Grocers brace for another blow from Amazon

E-commerce giant already has pushed grocers to focus on delivery and pricing. Now it takes aim at stores' profitable beauty aisle.

  • By Heather Haddon and Esther Fung,
  • The Wall Street Journal
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Amazon.com Inc. (AMZN) has challenged grocers by pushing them to lower prices and expand their delivery options. Now the company’s latest plans threaten to steal sales of some of the industry’s more profitable products.

The e-commerce giant plans to launch urban grocery stores that could offer a spectrum of goods that includes beauty products alongside food, The Wall Street Journal has reported. Beauty products represent a small portion of supermarket sales but tend to offer higher profits than more traditional items.

The move couldn’t come at a worse time for grocers, which have been focused on building up digital selling operations to compete with Amazon online.

Amazon has an aggressive timeline for the store openings, with the first on track to debut as soon as the end of this year, according to people familiar with the matter. The company aims to open dozens of locations in major cities, including Los Angeles, Chicago, and Washington, D.C., the Journal has reported.

Much could change about Amazon’s plan, but initial details about the size and layouts of the stores—smaller than most traditional supermarkets but bigger than many convenience stores—suggest they could pose a competitive threat to traditional supermarket chains like Kroger Co. (KR) as well as mass merchants like Walmart Inc. (WMT) and Target Corp. (TGT), according to food industry analysts.

Amazon has pushed for leases that won’t restrict what it sells in its new chain, opening it to offer cosmetics and skin- and hair-care products as well as other retail items, according to people familiar with the matter.

Beauty items offer high margins for grocers, and Amazon has expanded its array of such products under various labels. Health and personal-care items are Amazon’s largest source of consumer-product sales online, with roughly $5 billion in sales last year, according to e-commerce data analysts Edge by Ascential.

The timing of Amazon’s store development comes during a difficult period for the roughly $1 trillion food and consumer-product retail sector, which already deals with low margins and extreme competition. Grocers have been struggling to keep shoppers coming to their stores, while Amazon’s quick, low-cost delivery has eaten into sales of shelf-stable goods and bulky items sold at supermarkets, market analysis shows.

“Amazon just keeps on pushing the finish line further ahead for the others,” said Phil Lempert, a grocery consultant.

An Amazon spokeswoman declined to comment and said the company doesn’t comment on rumors or speculation.

Grocery industry executives said it is too early to know how traditional supermarkets would alter their operations in light of Amazon’s latest grocery store push.

In the past two years, however, many have been forced to change some fundamental aspects of their operations, from staffing to the way they organize their stores, often to facilitate online ordering and compete with Amazon.

Walmart, Target and Kroger, for instance, have sped up investments in technology and online selling strategies, and in some case have sacrificed profits to offer delivery and digital pickup for a growing number of markets.

Some also have cut back at opening new stores. Walmart reiterated last month that it would open fewer than 10 stores in its current fiscal year, while looking to double the number of locations offering same-day grocery delivery and adding 1,000 grocery pickup places.

“Amazon forced them all into delivery…and then this,” Mr. Lempert said, referring to the company building stores.

A Target spokesman declined to comment. A Walmart spokesman pointed to its chief executive’s comments last month on the company’s efforts to compete online and in stores. “We’re meeting the changing needs of customers and delivering solutions that are increasing customer engagement,” CEO Doug McMillon said.

Kroger, the U.S.’s largest supermarket chain by stores and sales, has scaled back on new store plans. The company also is spending tens of millions of dollars to build a network of automated warehouses for online grocery services, while trying to expand in higher-margin mass merchandise with a clothing line.

A Kroger spokesman said the grocer has a winning strategy. “We are transforming from grocer to growth company,” he said Saturday.

Investors remain skittish about the industry as the low-margin businesses divert profits into digital-ordering technologies that have yet to contribute to their bottom line, while also offering low prices for shoppers.

Following the Journal’s report about Amazon’s store plans on Friday, Kroger’s shares dropped more than 4% and Walmart fell 1.1%. Walgreens Boots Alliance Inc. (WBA), which recently struck a deal to put mini-Kroger stores in some locations, was down more than 6%. Amazon shares rose.

A Walgreens spokeswoman declined to comment on Amazon’s grocery push.

Amazon has a long-term initiative to build out a physical grocery presence, and at one point envisioned more than 2,000 brick-and mortar stores in different formats. It is a bet that shoppers still want to buy groceries, personal-care items and other consumer products at physical stores.

Though more shopping is expected to migrate online, less than 5% of the roughly $1 trillion in annual U.S. food and consumer product shopping is done over the internet now, market research shows.

With its new stores, Amazon could market itself as a food seller to a greater range of consumers than those currently buying sundries online. It also broadens its reach beyond the higher-income shoppers who tend to frequent Whole Foods Market, which it bought two years ago.

It isn’t clear whether the new stores would carry the Amazon name, but they are expected to be distinct from Whole Foods.

The latest foray into physical retail isn’t without risks. Those knowledgeable about the company’s plans say the stores could average 35,000 square feet—a size that industry consultants say could be tough to make appealing to consumers because it is too small for big shopping trips but larger than the typical quick convenience store run.

“The economics of a store that size are tough,” said Bryan Gildenberg, chief knowledge officer at Kantar Consulting, adding that Amazon will need to locate the stores in high-traffic areas to drive volume.

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