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Suzy Davidkhanian (00:00):

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(00:22):

Hi, everyone. Today is Wednesday, December 3rd. Welcome to eMarketer's weekly retail show, Reimagining Retail, an eMarketer podcast made possible by Viasat Ads. This is the show where we talk about how retail collides with every part of our lives. I'm your host, Suzy Davidkhanian. Joining me for today's podcast we have two regulars. Senior Analyst Blake Droesch joining us from New York City.

Blake Droesch (00:45):

Hey, Suzy. Great to be back.

Suzy Davidkhanian (00:47):

Great to have you. And Sky Canaves joining us from Texas. Hey, Sky.

Sky Canaves (00:51):

Hey, Suzy. Happy to be here.

Suzy Davidkhanian (00:53):

Thanks so much for joining us. So today we're talking about Amazon's grocery business because there's a core contradiction in Amazon's story. It dominates e-commerce with nearly 40% market share, but grocery remains the category it just can't crack. And since most grocery sales still happen in a store, Amazon keeps trying to reinvent its physical retail from buying Whole Foods to testing and closing Fresh and other Go formats. The newest pivot now, I think, is the Amazonification of Whole Foods, a micro fulfillment pilot with robots in the back, national brands on shelves where you wouldn't expect them. And so the question we keep asking ourselves is after all these pivots, what's really holding Amazon back in the grocery business and what would finally help them move the needle?

(01:42):

So for this episode, we're going to break it down into three different parts. First, we'll look at where Amazon stands today across Fresh and Whole Foods and their e-commerce business, and more specifically try to identify why it's not working. Then we'll dig into a few of their newest grocery initiatives. And finally, we'll look ahead into 2026 to see if there's anything they can do to gain real traction in grocery.

(02:05):

Okay, so let's start by taking stock of where Amazon actually stands today across Fresh, Whole Foods and their online grocery business. Let's think about why it's not working. So for this part, I want you to each give me three things you think are not working for the grocery business right now. I'll pick one from each of your lists. You can go a little bit deeper, and then we'll close the segment by agreeing on which is really Amazon's Achilles' heel right now.

(02:33):

So let's get started. Blake, I'm starting with you.

Blake Droesch (02:35):

Sure. So my first reason is that they just simply don't have enough stores. I think in grocery having a brick and mortar footprint is really the recipe to success. And despite the fact that Amazon has really deep pockets, they've been unable to just scale a brick and mortar footprint that works for them. So I think it's very simple.

(02:57):

The second is that Whole Foods is basically, it's a niche business model that carries a certain type of product and reaches a certain type of customer. And I just think that that model doesn't fit Amazon's takeover the world business ethos where they want to offer everything to everyone. And I think their goal of trying to scale that business that they acquired and fit it into the way that Amazon sees itself as a business, it has never been a good fit necessarily for the company.

(03:34):

The third is just competition in the space. The fact that Walmart has invested in technology better than Amazon has invested in stores means that they actually have a formidable competitor in the grocery space, which they don't really face in the realm of e-commerce in general.

Suzy Davidkhanian (03:53):

Love that. Sky, what are yours? It's okay if they're the same.

Sky Canaves (03:57):

So I was going to lead with the relatively small physical store footprint, which I agree has hampered their ambitions in grocery because they have about 500 Whole Food stores and another 50 Fresh stores. That number may be declining too. And then you have Walmart, which has about 10 times as many stores, so it makes it a lot easier to fulfill orders and to reach customers quickly with the full basket of groceries that they need.

(04:26):

Another one I think, and this might be related, is Amazon has struggled more broadly with developing physical retail, not just grocery. They picked up the Whole Foods brand, which is already an established brand with a corporate culture as well that goes into that, and now they're starting to try to merge that more into the Amazon culture. And there will be challenges along the way with the so called Amazonification of Whole Foods that customers might not like.

(04:54):

But other experiments in physical retail, like bookstores, clothing stores have not resonated with customers. And even the Fresh stores, I would say there's something somewhat sterile about them. There's a lack of creativity in the merchandising that comes through where it can be very efficient and customers want a clean grocery store, but not necessarily a sterile experience.

(05:17):

And then the third one I would say is in the online side it's still a very confusing and fragmented experience from the customer perspective shopping online for groceries via Amazon because you have the Whole Foods and the Fresh and now Prime Grocery delivery, and they are all jumbled up in results. They each have different delivery thresholds or costs associated with delivery. So it's not possible to build a single cart of all of the grocery products you might find while shopping on Amazon online. And that, I think, hampers their progress, although they have made significant progress online. Andy Jassy has commented in recent earnings calls that one in three items sold in the US on Amazon now is considered a household essential, so a lot of that would fall into the grocery category.

