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Should the Amazon/Whole Foods merger worry national brands?
Through a special arrangement, presented here for discussion is a summary of a current article from the monthly e-zine, CPGmatters.
For consumer packaged goods national brands, the biggest potential reverberation of the Whole Foods sale is whether it helps Amazon.com solve the challenges of delivering groceries to end consumers.
Once it has a physical-retail base, Amazon could further leverage its negotiating expertise and combined scale to push for still-lower prices.
In response, Ken Harris, managing director of Cadent Consulting, said brands “must figure out what they mean to consumers both in bricks and mortar and online, and cultivate that.” He told CPGmatters, “The good ones will double down on brands and brand building with Amazon or without Amazon.”
James Thomson, a former senior manager in business development at Amazon and now partner at brand consultancy Buy Box Experts, believes brands “must figure out how to get much more nimble.”
“If I’m a national CPG and I want to launch a new brand, it’ll still take me a year to 16 months,” Mr. Thomson said. “If I’m Amazon, I’ll get the product launched in 60 days, on a small scale after a couple of experiments. National brands are going to have to do that, too.”
Some question Amazon’s ability to establish private labels in the grocery space. Amazon’s own diaper line, for instance, hasn’t gained much traction against the category leaders, Pampers or Huggies.
Mr. Thomson warned not to underestimate what Amazon might be able to do through its digital wizardry and the benefits that gaining offline consumer data may provide in fine-tuning product development. He said, “Because Amazon doesn’t have the same profit requirement as most companies, they could build a private label product that could wipe out a national brand.”
One win for Amazon has been its Basic private label battery brand, which sells for 20 to 30 percent less than the national brands.
“And that could happen to any brand at all in the grocery space,” Mr. Thomson said. “Amazon CEO Jeff Bezos says, ‘Your profit is my opportunity.’ And if he believes some grocery brands are too profitable, Amazon will find a way to fill that need with a cheaper product that it builds itself.”
Discussion Questions
DISCUSSION QUESTIONS: How should national CPG brands respond to Amazon’s acquisition of Whole Foods? Do you see Amazon relying more heavily on developing its own private labels to capture the CPG opportunity than other retailers in the grocery space?
Poll
BrainTrust
Meaghan Brophy
Senior Retail Writer
J. Peter Deeb
Managing Partner, Deeb MacDonald & Associates, L.L.C.
Good article. Brands must become more nimble and react more quickly to consumer desires and changes in the marketplaces. At the same time, investors behind brands and retailers need to take a longer-term view of growth and profits. Pressure to get quarterly results causes short-term thinking and loses sight of the need to plan long-term. Amazon is both nimble and long-term. Brands and retailers should be worried.
What most think of as national brands are not present at Whole Foods. For example, they sell Annie’s (acquired by General Foods) but not General Foods’ mainstays like Cheerios. So CPG brands are fighting a different kind of battle, where it’s more about reaching a consumer that is tuned into non-traditional media and shopping with mobile augmentation.
CPG’s are also at the start of exploring direct-to-consumer sales. So the unknown is really about where the future is for CPG’s irrespective of Amazon attempting to create their own brands and how traditional grocers will react and strategize in response to the direction CPG’s take. I gave some thoughts in point four of “Five Pain Points Grocers Must Address Immediately to Survive in an Amazon/Whole Foods World.”
Food is the constant consumable that is production wrapped in marketing that is now being wrapped in the technologies of analytics and digital commerce. CPGs that have been all about production and have grown into marketing to protect their pricing and production planning must now use the tools of the supply chain, including those at the points of consumer engagement. CPGs must protect and build on their brand equity as a corporate asset by building their relationship with consumers.
Amazon has raised customers’ expectations about great execution in almost every category that it touches. CPG companies feeling threatened by the Whole Foods deal need to work with their existing retail partners to raise the bar. My own recent (and unhappy) experience with Safeway home delivery suggests there is a lot of room for improvement.
