Wolf Richter: Amazon Online Grocery Boom? Not So Fast…

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

Maybe Amazon has figured out that you’re not the only one who isn’t buying groceries online. Maybe it has figured out, despite all the money it has thrown at it, that selling groceries online is a very tough nut to crack. And no one has cracked it yet.

Numerous companies have been trying. Safeway started an online store and delivery service during the dotcom bubble and has made practically no headway. A plethora of startups, brick-and-mortar retailers, and online retailers have tried it, including the biggest gorillas of all — Walmart, Amazon, and Google. Google is trying it in conjunction with Costco and others. It just isn’t catching on.

And this has baffled many smart minds. Online sales in other products are skyrocketing and wiping out the businesses of brick-and-mortar retailers along the way. But groceries?

That’s one of the reasons Amazon is eager to shell out $14.7 billion to buy Whole Foods, its biggest acquisition ever, dwarfing its prior biggest acquisition, Zappos, an online shoe seller, for $850 million. Amazon cannot figure out either how to sell groceries online though it has tried for years. Now it’s looking for a new model — namely the old model in revised form?

This is why everyone who’s online wants to get a piece of the grocery pie: The pie is big. Monthly sales at grocery stores in June seasonally adjusted were $53 billion. For the year 2016, sales amounted to $625 billion:

 

But it’s going to be very tough for online retailers to muscle into this brick-and-mortar space, according to Gallup, based on its annual Consumption Habits survey, conducted in July. Consumers just aren’t doing it:

  • Only 9% of US households say they order groceries online at least once a month, either for pickup or delivery.
  • Only 4% do so at least once a week.
  • By contrast, someone in nearly all households (98%) goes to brick-and-mortar grocery stores at least once a month, and 83% go at least once a week.

Gallup summarizes the quandary:

At this point, online grocery shopping appears to be an adjunct to retail shopping rather than a replacement, as most shoppers whose families purchase groceries online once or twice a month or more say they still visit a store to buy groceries at least once a week.

But there are some differences by age group – and maybe that’s where Amazon sees some distant hope:

  • Of the 18-29 year olds, 15% shop for groceries on line at least once a month.
  • For 30-49 year olds, this drops to 12%.
  • For 50-64 year olds, it drops to 10%.
  • For those 65 and older, it essentially fades out (2%).

But all age groups shop between 97% and 99% at brick-and-mortar grocery stores at least once a month.

Online shopping became a big thing over 20 years ago. It is in the process of wiping out the brick-and-mortar ends of department stores, specialty apparel retailers, electronics stores, and many others. If these companies don’t have a vibrant presence online, they’ll be gone. Even shoe sales. Pundits said shoe sales would never migrate online because people would want to try their shoes before buying them. Yet, they’re migrating online — and Payless ShoeSource ended up in bankruptcy court.

But no one has yet found the magic formula for getting consumers to migrate their grocery purchases to online sites. People just don’t want to do it. They want to inspect and touch their produce. They want to pick what looks good. They don’t want to be shipped the milk that’s at the front of the shelf with tomorrow’s sell-by date. They want the fresher milk at the back of the shelf.

Some non-food items consumers buy at supermarkets — toilet paper, diapers, detergent, shampoo, and the like – are already migrating to online stores. This is one of the reasons supermarkets are hurting. But it hasn’t happened with groceries yet.

The failure of online grocery sales has been a two-decade nightmare for the online gorillas. They’ve succeeded in everything else except grocery sales despite the money they’ve thrown at it and despite the different schemes they’ve concocted.

Amazon’s purchase of Whole Foods seems to be an effort to look at this whole problem in a new way and come up with something that might actually get consumers to shift at least part of their grocery sales online. And maybe someday, Amazon (and others) will succeed in making a dent. But that day, based on how consumers responded in the Gallup survey, appears to be a long way off.

Nearly every retail chain caught up in the brick & mortar meltdown has been acquired in a leveraged buyout by a private equity firm. Now these LBO queens are heading into bankruptcy court. But PE firms win again. And stiffed creditors not amused. Read…  Brick & Mortar Retail Meltdown Fueled by Asset Stripping. Details Emerge in Bankruptcy Courts

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28 comments

  1. DJG

    “Amazon cannot figure out either how to sell groceries online though it has tried for years. Now it’s looking for a new model — namely the old model in revised form?”

