, and will proceed adaptively.”

Amazon's Dash Cart includes a digital scanner to look up items and a built-in scale. (Amazon)

Buch declined to comment on coming Amazon Fresh stores or their locations. But at least one more, a fifth, is slated for New Jersey at Cedar Knolls Plaza at 235 Ridgedale Ave. in Cedar Knolls, according to local officials.

In addition to being fiercely competitive, the grocery sector is known for having extremely thin profit margins, but it's huge in terms of sales, hence the allure to Amazon. The industry boasts "extremely high volume and frequency of purchase," according to John Mercer, Coresight's head of global research.

"Grocery retail is a $1.5 trillion market in the U.S.," he said in an email to CoStar News. "It provides very high frequency of touchpoints with shoppers, which in turn can be a springboard for cross-selling nonfood products and increasingly is the foundation for high-margin retail media businesses."

CEO speaks out

Amazon CEO Andy Jassy said the company is pleased with the progress it's making on its grocery strategy while addressing Wall Street analysts during a fourth-quarter earnings call in February. And he focused on brick-and-mortar stores.

“If you want to serve as many grocery needs as we do, you have to have a mass physical presence," Jassy said. "And that's what we've been trying to do with Fresh over several years. We've been testing [the second version] of our Fresh format in a few locations near Chicago, in a few locations in Southern California. It's very early, it's just a few months in, but the results thus far are very promising and on almost every dimension. And so we need to see it for a little bit longer time, but the results appear like we have something that's resonating."

Amazon’s top grocery executive, Tony Hoggett, left the company in November after nearly three years. “I’m optimistic about the work Amazon is doing to improve the grocery shopping experience for customers, and have no doubt the teams will keep the momentum going in my absence,” Hoggett said in a LinkedIn post.

Retail analysts like Mercer agree with Jassy about the importance of brick-and-mortar in the grocery business.

"At Coresight, we have long argued that Amazon needs a meaningful physical/omnichannel presence to truly carve share in grocery — an online-only proposition would leave it as a niche player," Mercer said.

At roughly 59,000 square feet, the Amazon Fresh in Woodland Park, New Jersey, is the largest store in the chain. (Linda Moss/CoStar)

The Woodland Park Amazon Fresh, the revised store format, has wider aisles than the original model and features a lighter color palette. There's a Krispy Kreme coffee shop, a station where pizza is made fresh, and a salad bar. There's a dedicated department offering a selection of crackers, cheese, and charcuterie. Prepared foods, such as ready-to-heat burritos, and ready-made meals, are available.

The store carries local, regional and national brands, as well as Amazon’s private-label brands Aplenty, Amazon Fresh and Amazon Saver, and 365 by Whole Foods. As another draw, Amazon Fresh recently announced it has expanded its Prime savings program by offering even bigger savings on over 3,000 grocery items for Prime members, including up to 50% off on eight to 15 grocery favorites that rotate each week, including fresh produce, protein, and pantry staples.

The Woodland Park store also offers some, but not all, of the high-tech features that Amazon Fresh touted with its initial locations. For example, patrons can use the Amazon Dash Cart — a smart shopping cart that allows shoppers to scan and tally up groceries and even weigh items right in the basket.

The next-generation Amazon Fresh stores are an improvement over the original version, but several retail analysts questioned if they are really different enough to draw customers from competitors.

Moving the needle

Doug Munson, head of Advisory Services Business Development at RetailStat, told CoStar News that he believes Amazon underestimated how complicated and competitive the U.S. brick-and-mortar grocery sector is. Amazon didn't "lean into" and leverage Whole Foods after it acquired the chain, and didn't recruit top supermarket chain veterans to launch Amazon Fresh, according to Munson.

As for the revamped Amazon Fresh stores design, he said, "I do question if there was enough that is going to move the needle ... this reset."

The revamped Amazon Fresh format is brighter with wider aisles. (Amazon)

Neil Saunders, a retail analyst and managing director at analytics firm GlobalData, echoed Munson's take on Amazon Fresh.

