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Retail View: Amazon’s bricks and mortar move ‘not surprising’

A cadre of retail experts had different opinions on reports that Amazon is looking to increase its physical footprint in the grocery sector, but they all agreed that it makes sense and is not unexpected.amazo

“It is not surprising that Amazon would be on an acquisition binge and as they move forward they would want a bigger footprint in our industry,” said Anthony Totta, CEO of FreshXperts LLC.

“It didn’t surprise me at all,” echoed Ed Odron of Ed Odron Produce Marketing & Consulting about a recent Wall Street Journal article exploring the online giant’s future grocery store plans. “Amazon realizes there is much more out there than just online business. They are covering all the bases.”

“Amazon is big and it makes sense that they keep pushing to the next level,” said Ron Pelger of RonProCon.

Dick Spezzano of Spezzano Consulting Service said selling groceries online profitably is a challenging proposition. He indicated it is a natural next step — after Amazon’s purchase of Whole Foods — to increase its physical presence in the supermarket arena.

Each of these experts has spent decades in the produce industry, mostly on the retail side, and have an informed view of the challenges and opportunities that Amazon faces, and who just might be the losers as that giant expands.

Spezzano said that while Amazon has revolutionized the world of online shopping, groceries are a unique proposition. He noted that an online shopper can buy two pairs of shoes — with the idea of returning one — and have them delivered in a small box with a retail ring north of $200. “You know how much space it takes to buy $210 worth of groceries,” he asked rhetorically, indicating that groceries, including perishables, just don’t fit neatly into small, efficient spaces.

The longtime Southern California retail veteran believes that Amazon’s foray into bricks and mortar is somewhat of an admission that online grocery sales are not a big winner for them.

Most people are still reluctant to buy perishables online and delivering groceries, customer by customer, is just not very efficient, said Spezzano. While it can work in a very densely populated location, it’s much harder to justify when there is distance between customers. He believes online ordering that involves picking up your purchases at the store is a better fit for most retailers and many shoppers. For that to succeed, it makes sense for Amazon to have more physical stores across the country.

The Wall Street Journal article said Amazon is going to launch its new effort with a few stores in the Los Angeles area. Spezzano believes the long-term strategy would be to grow through acquisition. He said one rumor he heard in early March was that Amazon was going to buy Stater Bros., a mid-sized, family-owned Southern California retailer.

Spezzano believes that makes sense, as it is a good exit strategy for some of these smaller, family-owned grocery stores, and can give Amazon some instant heft.

Pelger believes Amazon’s desire to have more of a physical presence is tied to that company’s knowledge that it has to continue to grow. “They have to always concentrate on growth to continue to thrive,” he said. “They are always going to be looking at the next thing.”

He knows that online grocery sales have not taken off yet but he likened the concept to organic produce. Pelger said it took many years for organic produce sales to even register a blip on the scale, and now that sector represents about 10 percent of produce department sales. Of course, he also joked that it took organics 30 years to achieve 10 percent.

“At that rate, in 300 years they will have 100 percent,” quipped the former A&P produce executive.

Pelger believes the order and pickup model is the one that has the best chance for success for fresh produce. “Our biggest challenge in produce [for online shopping] is its perishability,” he said.

He sees more and more retailers carving out opportunities to serve their customers through the pick-up model. Pelger lives in Reno and he said the local Walmart has huge tower-type lockers in the front of its store that serve as holding places for online orders.

“These are new developments,” said Pelger. “It just shows you that as time moves on, things change. Anything you are doing today (businesswise) is obsolete. If you don’t change, you become history.”

Odron said the reports that Amazon is looking at smaller footprint stores (35,000 square feet) makes sense, as he believes the large-format stores are just too big. With their ownership of Whole Foods, he said the online giant has a foothold in the upscale supermarket sector. He believes it makes sense to now operate physical stores in blue-collar neighborhoods where it can bring its low-cost model directly to consumers.

With regard to online shopping, Odron said he thought it would never catch on, but he sees it gaining traction. He also likened it to the growth of organics, which he said grew very slowly but has seen tremendous growth in recent years. “Online shopping is still at its infancy, but it’s going to grow.”

He’s another observer who has noted the trend toward buying online and picking up at the store. He lives in Stockton, CA, and said his local Raley’s Market has two full-time employees devoted to filling online orders in the store and then delivering them to the shopper as he or she pulls up in the parking lot in a preferred space.

Odron believes every retailer should be cognizant of what Amazon is doling. “They are aggressive. They are going to go forward at 160 miles per hour and they have deep pockets.”

Totta subscribes to that same theory. He expects Amazon to grow via acquisition, targeting independents with multiple units. “I don’t think they will go coast to coast [with a big acquisition]. I think they will be more selective and not compete head-to-head with Whole Foods. But there are plenty of pockets where Whole Foods does not have a big presence.”

He indicated that Amazon’s desire to be all things to all people may be driving this move to more of a physical presence.

“I haven’t seen the data, but my gut feeling is that the online business is much more efficient with non-perishables than with perishables,” said Totta.

It follows that Amazon would then want to increase its reach as a supplier of perishable items by having a physical presence.

Spezzano said it is an accepted fact that the United States is currently “over-stored and over-sized,” meaning there is more retail grocery space than necessary. So as Amazon enters the space in a bigger way, it stands to reason that there will be some losers.

Each of the experts interviewed agreed.

Spezzano said although retailers rarely make big announcements about store closings, there has been significant downsizing. He said the major retailers are closing more stores than they are opening each year and there have been some smaller chains go out of business. He believes smaller-footprint stores, like the ones Amazon is reportedly looking at, make the most sense.

Odron mused that if you hang around long enough, you see the cycles play out. “When I first started, the average store was 20,000 to 25,000 square feet — and then they kept getting bigger and bigger. You couldn’t have a store big enough. Now everyone is talking about scaling back, especially in California where the real estate is so expensive.”

Totta also believes that bigger might not be better. He opined that it is the huge box-store discounters that may have the most to lose as Amazon gets deeper into the grocery business, and he argues that the perishable-focused, smaller retailers who are concentrating on giving shoppers a positive and enjoyable experience by inspiring them will survive.

On the other hand, Totta said the broad line huge discounters that don’t provide a pleasant shopping experience could have trouble competing against Amazon.