    I doubt that I made a brilliant discovery as I read this article, but I’d venture that Amazon is buying Whole Foods because the upscale customer base at Whole Foods already buys on-line often. Further, certain lines at Whole Foods, like the nutrition aisle with its supplements, fluoride-free toothpaste for neurotics, and goat-milk soap, can become on-line stores. That long, long snack aisle of kale chips and stevia-sweetened cookies also can go on line–those products have long expiration dates. So Amazon is playing it safe. And the upper-middle class enjoys being coddled in stores and on-line.

    Yet here in Chicago, that upper-middle-class strategy is undermined by several reasons: Very few people who I know shop regularly at Whole Foods. They perceive the place as pricey. And the customers are notoriously rude. This slight stench is unlikely to be cured by an on-line presence.

    On-line shopping for groceries also doesn’t serve three needs: People who shop more than once a week for the sake of freshness and for what’s in season. People who pop into the grocery store at the last minute for that forgotten ingredient. People who by necessity are motivated mostly by price: When you are making $14 an hour and have three kids, that Tyson’s chicken in the shrinkwrap looks pretty good.

    And whatever happened to Peapod? Was it the first setback in the on-line grocery wars?

    Amazon / Whole Foods is also trying to undo customs and traditions: I recall the mess that the Californians made of Domenick’s, a respected Chicago chain with many years-long loyal customers. Suddenly, the house brands changed. Products that appeal mainly to Chicagoans disappeared. And Domenick’s went under, with some famous recriminations.

    Heck, Amazon is likely even to get formidable competition from local farmers markets.

    And you can’t discount the social / cultural aspect of grocery shopping. This is something that Slow Food certainly understands, which is why the movement has had such a big influence in Europe (less so here in the States). HarvesTime, here in Chicago, is run by a brilliant Greek, who makes it a point to carry some rather eccentric products–barley rusks from Crete, anyone? And, sometimes, the ambient music is rebetiko. You can’t beat a grocery store that plays rebetiko.

    1. a different chris

      >People who by necessity are motivated mostly by price

      Actually that’s the weird thing – I would think maybe those are the best targets, not the upscale shoppers. *If* you could ship packaged/canned food way cheaper than the brick&mortar place can.

      This is the model that online electronics shops pretty much drove out the Mom-and-Pop audio stores, at least for the “take box out front door” model. The survivors focus on installation… essentially a transition from a “grocery store” model to a “restaurant” model.

      I like fresh food, I dislike any packaging at all. But I would think somebody with even a more “normal” response than mine would feel some trepidation as they encountered a box of lettuce on the front porch. Yeah if it’s gross you won’t have to pay for it, but you still need brain bleach to wipe out the image you got when you opened the box. Can you order brain bleach?

    2. grayslady

      I recall the mess that the Californians made of Domenick’s, a respected Chicago chain with many years-long loyal customers. Suddenly, the house brands changed.

      The same thing is happening now with Mariano’s, ever since Kroger purchased the chain (including the excellent Wisconsin-based Roundy’s). Dominick DiMatteo and Bob Mariano both grew up in the grocery business in the Midwest and knew how to run their stores. (Bob Mariano was also the one-time CEO of Dominick’s.)
      Bob Mariano used Roundy’s buying power to cut some excellent deals with local manufacturers. For example, the Roundy’s coffee beans are roasted by a Milwaukee roaster. The beans have an excellent taste and aren’t greasy, like the awful Trader Joe’s beans. Best of all, I buy a two-pound bag of coffee beans for $10-$12, depending on whether they go on sale.
      I also used to buy the Roundy’s frozen waffles, but now they’ve been replaced by Kroger waffles. Kroger simply doesn’t understand that the Kroger name doesn’t signify quality to shoppers in Illinois and Wisconsin. Reminds me of what happened when Macy’s purchased Marshall Field’s. Macy’s has had dismal results at their Midwestern stores.

      1. DJG

        grayslady: Yep. Here in Chicago proper, I see the bakery section swiftly deteriorating at my local Mariano’s. The produce section, which was pretty good, but certainly not as good as the local independent grocers, is in some kind of slouch toward mediocrity. Kroger’s left Chicago years ago unceremoniously, and Kroger’s hasn’t learned much since.

