For Amazon, Now Comes the Hard Part — WSJ -2- – Fox Business

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The web titan joins a crowd with its Whole Foods deal; the ‘last mile’ puzzle

With Inc. wheeling sharply into the grocery aisle, the business of selling food may never be the same.

Food retailing was already struggling with low margins and slow sales growth as shoppers shifted buying patterns. New players have swarmed the crowded market, with grocers ranging from giants Wal-Mart Stores Inc. and Kroger Co. to smaller chains fighting to attract consumers, in large part by slashing prices.

And the industry has been struggling to figure out how to sell fresh food online.

Amazon’s agreement to buy Whole Foods Inc. could add to the saturated market as it puts more of its own groceries into the distribution system, while putting new pressure on grocers to figure out how to sell fresh food online lest the web giant beat them. The deal is “a seminal moment in the world of eating,” said RBC Capital Markets LLC analyst David Palmer.

It isn’t at all clear whether the king of e-commerce can do in fresh cabbages what it has done in CDs, books and just about everything else. Amazon and Whole Foods combined still have a small fraction of Wal-Mart’s share of groceries. And Amazon faces a “last mile” logistics problem of getting fresh food to doorsteps that it doesn’t with other goods.

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“This is going to be one of the hardest areas for them to get into,” said Kent Knudson, a partner at consulting firm Bain & Co., “because of some of the physical challenges of getting food into people’s homes.”

The challenges for grocers today include a new reality: The days of shoppers filling carts during a big weekly trip to their neighborhood supermarket appear over for now. Consumers are more targeted in their shopping habits. They are less loyal to retailers and more willing to buy groceries online. And they are buying more from stores at two poles: ones with cheap prices, and ones that offer high-quality fresh food, often at a premium.

Grocery sales last year barely budged from 2015 levels, after rising a bit more than 2% in each of the previous three years, according to market-research firm Nielsen. Kroger ended a 13-year streak of rising quarterly same-store sales this year, while Wal-Mart, which gets more than half its sales from groceries, and Target Corp., have struggled, too.

Consumers want “convenience, selection and the right price and they want it now,” said Natalie Kotlyar, head of the consumer business practice at consulting firm BDO USA. “Everyone is trying to meld those concepts to create the perfect shopping experience.”

Amazon, which has revolutionized the way people shop, is betting it can learn the business and solve at least part of the puzzle. It has shown a willingness to forgo profits for years to build market share in an industry. It has cash to burn, deep experience in logistics and a record of relentlessly driving down supplier costs. And its big push into fresh groceries will likely force other food retailers to accelerate efforts at making e-commerce work if they are to remain competitive.

E-commerce has been tough to crack for the more-than-$700 billion grocery sector because selling food online is inherently complex. Last year, online shopping accounted for 2% of the sector’s sales, according to consulting firm Kantar Retail.

People want to squeeze their produce, pick out their vegetables and inspect their meat. Making sure fresh groceries stay that way through transit is challenging yet crucial for attracting shoppers. “It’s really the fresh categories such as produce and meat that are driving people’s decision of where to shop,” said Bain’s Mr. Knudson.

Wal-Mart, Peapod LLC and FreshDirect LLC have been competing to deliver groceries faster and more cheaply. But fresh-food delivery is typically unprofitable, analysts and some companies said.

“Amazon has obviously reinvented supply chain and logistics in a way nobody has,” said Doug Ehrenkranz, a 25-year food industry veteran who is now a recruiter at Boyden Global Executive Search. Now, the more-than-460 Whole Foods stores across the country give Amazon access to the kind of refrigerated distribution system its regular fulfillment network lacks, all while tapping into the upmarket natural and organic foods market that it has barely touched.

“Wal-Mart and Kroger will feel pain for a while and the regional players that can’t move fast enough will disappear,” said Diana Sheehan, director of retail insights at Kantar Retail. “The bigger concern becomes, what does Amazon do next? Once they’ve navigated the Whole Foods space, they’ll learn how to play in mainstream grocery, too.”

Amazon and Whole Foods declined to comment for this article.

A Kroger spokesman said: “We’re in the middle of a transition today both because of the operating environment and the competitive landscape. We will continue to evolve.” Target said grocery is a key business for the company.

A spokeswoman for Peapod said it is profitable in its mature, established markets. “The grocery industry is a low-margin business and last mile logistics make margins even more challenging,” she said. Wal-Mart said: “We feel great about our position.”

Fresh-food logistics

While Amazon could put pressure on others to step up their e-commerce game, it has struggled for years with a logistical challenge in fresh food that it doesn’t in books and electronics. A Cowen & Co. report points out: “The entire fulfillment process is more complex and time consuming from the moment a ‘grocery’ shipment arrives” at a fulfillment center until it is shipped, what with the need for refrigeration and attention to factors such as “expiration dates, smell, and color, among others.”

The Amazon-Whole Foods deal came together relatively quickly, according to people familiar with the matter, indicating Amazon may not yet have a fully formed strategy for Whole Foods.

Amazon will try to expand the appeal of Whole Foods by using its efficiencies to lower prices, which would bring a fresh wave of pressure to the beleaguered sector, said Chris Baker, a retail and consumer-goods expert at management consulting firm Oliver Wyman.

The supermarket business has always been tough, in part because American consumers have grown accustomed to cheap food. Supermarkets arose out of the Depression, as the efficiency and scale of larger stores made food more affordable for consumers than shopping at local cheese and meat markets, said food historian Andrew F. Smith. As suburbs developed after World War II, grocery chains expanded and found that stocking more inventory provided greater economies of scale.

A seismic change hit the industry in the 1990s when Wal-Mart began selling low-price food and within a decade became the nation’s largest grocer. Ever since, traditional grocery chains have been scrambling to compete. In recent years, price competition has become even more fierce as the number of retailers has grown.

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