Amazon has bought Whole Foods in a deal worth $13.7 Billion, around $18 billion Australian. The gorilla of the digital retail troupe has invested in an old fashioned, albeit trendy, bricks and mortar retailer.

This Whole Foods purchase makes it very clear that Amazon is setting out to be a significant player in grocery, and you would be brave to bet against Jeff Bezos.

In the US, listed retailers shares took a real dump, while here, Woollies and Coles shares dropped a bit on the announcement of the purchase, but seem to have largely recovered. Perhaps this is because share punters considered the considerable time frame of an impact by Amazon on the profitability of  Woollies and Coles, and the shorter term ‘Aldi effect’ is already priced in.

Amazon sells some grocery staples, and is experimenting with delivery options, including the Amazon Go store in Seattle, but this is a step further. What does this purchase gives them, beyond the small market share estimated at 1.7% ?

• A footprint they would have found hard to replicate from scratch in a reasonable time,

• A well known and liked brand that fits comfortably with the heavy users of their on-line services,
• 20 years of experience in the creating of fresh supply chains from farm to the consumers plate.

I suspect this last one, not mentioned by the financial analysis that has happened in the last few days,  would have been a significant factor in the considerations. Being able to put Amazons tech capabilities alongside that experience could just be the game changer that grocery  home delivery  has been looking for.

Add this purchase to Amazon’s other activities and extensive list of experiments like Amazon Go, and you have the dynamic pricing capability of  Amazon being deployed into the centralised and rigid pricing system that drives the supermarket model.

Isn’t this what taxis used to look like?

In Australia Amazon are pretty well known to be recruiting, and they will not be doing that without some sort of  plan. Retail of any colour requires trade-offs between speed, variety, convenience and price. Home delivery has ‘taken off’ according to some pundits who have a horse in the race, but still has no more than 3 – 5% market share, depending on whose numbers you use. Whatever share it may be, it is heavily skewed towards shelf stable commodities.

These numbers do not seem to have dented the enthusiasm of Coles and Woolworths for store expansions. Their business model serves the last retail step better than  any home delivery has to date, albeit becoming a bit frayed at the edges. The combination of order size, delivery density, and labour and freight infrastructure costs has been toxic for home delivery to date.

Of particular concern to both sides of the equation are the perishable lines, fresh and frozen,  now a significant part of any households consumption. The cold chain requires very close management, and there is no room for error.   At some point I guess someone will ‘Uber’ it by enlisting the crowd in some way to pick up and deliver a packed order at a specific times for a small fee.

Perhaps history will repeat itself.

As a very small boy I remember Mum shopping at a small store in Avalon beach. There was one man in the shop who served from behind the counter, and pretty much knew what Mum bought, so assembled an order from memory as she walked into the store. These days the ranges of SKU’s has exploded, but that can be fixed with a data base on your phone and perhaps the supermarkets of the future will go the way of other capital intensive infrastructure and decentralise.

Amazon has picked on the retailer who does fresh best in the US. In Australia, there may be a couple of options for  them to do the same thing. I wonder if the Harris family is prepared to sell out this time?

Online also misses the impulse sale, the one made as you wait in the queue, although Amazon has a pretty good handle on the personal preferences of their customers. My wife of 35 years ‘never knows’ what to buy me for Xmas and birthdays, but Amazon sends me invitations to buy stuff several times a week, some of which I would genuinely like. The irony of that!

The challenge of traditional retail is the very high fixed costs involved. Retailers seek to convert as much of those fixed costs to variable ones so at least  they can match their costs to activity to some extent. They do this by casualising the workforce, and deploying technology. In contrast, the on line retailers have way lower fixed costs, but their variable costs in the order construction and delivery are much higher.

Even that may not be the major hurdle faced by the established retailers. That hurdle is the capacity Amazon brings to the table for innovation, at high speed. While Woolies and Coles are contemplating a new store layout to trial somewhere, Amazon has trialled, optimised and dumped or implemented several iterations of the best ideas they have at any one time.

Retailers seem to me to have thought that merging their legacy operations with some level of ‘digital transformation’ is something they can do over an extended period, with all the risk modelling that has evolved to supp0rt their existing business model. However, that assumption now seems to have gone out the window.

I do  not know the percentage of revenue that Coles or Woolies spends on anything genuinely new, but suspect it will go nowhere even in sight of the 11.8 % Amazon spends on ‘technology and content’ on their revenue of $135billion.  The major part of that massive amount will not be directed at FMCG, but the lessons will be directly applicable.

I may  not be around to see this all finally play out, but I know for sure that grocery retailing will  not look anything like it does now when my baby granddaughter is buying for her family.