CPG brands should respond by being very aware of the value they offer shoppers. Low prices and high quality will be increasingly important to keep up with Amazon, especially now that Amazon will own the Everyday 365 brand which is already popular with consumers. Household brand names don’t carry the weight that they used to. Consumers are open to purchasing store brands and private label and Amazon is ready to deliver.
CPGs need to start moving much further, much faster to stay competitive. Amazon has the ability to test and iterate products online exponentially faster than every legacy CPG out there. Combine that with the trust they already have and the private label they’re acquiring in the Whole Foods deal, and CPGs don’t have much choice but to respond.
There are many unknowns yet with the Amazon takeover of Whole Foods. Is Amazon interested in reinventing Whole Foods? Are they interested in developing private label brands? Are they interested in providing the best home delivery services or some other use they can benefit from by having brick-and-mortar locations? Probably all of these. But CPG companies should be thinking now about how they can work with Amazon, possibly by offering Amazon exclusive products at a lower cost. The CPG companies are going to have to be careful not giving it all away to Amazon or run the risk of losing business to Amazon’s competitors. So proceed with caution and be ready on all fronts.
This merger is a tremendous opportunity for store brands and their manufacturers. When Amazon makes the 365 brand available online and potentially expands the offerings of main line items under their label they will have the ability to reach many more consumers with delivery and store pick ups of many more items. National brands will have to get more aggressive in both partnering with Amazon and their own digital marketing efforts. The landscape will look very different in five years.
I think we are asking the wrong questions here.
First of all, Whole Foods isn’t a big national brand promoter. In fact, Whole Foods is the brand that attracts customers, so the first question is based on a false equivalency. Secondly, that false equivalency is reinforced by the second question.
I think CPG companies who only worry about product-based branding are hopelessly stuck in the 20th century and will continue to fail over time. Amazon’s brand isn’t based on products, it’s based on creating multiple customer touchpoints, technological innovation — especially in the area of communication technologies — and generally enhancing connectivity and one-on-one relationships. In the same vein, Whole Foods’ brand is built around a set of values reinforced by products. These new notions of brand building — through connectivity and values — make products almost secondary.
And as to the products themselves, let’s be honest. As Dave Nichol demonstrated so brilliantly at Loblaw years ago when he created the President’s Choice line, any national brand can be cloned and improved and sold at a lower price point, so “product quality” isn’t the exclusive property of a handful of branders. It’s a principle reinforced by the example of Costco’s Kirkland brand. I know several “top” branders that couldn’t pack to Costco’s specs because they were too high.
So focusing on brand vs. private label causes you to miss the real threat to established brands — the fact that the rules of the game of customer engagement have changed and they, by and large, have stood still and doubled down on their tried and true mass market building strategies.
Amazon’s private label ambitions are bold, and the Whole Foods acquisition will allow it to significantly accelerate development of brands like Amazon Elements and Happy Belly. Fortunately for brands, Whole Foods is no Walmart: It is a modestly-sized chain that is a key retailer for few large brands.
Whole Foods currently has a lot of requirements regarding ingredients of products. If Amazon keeps those requirements as a distinctive feature of Whole Foods, what impact will that have on using the store as a distribution point for other grocery products? Will distribution by Amazon lower the price of products at Whole Foods? There are lots of questions to answer before discussing the impact of the deal.
Talk about a match made in heaven, especially for Whole Foods. It’s actually very angel investor-like. Now Whole Foods’ 365 can get the proliferation it needs without activist investors trying to denigrate the brand and turn over the reigns to former Kroger execs or some other crime for short-term profit.
I think Bezos “gets” the mission of Whole Foods, which is to bring healthy food to everyone. And Amazon is the vehicle to help them attain that mission. Before it was through their limited amount of stores only. Now, forget about it!
I love it. I can hardly wait to have a Whole Foods healthy dinner delivered to me within the hour by a drone.
The vehicle that Amazon is intent on purchasing to take them closer to same day grocery delivery isn’t running on all cylinders and looks like it may have a couple of flat tires. The process of merging these two companies into one is going to be plagued with issues stemming from the opposing core business perspectives and practices of both. To make this merger more challenging and less possible, Mr. Bezos might want to consider same-day coffee delivery and buy Starbucks to get started in an e-commerce convenience market venture.