Suzy Davidkhanian (06:10):

A couple that we didn't think about, I'd love to get your perspective, is with all the pivoting and all these efficiencies, and I think it was an interesting way of saying you want an efficient, I might be putting words in your mouth, Sky, you might want an efficient experience online, but maybe not in store, definitely not a sterile one. Is there something around customer confidence is eroding, the charge me for delivery, don't charge me. Yesterday I ordered stuff and I was like, oh, I didn't realize that if I don't order for $35 or more, this particular random item, that it won't get the Prime delivery treatment. Is there anything around that?

Sky Canaves (06:44):

Yeah, I feel like they do disclose their delivery costs pretty well upfront on the app, but they're different for different things. Like if you're buying from Amazon.com, you can get free delivery as a Prime member on orders and same day and it's fast, but Whole Foods has like a $10 delivery fee, which I think is across the board. And then Fresh, it's free delivery maybe over a certain threshold, like $50. While Walmart has really simplified that. If you're a Walmart+ member, it's free over $35, and their customers don't have to think as much about what they're buying.

(07:18):

So I know with the online part, I've added on items into my cart because they pop up as I'm checking out, and I see that and I'm told it's free and it will arrive in a few hours, but I have to think that is a huge drain on profits to be adding onesies of groceries into an order for same-day delivery where they're not even being packaged with the rest of the order that's non-grocery.

Suzy Davidkhanian (07:42):

Do you think it's the perishables that they have too many things of and they just want to get it out of their warehouse?

Sky Canaves (07:47):

I think they have to be fulfilled differently. I think it's probably the picking and packing. I don't know how much of the Fresh part is automated through robots, but they're certainly not in the same warehouse because they would have to have the cold storage for all of the Fresh grocery and then the robots can go through the regular fulfillment center.

Suzy Davidkhanian (08:08):

I see. So it sounds to me like we agree that the confusing banners and the way that they are thinking about scaling is probably their biggest weakness, which brings us to the next point. It's clear that they realize that they have some real issues to solve. And so they're rolling out a bunch of initiatives, and it's nonstop, to try and fix these problems.

(08:29):

So let's take a look at a few of the latest moves that are in the news right now. And my question to you guys is I'm going to tell you a little bit about the initiative, very little bit about the initiative, and then I want you to tell me if Amazon should go bigger, should they pull back or should they tweak that initiative?

(08:46):

So here we go. First up, say it twice, Amazonification of Whole Foods. Amazon is testing tiny Amazon grocery shops inside or next to Whole Foods with a microfulfillment center as a pilot to let shoppers grab national brands, so CPG staples, and place that order while they're already doing their Whole Foods run. And the idea here is like on Amazon online, is to try and keep the entire basket within the Amazon ecosystem.

(09:17):

Sky, what do you think? Go bigger, pull back or tweak?

Sky Canaves (09:20):

I have struggled with this. I had a chance to visit the Amazon grocery store in Chicago when I was there for Shoptalk Fall in September, and it was very much like the grocery section of a CVS or Walgreens in that there were full-size items. I think the prices would be lower than at a drugstore, but there was a sign right downstairs pointing people to go upstairs to Whole Foods. And one of the first signs I saw when I was in the Whole Foods section was talking about their commitment to natural and preservative-free food and downstairs there's all the junk food. So the messaging gets really mixed.

(10:00):

It's convenient. I didn't see a lot of foot traffic in the downstairs part while everybody seemed to be going up to Whole Foods. And maybe I think the location matters as well. It was in a really central location, so you would get people who might be going to a convenience store otherwise or to a drugstore to pick up some last-minute items, some soda or chips. Whether people are going to shop there for their rest of their household essentials, I don't know. I think you could just also order it on Amazon.

Suzy Davidkhanian (10:27):

So would you go bigger, pull back or tweak the pilot?

Sky Canaves (10:32):

I would probably tweak it.

Suzy Davidkhanian (10:34):

And you would tweak it how?

Sky Canaves (10:35):

I think I would tweak it to try to integrate it a little better into Whole Foods, and maybe that is part of the merchandising mix, or is Whole Foods going to evolve where it's a store that essentially changes its culture to allow a much broader type of grocery experience the way we see in our larger stores where they do have the more natural or bougie products alongside the national brands?

Suzy Davidkhanian (11:05):

I love that. That's a tweak for Sky. What do you think, Blake?

Blake Droesch (11:08):

I think it's going to fail. I would shut it down. I think it's basically trying to be a compromise between fully embracing the Amazonification of Whole Foods and keeping Whole Foods separate from the rest of Amazon and the national brands.

