Why is Amazon buying a supermarket chain?

Either Jeff Bezos has lost his bearings or many people think about Amazon in the wrong way

Just when we thought we understood Amazon, it surprises us. We are used to observing an online retailer that cuts prices relentlessly to undermine brick and mortar stores. It has now decided to buy Whole Foods Market, a premium chain for Americans who can afford fancy cheese and fish.

If it wanted to turn physical, the Amazon of our imagination might have followed Aldi, the private German retailer, by investing $5 billion to expand its US discount stores, or have directly taken on Walmart's 3,500 grocery and hardware Supercentres. Jeff Bezos, Amazon's founder, is instead entering the top end of the grocery market by offering $13.7 billion for Whole Foods.

This suggests either that Bezos has lost his bearings or that many people think about Amazon in the wrong way. In fact, it is not so much an online discounter as a vast convenience store. Making things easier, either by cutting prices or by delivering goods simply, is his master plan.

The Whole Foods deal brings to mind not Walmart, Aldi, or Kroger, the largest traditional US supermarket, but a company that predated them: the Great Atlantic and Pacific Tea Company. A & P was a precursor of US supermarkets and the way that it combined efficient technology with high street grocery outlets provides clues to Bezos's thinking.


Before A & P, Americans shopped at small-town stores that were "often run in a haphazard manner" and purchased their supplies from "a Byzantine collection of jobbers and middle men that was rife with corruption", according to Paul Ellickson, an economics professor at Rochester university.

Like an early 20th-century Amazon, A & P cut through all of that. In 1913, it opened “economy stores” on high streets, supplying them through its own network of warehouses and delivery trucks. It offered its own private label brands, which were fresher and less likely to be out of stock. A & P expanded to 16,000 stores in 1930 as economies of scale allowed it to undercut independents.

It eventually became a victim of its own success. Smaller operators lobbied for it to be curtailed and price discrimination was banned by the 1936 Robinson-Patman Act to stamp out discounting. It went into decline, replaced by large supermarkets built by Kroger and Safeway in warehouse districts and away from high streets.


But the combination of Amazon and Whole Foods suggests that history is starting to repeat itself. The supermarket itself has reached an apotheosis in huge suburban stores run by Walmart, as well as Carrefour and Tesco in Europe, and many shoppers are looking for alternatives. Amazon's Whole Foods deal is an experiment rather than the solution, but it is intriguing.

The supermarket’s strength is becoming its vulnerability in an age when technology is changing the rules of retailing. It reduces costs and prices by grouping together many kinds of goods in one place, from tins of beans to fresh fish and meat, and persuading shoppers to bear the cost of final delivery. They drive to stores to load their trolleys and purchase everything at once.

Technology now offers a way to unbundle the traditional supermarket – to sell different things in different ways. Instead of having to shop for bulk household items, dried pasta and rice, and fresh fish all at once, the shopper’s leisure time can be allocated more enjoyably and effectively. Routine goods can be ordered online and delivered directly, leaving time to pick the choicest produce in person.

It is more complex than that, of course. For one thing, people’s shopping habits and sense of convenience vary according to where they live. Online grocery providers such as Ocado in the UK and FreshDirect in the US do best in cities, where people want to avoid traffic jams on the way to the supermarket. In the suburbs, it is often easier to drive to a Walmart or Kroger store.

Shopping habits also depend on income. Whole Foods and chains such as Trader Joe’s draw people who can afford fresh and organic produce and can pay higher prices. They are also likely to be busy professionals who might buy the same food online if they were offered freshness and variety.

The challenge for online grocers is that freshness and variety are hard to combine – if they sell one type of tomato, their stock will turn over fast and be very fresh. If they offer 20 types, the choice is wider but the tomatoes will sit in warehouses longer. The supply chain for groceries is trickier and costlier than for non-perishables.

Having experimented with Amazon Fresh, its online grocery service, in cities in the US and elsewhere, Amazon has clearly realised that it needs a physical network as well. It has to expand in order to attain what Chris Baker, a partner of the consultancy Oliver Wyman, calls "a virtuous cycle of volume, turnover and freshness".

Beyond the Whole Foods acquisition lies a tantalising vision of the 21st-century A & P, an enormous, efficient retail enterprise that deliver a wide array of fresh, cheap groceries to a network of small and large outlets, as well as directly to homes. That would be the ultimate convenience store and I imagine that Bezos knows it.

Copyright The Financial Times Limited 2017