I would love to watch how he sells his board and the banks on ideas like this. It must be an amazing experience. As for an appropriate response to this venture I would suggest considering a celebration parade.
Amazon surely has a cost and capital advantage, and therefore wins on speed to market and value. Their vast data tells them which products are popular and what they should look to create and distribute themselves.
But they will not be an innovator in this category or any other.
They will always be relying on data that shows them after-the-fact, what is trending in the marketplace.
Therefore the necessary step that brands must take is to innovate with their products and accept a shorter period of market dominance before Amazon produces their own PL version. Even then, Amazon will likely pursue only the top selling products.
Maybe some numbers will help: everyone’s favorite hobby, it seems at times, is to have Amazon responsible for everything (of course when you’ve been growing exponentially for years, it’s easy to extrapolate that trend and arrive at 100% share of everything … and soon) but in acquiring WF they picked up a retailer who has about 1.5% market share (by comparison, Walmart has 20+%). Of course the share in niche markets — organics, hipsters, etc. — is higher, and Amazon may well grow it, but it’s not going to grow it so dramatically that it even begins to approach WM in scale. So if nationals have survived the onslaught from Bentonville, they’ll survive this … most of them, at least.
Amazon has never been about short-term profit margins; they will always make decisions that they believe will bring the most return down the road. If that means developing their own brands (or more likely purchasing existing brands and implementing them into their supply chain), then that’s exactly what they’ll do. The only reason a CPG should worry is if they don’t factor into the Amazon/Whole Foods strategy in any way.
CPG brands should be prepared to stay a step ahead of Amazon during changes in the marketplace. They also need to be able to respond quickly to any changes in consumer needs and trends to launch a new brand quicker while maintaining high quality. Given their established ability to quickly create private label brands at scale, Amazon may indeed begin to vertically integrate and focus on developing its own private label groceries. It is crucial for CPG brands to stay ahead of the market and focus on quality while keeping costs low as possible to compete with Amazons low prices.
National CPG brands and the people who make their bonuses based on the old wholesale model should be worried and should be looking at their brands that were built around store placement and mass marketing with new eyes. Why a customer should choose their product and how to really communicate with customers should be top of mind. This should have been top of mind prior to this acquisition but maybe this is yet another wake up call. Amazon with its wealth of customer info and product info, which will only get better with Whole Foods data layered on, will look at other categories like they have done with batteries and now apparel and will expand private label where they see opportunity.
A bit self-serving, but we at my company argue that quality CPGs should focus on creating their own direct-to-consumer subscription and membership programs to start a real and ongoing conversation and relationship with their customers. You can’t compete with Amazon and Wal-Mart in e-commerce as they have a huge head start, but you can take a different tack and start a subscription with the people who do love your brand and your product. Don’t wait to be disrupted, like Gillette vs Harry’s and Dollar Shave Club, and then react with a copy cat. Get out ahead of Amazon and other disruptors and start to acknowledge that it is now about the customer and not your product and your brand.
Amazon does not care about your product or your brand. Whole Foods might for a little while but they also have an amazing private label business already for everything from delicious sliced turkey “made right here” to everything under the 365 Brand.
I use this example all of the time, but as shopping and product discovery moves to voice, brands will take a back seat to ingredients, what the product does, speed of availability and, of course, price. Try to order batteries with Alexa. You have to really try hard to get Duracell or Energizer, and those brands dominated for decades. This trend is going to accelerate.
Brands should be concerned about the Amazon acquisition of Whole Foods. You can’t ignore a company that is known to disrupt industries. That doesn’t make Amazon bad. It just makes them a disruptor. Wouldn’t you be concerned if a competitor moved in next store to you? It’s the same. It’s like Walmart coming to town. Plenty of business were scared. In the case of the Amazon and Whole Foods acquisition, it’s time for brands to get smart and think about ways to compete. You can’t ignore it. So, figure out ways to live with it — and even take advantage of it.