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05/25/2016

The Tidal Wave is Still a Ripple

Amazon is the wave of the future in grocery—so the story goes.

The internet delivery giant is regularly the subject of breathless journalism, usually on the internet, about how its market share in grocery is "exploding" and it's about to "kill your local grocer." Its year-over-year growth in grocery regularly reaches double digits—it was 18 percent last year—and it keeps opening grocery delivery service in major markets (the latest was London). It all looks very impressive, especially given Amazon's ubiquity in our lives in general, and its dynamic, quotable CEO, Jeff Bezos. He buys the Washington Post and talks about same-day delivery by drones, and how can you not pay attention to him and his company?

But as usual, context is everything.

It's easy to post fine-looking growth figures when you're not that big to begin with. When it comes to online grocery, Amazon's share is impressive (about 39 percent), but it's a big share of not much. Estimates vary on the amount of groceries purchased online in the U.S., but it's generally conceded to be less than 4.2 percent; some have it as low as 1.5 percent. As for Amazon being a business juggernaut, a lot of people tend to lose sight of the fact that, relatively speaking, it doesn't make much money. In two of its last four fiscal years, it posted a net loss; the highest profit margin in the other two was 0.56 percent.


It's easy to post fine-looking growth figures when you're not that big to begin with.



The point is not to pick on Amazon in particular (well, maybe a little), but to look critically at the idea that online grocery purchasing, especially involving home delivery, is some sort of tidal wave that's about to swamp the industry. When it comes to groceries, e-commerce has two enormous obstacles, both having to do with perishable food.

The most obvious one is that perishables are much harder to deliver than almost anything else. When you have only a few hours to get something somewhere, it usually requires big investments all across the supply chain, especially when it's a cold chain.

That is, of course, a technical challenge, and American business is all about overcoming technical challenges (if there's sufficient motivation). But the second obstacle is tougher, because it involves consumer attitudes. Simply put, a lot of people want to see their food before they buy it, especially things like fruit, fresh vegetables and meat. Think about it: Are you comfortable forking over $15 for a USDA prime steak sight unseen?

These aspects of perishable food not only are natural advantages for brick-and-mortar stores; they feed into a bigger potential advantage: The ability of a really good B&M store to give customers a satisfying experience that they just can't get online.

Kevin Davis, who appears on this issue's cover, heads Bristol Farms, a Southern California chain that prides itself on running destination stores, due in part to their outstanding offerings in fresh and prepared foods. He lives not far from Disneyland and notes that, despite practically all Disney's movies, songs, etc., being available digitally, people still line up to go there.

"Our goal is to try to create stores that are like Disneyland for adults," Davis says. "It's where people go to have fun, get information, have an experience, and it's different from filling a list of commodities and delivering it to somebody's porch."

Pan Demetrakakes

Executive Editor
[email protected]