Amazon’s purchase of the U.S. food supermarket chain Whole Foods for $13.7 billion in August may be an historic moment in the digitisation of the economy. To get an idea of how historic, in January, Nielsen, a market research company, reported that online grocery shopping in the US could reach 20% of the $600 billion sector by 2025. In February, Bain insights predicted the share of big supermarkets in the EU could fall from 70% today to as low as 48% by 2025, and that retail margins will fall by up to 40% by 2025. Winners will include discounters and online retailers.
But these figures don’t reflect what Amazon and its imitators might do to speed things along. We can assume Amazon will deploy Artificial Intelligence to better know its market and that it is at least considering an extension of its Amazon Prime Pantry service across the U.S. and to other markets so that it can turn the delivery of groceries into a service. Add in systems supporting feedback, product returns and reviews and we can see how Amazon could work to build confidence in online grocery shopping. Building trust will expand the number of products consumers are willing to buy online.
In other words, mass acceptance of online grocery shopping may soon be here. And as Peter Sondergaard, Gartner's head of research and advisory, says 'once digital revenues for a sector hit 20%...the digital bloodbath begins’.
Much has been written about Amazon’s access to cheap capital. The company can raise finance at little cost because its shareholders have rewarded its relatively low-risk, yet potentially game-changing, innovations by pushing its share price ever higher. The company’s purchase of Whole Foods was financed with $16 billion of unsecured bonds, at rates as low as 1.45 per cent above Treasuries. The stock market views Amazon’s proven ability to combine innovations in AI, logistics, robotics, and delivery, as a vector for the eventual digitisation of all key sectors of the economy. Investors believe that digital innovation can confer first-mover advantage on digital businesses entering traditional industries. Even if it won’t be winner-takes-all, winner-takes-a-lot is enough to motivate shareholders.
Of course there’s is much that Amazon needs to get right. Making money from selling groceries online is hard. One online grocer, Open Taste, relies on a crowdsourced delivery system, like Uber, whose drivers need to be able to make multiple deliveries. But can this approach be scaled to meet the increasing on-line needs of the grocery market? To make money in groceries Amazon will need to consider how it will integrate and implement systems that can anticipate customer needs, manage inventory, and distribute perishable products quickly.
Which brings us to Europe. European policymakers have been getting excited by the likes of Facebook and Google whose business models require the processing of large amounts of data freely given by EU citizens in exchange for free services. The German Cartel Office is forging a new legal doctrine by accusing Facebook of abusing its dominance of a ‘market for social networks’ by breaking German data protection rules. No one had ever heard of ‘the market for social networks’ until the Cartel Office, like a brilliant Mittelstand company milling a bespoke sprocket, invented it and fitted it into its competition case against Facebook. Using a chain of unreason—including a redefinition of data as currency, that would have made Marx proud—the Cartel Office has connected this sprocket to an allegation that Facebook broke Germany’s data protection rules, thereby abusing its dominant position. At the same time the European Commission has determined that Google search has been biased in favour of its ‘shopping comparison service’. Most people under 35 don’t know what a ‘shopping comparison service’ is and most people over 35 can’t remember. Such tortuous legal maneuverings are an attempt to catch the tail of a digital comet. If Facebook and Google get Europe’s policymakers this excited what impact will Amazon have?
It’s worrying that the debate in Europe is so dominated by a discussion about how to either stop or control the impact of digital technology while so little attention is being paid to how we have benefitted from it and how we can continue to do so. For example, the basic business model of ride-hailing and accommodation-sharing apps unlocks capital for the benefit of drivers, homeowners, and travellers. As such these are de facto economic reforms of just the kind that much of Europe needs. Yet many European governments, both national and local, have treated these pro-consumer innovations with hostility.
Amazon’s purchase of Whole Foods is a tectonic shift in the digitisation of our economy. Ultimately European consumers stand to benefit from the changes that will follow when grocers successfully adapt to, and start to shape, the new reality.
Digitisation of the grocery sector is unstoppable. By viewing the likes of Facebook, Google, and Airbnb with suspicion Europe’s policymakers have set a worrying precedent. The stakes in Europe’s grocery sector are much higher. The time for grandstanding is over.
Views expressed in this article are those of the author and not those of the Global Digital Foundation which does not hold corporate views.