(11:26):

But the problem is just it's too small of a space. It's not going to be large enough to have all of the national grocery brand items that are going to be able to satisfy an entire shopping cart. And I think like Sky alluded to, that's a good analogy. You can't do all of your grocery shopping in the aisles of a CVS or a Walgreens. You're inevitably going to need to go to another location for most of that stuff. And the reason why grocery stores like Walmart win is because they have the space and they have the product selection.

(12:03):

I also just don't really think that it'll be valuable enough real estate on the other side to give up away from Whole Foods, particularly because a lot of Whole Foods exist in urban areas where every square foot of the store is valuable. And that's space where Whole Foods' products could be taking up space and potentially selling better at a premium price point and products that people who are going into the store are used to getting.

Sky Canaves (12:33):

I think it's interesting that the one in Chicago, I read that it used to be the Whole Foods coffee shop, and they turned it into this now Amazon grocery. And they still have coffee. There was a big sign outside that you could get your pumpkin spice latte there, I guess, as people had before. And they had a frozen yogurt machine, but it was broken. So maybe they have to think about ways to create a more enticing type of store experience if they're going to go in that direction because otherwise it was pretty sterile.

Suzy Davidkhanian (13:05):

So it sounds like it's lukewarm, it doesn't solve the second stop problem necessarily and most likely not scalable and dilutes their original brand for Whole Foods. So lukewarm to maybe not the best initiative.

(13:18):

Up next is Amazon Grocery. So this can be confusing because there are lots of ways we talk about Amazon Grocery as two words that come together, but this in fact is their new private label brand that is pulling together the Amazon Fresh brand with the Happy Belly products under a new label called Amazon Grocery. And it's going to have 1,000 items, mostly under $5, aimed squarely at the cost-conscious shopper, which is not necessarily the original Whole Foods. And they have said that they are going to keep the Whole Foods private label brand intact.

(13:51):

It's a way for them to lean into the private label boom and also to make sure that they have their name on everything and for the private labels brand to stand for something, kind of similar to what some of the big competitors, like we've talked about Costco and Walmart doing.

(14:06):

So what do you think, Blake?

Blake Droesch (14:07):

I would lean into it, but I would tweak it by getting rid of the name Amazon Grocery. I think the Amazon Grocery just sounds so unappetizing to me. It's very cold. It reminds me of something that it might be good on batteries or electronics, which is I think the areas where they first excelled in private label. But take a page from all of the other retailers that have rebranded their private label grocery just under more attractive names.

(14:36):

But I think at the end of the day, it's a great idea, super necessary for them to invest in private label, particularly shelf-stable goods that are undercutting their competitors of the actual brands that are selling on Amazon, which is a classic Amazon business model. And I think grocery, in particular, is just an area where people want to save, particularly if they're ordering it online, and a large selection of private label is certainly the way to go.

Suzy Davidkhanian (15:09):

Sky, what do you think?

Sky Canaves (15:10):

So I didn't see this as much as a whole launch of a new brand because it really is more of a rebrand of existing products that were under the Amazon Fresh and Happy Belly line, which I think maybe a lot of customers weren't always aware that Happy Belly was an Amazon brand. So it fits in with a broader trend of private label grocery companies wanting to put their name more prominently on the product because there's no shame in private label. And once customers come to know and want to buy a private label brand and they have positive associations with the retailers.

(15:48):

So I think Aldi has done something similar. They're putting their name more prominently on all of their private label products. So yes, maybe there is a more exciting name than Amazon Grocery that wouldn't also cause confusion with the grocery stores or the whole topic of Amazon grocery that we're discussing today.

(16:08):

But maybe it also creates another opportunity for these Amazon Grocery stores to sell more Amazon Grocery products in addition to those national brands. And it would be interesting if they could bring those into Whole Foods because then it would solve the problem of having more traditional CPG brands if there's more value attached to it, where it's another option apart from the Whole Foods 365 private label that could be more affordable for consumers.

(16:38):

And they have another private label that I think is still on its own, Saver, that they launched last year, which is all products under $5. So it's interesting that the Amazon Grocery also has that big value orientation with that price point.

Suzy Davidkhanian (16:54):

So it sounds like we're all in on private label for the win, perhaps not the exact name, but the idea of having a good, better, best strategy in private label will only help their business.

(17:06):

Finally, Amazon, as we know, continues to pivot on store concept, as Sky was saying, but also closing stores. And they just had a new wave of store closures. In the UK, it sounds like they closed every store or are repurposing some of the stores from Amazon Fresh to Amazon's Whole Food concept. In the US, they just talked about closing five more stores on top of the ones that they did earlier in the year. This is basically Amazon signaling that Fresh store format isn't really landing, so they should maybe be doubling down on delivery and partners instead.

