For a decade, Amazon—a company with $178 billion in revenue and seemingly limitless resources—had not come close to breaking the billion-dollar sales mark in its fresh food operation.
The lack of progress is not entirely the retail giant’s fault. Grocery is a notoriously difficult business—and that’s before you start layering on the costs and challenges of delivery. Scott Galloway, a professor of marketing at New York University’s Stern School of Business, boils the problem down to this: A head of lettuce has a margin of less than a dollar and can survive outside the fridge for no more than a day. How can a retailer deliver it at peak quality—and make a profit?
But with the $13.7 billion acquisition, Amazon had bought itself a real shot at remaking the $800 billion U.S. grocery sector—the last frontier of e-commerce and a massive one at that. Some 20% of retail spending goes toward food, but only 2% of those sales take place on the Internet. “Grocery is the Wild West for online,” says Carrie Bienkowski, the chief marketing officer of online grocer Peapod. “The size of the prize is huge, and it’s growing.”
The very thing that makes grocery delivery hard—that food goes bad—is the reason it’s so desirable to a company like Amazon. Because cheese grows mold and meat goes rancid and milk sours, consumers can’t hoard it in their cupboards or refrigerators indefinitely as they might toilet paper or laundry detergent. As a result, the average family hits the supermarket at minimum once a week; there’s nothing else you purchase or consume so much or so often. For Amazon, getting in on that frequency is critical to further ingraining itself in our routines and behaviors. “Food is the platform for selling you everything else,” says Walter Robb, the former co-CEO of Whole Foods. “It’s an everyday way into your life. There’s nothing else that happens quite that way.” Amazon’s quest is therefore about much more than just food.
Amazon is perhaps the most disruptive and innovative company in retail, but using food as a lever for growth is nothing new. Walmart became the biggest retailer in the U.S. by turning itself into the nation’s largest grocer. In its fiscal 1998, 14% of Walmart’s U.S. sales came from grocery. This year, as the company hit $500 billion in revenue, that figure jumped to 56%. “Walmart pioneered this,” explains Wedbush analyst Michael Pachter. “Once you get them in the store for groceries, they walk up and down the aisle for everything else.” Says Jack Sinclair, who led Walmart’s U.S. grocery business for eight years, “The principle of what Amazon is doing is almost exactly the same.” Indeed, JPMorgan estimates that Amazon will match Walmart in U.S. sales by 2021.