    3. kimyo

      fluoride-free toothpaste for neurotics

      Are fluoride levels in drinking water associated with hypothyroidism prevalence in England?

      Findings: We found that higher levels of fluoride in drinking water provide a useful contribution for predicting prevalence of hypothyroidism. We found that practices located in the West Midlands (a wholly fluoridated area) are nearly twice as likely to report high hypothyroidism prevalence in comparison to Greater Manchester (non-fluoridated area).

        1. kimyo

          Fluoride in Water and Underactive Thyroid Rates

          They found that in locales where tap water fluoride levels exceeded 0.3 milligrams per liter, the risk for having an underactive thyroid rose by 30 percent.

          Peckhams’s team also found that hypothyroidism rates were nearly double in urbanized regions that had fluoridated tap water, compared with regions that did not.

          U.S. Lowers Recommended Fluoride Levels in Drinking Water

          The optimal fluoride level in drinking water to prevent tooth decay should be 0.7 milligrams of fluoride per liter of water, the U.S. Department of Health and Human Services (HHS) announced Monday.

          The new level falls at the bottom end of the previously recommended fluoridation range of 0.7 to 1.2 milligrams per liter, which was issued in 1962.

    4. Yves Smith Post author

      People who buy supplements generally don’t buy at Whole Foods unless they need it right away. There is robust competition from dietary supplement vendors for all that stuff and Amazon could launch a vertical at Amazon just as well. It doesn’t need Whole Foods for that. So even that makes no sense.

  2. JohnnySacks

    That is good news, the quicker and harder online grocery ‘entrepreneur’ types fall into bankruptcy, the better. Good riddance. Maybe some Uber-like scam can vaporize a boatload of VC cash in the process for a win-win. I’m trying to do my part by not even remotely considering buying lettuce online but I can’t be the only person who thinks it’s a pathologically stupid idea. I have a refrigerator and a nice local grocery chain who fought off a shareholder corporate overlord takeover (Market Basket for anyone familiar with the story) and happen to like deciding if the physical quality observed meets my cost threshold before I buy.

    1. MyLessThanPrimeBeef

      Eating as a journey.

      From Baizhang Huahai, Wikipedia:

      Baizhang Huaihai (Chinese: 百丈懷海; pinyin: Bǎizhàng Huáihái; Wade-Giles: Pai-chang Huai-hai; Japanese: Hyakujō Ekai) (720–814) was a Chinese Zen master during the Tang Dynasty. He was a dharma heir of Mazu Daoyi (Wade-Giles: Ma-tsu Tao-i). Baizhang’s students included Huangbo, Linji and Puhua.

      These rules are still used today in many Zen monasteries. From this text comes the well-known saying “A day without work is a day without food” (一日不做一日不食 “One day not work, one day not eat”).

      Here, work can be checking out the physical quality.

  3. fresno dan

    ” They don’t want to be shipped the milk that’s at the front of the shelf with tomorrow’s sell-by date. They want the fresher milk at the back of the shelf.”

    See this clip from the movie “Clerks” starting at 47 seconds
    https://www.youtube.com/watch?v=D9khHJTztKk

    Amazing what sticks in the head – it would be fascinating to be cognizant of what will stay in my head when I go full Alzheimer’s…..

  4. flora

    My town has 2 supermarkets that do home delivery. You call, tell them what you want to order (you can even get fresh stuff from the Deli) pay by card, and they deliver same day if called before 2:00 pm. Next day if after 2:00 p.m. Or you can call, order, and pickup at a drive through window. They’ve been doing this since before Amazon existed.

  5. justanotherprogressive

    I read this article first on Wolf Street. The comments there are worth a read also!

  6. shinola

    A small niggle with the article:

    I’m not so sure that Payless Shoes’ is a good example for this article. It has been my impression that Payless was pushed into bankruptcy after an LBO by Vulture Capitalists’ malignant manipulations rather than loss of sales to online retail. Indeed, the link leads to an article that discusses that very situation.

