What Does the Amazon and Whole Foods News Mean for the Retail Industry?

by | 22 June 2017

Like so many others, when I woke up last Friday morning there was one story dominating my news feeds, social channels and email inbox: Amazon’s plans to purchase Whole Foods. As a real estate professional who focuses on the retail space, the intersection of retail and technology is a topic I discuss with clients daily — but this news felt like a tipping point.

It also seemed ironic that the news came the same day as a logistics article in the Wall Street Journal that commented on how Kroger, the nation’s largest grocer, is scrambling to keep pace with two German grocery discounters — Aldi and Lidl — that exemplify the disruption of the traditional grocery business by small, nimble stores with high-quality, self-branded goods and prepared food products.

It’s no secret that many traditional grocers are struggling to adapt in today’s retail environment. So, what’s the big deal with Amazon’s latest move? I’m sure you’ve read a lot of opinions, but here are a few thoughts my colleagues and I have been discussing in the past week.

AS WHOLE FOODS STRUGGLES, AMAZON SEES OPPORTUNITY TO “BUY THE WHEEL”

Whole Foods has been under pressure over the past few years as its model has been challenged by competition selling organic and healthy food at lower price points. However, Whole Foods customers are very loyal and their stores tend to be located in areas with high-income, well-educated demographics.

This is largely the same core demographic for many aspects of e-commerce, as there is a correlation between educational attainment, income and technology usage. Buying Whole Foods appears to give Amazon the perfect vehicle to harness its technology and the direction the company has already been taking the retail industry: faster, simpler and direct-to-consumer — whether by drone, self-driving truck or robot. Instead of reinventing the bricks-and-mortar grocery wheel, Amazon bought the wheel!

When I think about what might happen next in terms of implications for commercial real estate, my first thoughts turned to the industrial space. Our research shows that e-commerce fulfillment centers are a major driver of industrial demand. But the traditional 200,000-square-foot fulfillment centers tend to be located in areas that don’t meet the need-it-now demands of consumers that Amazon is seeking to meet. Will that continue to change, as we’ve already seen in the uptick in urban warehouses to support last-mile delivery?

Then I thought about the retail space. Whole Foods stores tend to be larger than they need to be and the company has experimented with smaller stores that allow them to merchandise specifically to the location, cut down on waste and be more profitable. Is this the model that will take hold with Amazon at the helm?

And what will come next from Amazon’s own experiments with grocery stores and smaller pick-up centers within shopping centers? Utilizing Whole Foods locations might provide them with mini-fulfillment centers closer to their customers, which they can service better for delivery and pickup.

And then my thoughts turned to merchandising strategy. A core component of Whole Foods’ offering is prepared foods — a rapidly expanding industry segment with many players jockeying for market share. With each Whole Foods having their own restaurants and food prep space, will that allow Amazon to move into the prepared meals segment? Additionally, many Whole Foods locations have enhanced the in-store experience with components like tap rooms, juice bars and coffee shops. Would Amazon capitalize on these spaces to integrate with their new small-format bookstores and redefine the store-within-a-store concept?

THE NEXT FRONTIER OF OMNICHANNEL

There’s no doubt that Amazon is pushing the envelope when it comes to perfecting the omnichannel approach that nearly every retailer is grappling with.

How will this change the retail landscape? We certainly don’t believe that the rapid growth of online retail spells the end of the physical store. But the grocers of the world with a slowly developing or completely lacking technology presence should be concerned.

Walmart has certainly been one of the most aggressive in countering Amazon for the omnichannel crown. It is either ironic or strategically planned that Amazon announced the Whole Foods deal just a day after Walmart announced their planned purchase of online clothing retailer Bonobos. This in itself was a huge move by the old guard, but its significance was lost in the aftermath of the Amazon-dominated news cycle. The media does seem to hype the “demise of retail” more than the gains bricks-and-mortar is making in e-commerce.

So, will we see contraction? With fewer grocery stores anchoring shopping centers, how will the other tenants in the centers survive? Will shopping centers just become places to get a quick bite to eat and a haircut? Inevitably, there will be an effect on the physical retail landscape with respect to traditional grocery, but other forms of retail — whether medical, entertainment or recreation — will likely fill in the gaps.

While so many questions will continue to emerge, there’s one thing that’s certain: The future is here! And the retail industry will keep evolving in exciting ways we might not have predicted.

Tom Nelson is vice president | San Jose – Silicon Valley and represents landlords, tenants and investors in the leasing and sale of retail properties. Tom is dedicated to building solid relationships, delivering on promises and adding value for his partners and clients.