(17:40):

What do you guys think about the move around closing stores, keep doing it, stop, tweak?

Sky Canaves (17:47):

I feel like it's part of an ongoing evolution that's been very confusing and meandering with Amazon Fresh stores. They're closing some. It's a tiny number of stores to begin with. There are about 50 stores in the US and only in certain places, but they seem to be always closing and opening really large stores. And then that doesn't work out so they close it, and then they open a much smaller store, and who knows where it's going to land.

(18:14):

I think the latest example of this robotic microfulfillment center where shoppers can go and use QR codes to shop is not going to really go anywhere. Maybe it helps support the delivery part better. So I still feel very confused by the store strategy as a whole.

(18:34):

There's also the new small format Whole Foods that are starting to pop up, which in places like New York, which maybe would be more like a small grocery store than a supermarket. I don't know, but it seems like it's a very confusing strategy, and I think it still speaks to Amazon's fundamental struggle with creating its own physical retail experiences. It's just not something that's in the company's DNA. They've borrowed some of it from Whole Foods, but now if Whole Foods will become more like Amazon, that will be a different experience as well.

Suzy Davidkhanian (19:10):

Sounds like tweak to me. What do you think, Blake?

Blake Droesch (19:13):

I would say just close all the stores and focus on making delivery faster and cheaper. They're still going to need to, obviously, invest in commercial retail space, but they could make those fulfillment centers, they could focus those investments on unifying the fulfillment process across the different Amazon grocery options, and they don't have to then interfere with what is working at Whole Foods.

Sky Canaves (19:45):

Yeah, or I would say turn them into smaller Whole Foods stores because the Whole Foods business is still doing surprisingly well. In the last quarter, they reported really strong growth of their physical stores business, which is almost all Whole Foods, not Fresh. So they could lean into that more.

Suzy Davidkhanian (20:03):

So we've talked about where the weaknesses are, and we've looked at how Amazon is trying to fix some of them. So let's switch gears and look ahead to 2026. If Amazon were to make one surprise grocery move, the kind that everybody would be like, wow, we should be paying attention to that, what would it be? Blake?

Blake Droesch (20:23):

I don't know if this is something that would be super shocking, but I think that the best thing they could do is make the same-day perishable food delivery just available everywhere to all of their customers. They started offering same-day delivery on perishables in I think August in 1,000 cities, and they said that they're going to expand to over 2,000 locations by the end of the year. I think they just need to keep growing that, focus on e-commerce, focus on directly appealing to their Amazon Prime membership base. That way they don't necessarily have to reinvent the wheel in terms of scaling the Amazon Fresh side of the business. They can instead grow revenue by just adding more food and beverage products to the shopping carts of their core Amazon.com users.

Suzy Davidkhanian (21:19):

Great. Sky?

Sky Canaves (21:20):

I'm going to say maybe, also not a huge shock, I mean, maybe it's more a shock if they can make it work, but unifying the single grocery cart online. It would be really important, along with the delivery, for a unified experience from the customer perspective where you can get your Whole Foods and whatever you would buy on Amazon and Fresh all in one cart. And it should be free delivery because that's what customers expect.

(21:46):

I think the trials that they've had with different types of delivery fees or subscriptions for grocery only won't really gain a lot of traction from Prime customers who are already paying close to $150 a year, maybe. And then there's Walmart that is much cheaper both for the subscription and has a low free delivery grocery threshold.

(22:09):

So I think that would, if they can unify and create a single shopping experience for the customer for groceries. And maybe they brand it under Amazon Grocery within their website and app so that it's really easy to buy everything that you need and have it delivered the same day.

Suzy Davidkhanian (22:25):

I'm fully supportive of that and throwing in I was thinking they could do something like you know how Amazon Prime Video you can buy tiered? I don't know why there isn't, and they do the $10 a month delivery fee for Whole Foods, but there's a mental block. So they're already doing it, but if they could just put it through as Amazon Prime Grocery and that's a little bit of a different price point, then you don't feel it's like gouged. It's like a clear value proposition to have a tiered program that they're already doing, but just not getting credit for.

(22:54):

All right, that's all the time we have for today. Thank you, Blake.

Blake Droesch (22:57):

Yeah, pleasure to be here.

Suzy Davidkhanian (22:58):

Thank you, Sky.

Sky Canaves (22:59):

Thanks, Suzy.

Suzy Davidkhanian (23:00):

And thank you listeners and to our team that edits the podcast. Please leave a rating or review and remember to subscribe. I'll see you for more Reimagining Retail next Wednesday. And on Friday, join Marcus for another episode of Behind the Numbers, an eMarketer podcast made possible by Viasat Ads.