"The newly designed stores are somewhat better than older ones, especially in terms of the selection of products," Saunders said in an email to CoStar News. "They also have a good range of convenience foods for busy consumers. While the stores are more compelling, I don’t think they are all that unique — and this might be one of the reasons that they have difficulty in pulling customers away from their existing supermarkets."

To that point, Munson said he's not sure what Amazon's objective is and who is it targeting with Amazon Fresh.

"Are you going with after the conventional customer?" he said. "Are you going after the Wegmans customer? Are you going after the Aldi customer? I would tell you that I don't think they answered that question. ... Are they going after the ShopRite customer? Because if they are, then they better be in with pricing. They better be in with customer service."

Amanda Lai, a director at retail consultant McMillanDoolittle, in a recent report said Amazon is trying to reach a wider group of grocery shoppers.

"Although Whole Foods leads in fresh-format stores, this remains a smaller segment within the overall U.S. grocery market, which is dominated by traditional grocers like Kroger and mass merchants like Walmart," Lai said. "Amazon aims to tap into this broader market opportunity with its Amazon-branded food stores."

Capitalizing on synergies

In a big change, it appears Amazon is now more aggressively attempting to take advantage of synergies and cooperation between Amazon Fresh and Whole Foods.

The first Amazon Grocery store has opened in Chicago, adjacent to a Whole Foods Market. (Retail Specialists)

"While there was little obvious integration between Amazon Fresh and Whole Foods formats for some time, we have recently seen Amazon start shipping Whole Foods orders from Amazon Fresh fulfillment centers with plans to extend this, and a new Amazon Grocery store format co-located with a Whole Foods Market store in Chicago," Coresight's Mercer said. "These suggest a renewed emphasis on bringing its grocery operations together."

Lai visited and did a detailed report in October on the first Amazon Grocery at 3 W. Chicago Ave. in Chicago. That small-format store "is located on the ground floor of the One Chicago building ... and uniquely shares a lobby with its upstairs neighbor and grocery sibling Whole Foods," Lai said in her report.

With an Amazon Grocery and Whole Foods at the same location, Amazon is looking to serve customers who shop at both conventional and natural and organic supermarkets, according to Lai.

"Customers might buy packaged goods at Amazon Grocery, then head upstairs to Whole Foods for high-quality meat and organic produce," she said.

Amazon could expand its 3,800-square-foot Amazon Grocery concept "to other urban markets where it would be challenging to open and operate standard 40,000-plus-sure-foot full-sized supermarkets," Lai said. "Weeks earlier, Whole Foods opened its first small format Daily Shop concept in New York, another market well-suited for smaller-sized stores."

However, she did question whether shoppers will be befuddled by Amazon's various brick-and-mortar grocery offerings.

"The new concept [Amazon Grocery] adds complexity to a growing portfolio of store brands that could lead to consumer confusion," Lai said. "Amazon’s grocery portfolio now includes Whole Foods Market, Whole Foods Market Daily Shop, Amazon Fresh, Amazon Go, and the new Amazon Grocery."

Beyond online disruption

Amazon disrupted the grocery segment with its online delivery service, forcing rival supermarket chains to offer or improve their e-commerce channels, according to Munson.

Roughly three years ago, Kroger partnered with Ocado Group — a tech firm based in the United Kingdom — to open fulfillment centers in markets where it didn't have stores, so it could offer online grocery delivery in those areas. Munson correlates that move by Kroger to its recognition Amazon's "huge online presence" and its deep dive into grocery by acquiring Whole Foods.

There's a lot of opportunity now for a deep-pocketed company like Amazon, even though it has a small physical footprint now, to establish a bigger presence in the highly fragmented grocery industry, which is ripe for consolidation, according to Mercer.

In December, Albertsons backed out of a $24.6 billion proposed merger with Kroger — the largest deal of its kind in U.S. history, a day after a federal judge scuttled the plan.

"Longer term, we see opportunities for Amazon to capture greater share with a combination of a strong cross-channel proposition, high-quality private labels and price competitiveness," Mercer said.

He added that they expect Amazon to be one of a number of retailers, including discounters such as Aldi, "that challenge the traditional supermarket segment."

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