    1. Art Eclectic

      That’s the case with a large number of chain retailers, they could have rode out the Amazon crisis except they’d been picked clean by financial engineers. But, sure, keep blaming Amazon everyone…

  7. lyman alpha blob

    So we’re supposed to all be working from home, shopping from home, having a car drive us if we ever do need to leave the house.

    Is anybody else reminded of that movie WALL-E, where the population is a bunch of fat slobs lounging around on their automated chairs waiting for other robots to bring them stuff to guzzle down?

    I don’t think I much like the future some of these supposed visionaries have in store for us.

  8. MichaelSF

    FWIW, an older (early 70s) friend who has mobility issues uses Safeway’s Internet order/home delivery service and she is very happy with it. She says they show up on time, bring her groceries up several floors to her apartment, are normally pleasant to interact with and they will not accept tips. I’ll note that she lives at the top of a hill in downtown San Francisco where parking is often non-existent and had to stop driving several years ago.

    Perhaps the target market for home grocery delivery should be the aging Boomer population instead of younger people?

    1. BRUCE CARROLL

      If parking is a problem in the neighborhood, where do the delivery trucks park? Is this mechanism of home delivery scalable in a congested high-rise neighborhood? Will even more of the limited street parking be usurped (de jure or de facto) by the corporate demands of such an industry? Will the airspace outside the balconies of condominiums towers be continuously subjected to an onslaught of flying delivery drones? Maybe Jeffery Bezos of Amazon had the right idea about the future of home delivery: the economic advantage belongs to the technological (and political) victor in the urban drone war.

  9. Jim A.

    You know, 100 years ago, before people had cars it was reasonably common for grocers to deliver.

    1. justanotherprogressive

      True, but back then people usually didn’t buy their dairy, meat and vegetables from the grocer. If you were rural, you probably had your own garden, chickens and a milk cow or two….if you lived in the city, you got your vegetables from the vegetable markets, your milk and butter was delivered by the milkman, and you got your meats from your local butcher…..

      1. MyLessThanPrimeBeef

        People actually provided their on nightly entertainment, most of the time, for most of them.

        Propaganda and brain washing was not as easy as today.

      2. Elizabeth Burton

        Not necessarily. Delivery was something one used if there were time constraints, or for other reasons. Back then, heading out to the local market with three toddlers was a horrendous experience, because the amenities that make it possible now didn’t exist. And even now, a parent in that position would likely opt for delivery if it were reasonably priced.

        And I, like MichaelSF’s friend, have a disability that makes shopping agony. I use Amazon’s subscription service to get regular deliveries of good I specifically like and which all too often aren’t available locally. I will note, though, that not all of those with disabilities are antiques like me, so there is a market broader than “aging Boomers.”

        The real problem I see is similar to the one mentioned regarding the Kroger takeover of Roundy’s. Until Walmart bought out Jet.com, I could get several products there I can’t find anywhere else. Now, I can’t get them there, either, because I suspect I only have access (based on speed of delivery) to products carried by the local Walmart markets.

  10. TomDority

    How much does tax have to do with on-line vs Brick and Mortar.
    Most places are not taxing food sales, whereas shoes get hit with tax on the ground and On-line..not.

    Tax policy…. tax the thing you want less of. Un-tax the things you want more of.

  11. Art Eclectic

    I’m one of those 3-times a week grocery shoppers. I like fresh produce. And I want to inspect my meats and other perishables.

    The dry goods and non-perishable items I happily order online and have delivered. FFS, I have my cat food delivered. But perishable goods I want to eyeball first, end of story.

    Plus there’s the question of handling of frozen items, how are those being stored? I have to make sure I’m home so they don’t sit around on the porch…

    I think most people would have a hard time trusting grocers not to ship them the dregs of whatever they needed to sell fast because it was almost out of date.

  12. BRUCE CARROLL

    When cities have given rights for high-rise development there is more involved than designating parking allocation. There is allowing for garbage collection and host of other basic services that need to be addressed. Should developers be required to supply public space (therefore not subject to escalation in real estate values) for the basic services that a walking urban neighborhood should have? This is especially needed when developers are granted dispensation for reduced parking space because public transportation is “readily available”. The model of providing public space for a farmer’s market needs to be extended to publicly-determined leasing arrangements for a brick and mortar service providers. A grocery store would certainly be near the top of such an approved provider list.

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