Is this the eGrocery Onslaught?

By Ben Conwell, Senior Managing Director, eCommerce and Electronic Fulfillment Logistics & Industrial Services & Garrick Brown, Vice President, Head of Retail Research, Americas

 

On Friday, June 16, 2017 Amazon sent shock waves through the grocery world when it announced its Whole Foods acquisition for a whopping $13.7 billion. Stock prices tumbled for Walmart, Kroger, Costco, and others as the marketplace reacted. The concern was whether the eCommerce disruption that has led to sharp contraction in other retail categories was hitting the relatively eCommerce-resistant grocery sector.

This is Amazon’s largest acquisition ever though it has acquired nearly 80 other companies since its founding in 1997. The eCommerce giant has typically pursued smaller deals involving complementary, tech-arena companies like video game-streaming site Twitch, audiobook service Audible, entertainment information provider IMDB, etc. In fact, Amazon’s largest acquisition prior to Whole Foods was the 2009 purchase of Zappos.com for $1.2 billion. The Whole Foods purchase—expected to close over the final half of 2017—not only dwarfs that deal size, but also in potential impact on the marketplace. And that is what has sent markets into a frenzy.

eCommerce and Retail
 

eCommerce sales have accelerated at an aggressive pace for nearly every major retail category over the last few years. Since 2010, while overall retail sales in the U.S. grew annually between 2 - 3%, overall eCommerce sales grew around 15% each year. And disruption has followed. As eCommerce sales have increased in one retail category after another, so too have bankruptcies from failing bricks-and-mortar players, as well as strategic closures.

The latest category to feel the pain has been apparel/accessories. In 2012, total U.S. apparel sales approached $210 billion, eCommerce accounting for $31.8 billion, or 15.2% of all sales. Amazon has been ramping up apparel offerings for the past couple of years, with results. As of the close of 2016, total U.S. apparel sales were around $226 billion, with eCommerce at $60 billion in total sales—or 26.7%. Amazon’s growth in this space has increased from 6.7% market share in 2015 to a likely 11.0% share by the close of this year. Amazon should overtake Macy’s sometime in 2017 to become the largest apparel retailer in the U.S. Their apparel business reached $16.3 billion in 2016, compared to Macy’s $22.2 billion, and Amazon expected to approach $28 billion in 2017. Only four years ago, Macy’s apparel sales were five times greater than Amazon’s. 

The Retail Apocalypse

This eCommerce growth coupled with more race-to-the-bottom discounting and an over-retailed landscape, is the catalyst for the ongoing spike in apparel and department store closures and bankruptcies referred to hyperbolically by the media as “the retail apocalypse.” The market could see as many as 9,000 major chain closures in 2017, an increase of 125% over last year. We anticipate that those numbers will grow further in 2018 to as many as 13,000 major chain closures thanks to the likelihood of at least a couple of major retailer bankruptcies and a probable surge in strategic closures. 
 

Until Now, Grocery Has Been eCommerce-Resistant

The grocery world has stood out as one of few retail categories where eCommerce disruption has been minimal. Grocery has been seen as eCommerce- resistant, if eCommerce-proof. Total online grocery market share in the U.S. stood at just 1.4% as of the close of 2016, comprising $8 billion of $989 billion in food and drug retail sales. Groceries alone were in the 4% range. However, with room for growth, many landlords, investors, developers, and market-watchers were already wondering if the grocery industry would be disrupted next, and what that would look like. And what would its impact be on commercial real estate?

It should come as little surprise that the June 16 announcement sent shock waves throughout the grocery and commercial real estate worlds. Market players and watchers alike have responded with varying levels of concern as they gird themselves for another wave of retail disruption. Analysts and publications are already proclaiming that grocery will be the next shoe to drop at a time in which it seems bricks-and-mortar retail is being challenged on virtually all fronts. Yet is this really the case? 
 

What We Know, What We Don’t

We have known Amazon planned to ramp up its eGrocery efforts. Amazon has continued to roll out Amazon Fresh, expand into new markets, and add grocery distribution hubs and spokes to its distribution network. And in April 2017, Amazon even launched a new cashier-less convenience store concept in Seattle (Amazon Go), possibly a central part of Mr. Bezos’ urban eGrocery rollout strategy.

For certain, this activity demonstrates Amazon’s practice of piloting multiple new technology platforms to make “last mile” easier, cheaper, and faster. The acquisition of 461 Whole Foods stores has major implications for the grocery marketplace. But here’s the question: does the deal change the challenges that have kept eCommerce penetration of the grocery market to a minimum so far?

To answer these questions and more, we turn to two of our resident experts on the topic of eCommerce and bricks-and-mortar retail, Ben Conwell, Senior Managing Director, eCommerce and Electronic Fulfillment, Logistics & Industrial Services, and Garrick Brown, Vice President, Head of Retail Research, Americas.

 

Ben Conwell
Senior Managing Director
eCommerce and Electronic Fulfillment
Logistics & Industrial Services

 

Garrick Brown
Vice President
Head of Retail Research, Americas