Reports that Amazon plans to open a new chain of grocery stores separate from Whole Foods is especially threatening to consumer goods manufacturers that would increasingly be competing with Amazon's private-label brands. CPGs must build more relevant brand equity to survive.

Jon Reily, vice president and global commerce strategy lead, Publicis Sapient

Jon Reily, vice president and global commerce strategy lead, Publicis Sapient

The Wall Street Journal reported last week that Amazon, which in 2017 acquired Whole Foods, is aiming to broaden its reach in the grocery industry by opening its own grocery stores. These stores would be separate from the Whole Foods brand, have a wider range of products and potentially offer lower prices than Whole Foods currently does, which would help create distinction between the two chains.

While there are a lot more questions than answers at this point, it appears that this move is less about Amazon’s ambition to grow its grocery market share and more about embedding the brand in our daily lives and collecting more of our data. The new chain will be an effective vehicle for Amazon to move its high-margin private-label goods, which the company has been quietly building up behind the scenes.

There’s a good chance that this move is partly a test to see if Amazon can install their technology in existing stores as much as it is an overt move further into the grocery space or a play to acquire more Amazon Prime customers.

It also offers up a new source of customer data for the company. By making this chain a more affordable alternative than Whole Foods, Amazon gains access to new, untapped groups of consumers—the types that typically don’t shop at Whole Foods or have an Amazon Prime membership.

A Potential for an Acquisition

Sources say that Amazon is considering the option of purchasing regional grocery chainsto accelerate the new grocery brand’s launch and market reach. The fact that the Wall Street Journal report said there would be stores by the end of the year aligns with the idea that Amazon is leaning towards an acquisition over building new physical stores, though that doesn’t mean they won’t expand on their own later. Regardless, there’s no doubt Amazon has properties and targets in mind already. At the end of the day, Amazon is all about speed, and buying an existing chain would allow them to go-to-market much quicker.

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In fact, there’s a good chance that this move is partly a test to see if Amazon can install their technology in existing stores as much as it is an overt move further into the grocery space or a play to acquire more Amazon Prime customers. The beta tests of AmazonGo technology appear to be successful and the platform is gaining maturity as they open more stores, so this could be the perfect testing ground.

The Biggest Losers: CPGs, Not Grocery Stores

While grocery stocks initially fell when the news broke, the ultimate risk is not to major grocery chains themselves, but rather the consumer packaged goods (CPG) companies who stock their shelves.

This latest news appears to be less part of master plan by Amazon to dominate the grocery space, but rather a way to get into even more households and sell more Prime and private labels. The short- and medium-term losers here are CPGs who will lose out on a channel that gave them a chance to reach customers one-to-one, without Amazon. They now have to compete via brick-and-mortar stores with Amazon’s private labels.

Most CPGs are reacting to this news in one of two ways: either acting like their hair is on fire or sticking their head in the sand. Those that are acting are acting fast—maybe too fast—swooping up ecommerce and digital transformation experts and building direct-to-consumer (DTC) websites. CPGs are desperate to find an avenue to own their customer and develop a one-to-one relationship with them.

Unfortunately, it seems thus far that consumers are not that interested in having a one-to-one relationship with everyone in their pantry and medicine cabinet. As a result, many of these ventures have not been the successes CPGs hoped them to be.

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What Lies Ahead

What can CPGs do to compete? To start with, they need to realize that the days of having brand equity simply because they’ve had it in the past are over. Dollar Shave Club has shown a generation of startups that anyone can take on the big boys if you have a decent product and a good story. Therefore, the onus is now on legacy CPGs to make their brands come to life—and stop resting on the laurels of “serving you since 1950.”

By 2027, Gen Z will account for 40% of consumers, and statistics show that, so far, they haven’t shown a strong loyalty to specific brands. CPGs will have to find a way to address that or they will die, no matter how long they have been in business.

While Amazon’s entrance into the grocery world via its Whole Foods acquisition hasn’t been uber-disruptive to the industry so far, it doesn’t mean that change isn’t coming. This new grocery chain could provide more infrastructure to grow Amazon’s grocery delivery services, crowding out competitors. And if it does decide to roll out its AmazonGo technology, it has the potential to start changing the way that people grocery shop in stores.

The details around the new stores are still unknown, but history shows that when Amazon undertakes a project, it sets a high bar—usually leaving the rest of the industry scrambling to catch up.

Grocery chains and CPGs still have a chance to protect their shares of the market, but they must learn to adapt and evolve in order to do so. None of them will be out of business tomorrow, but that may not be the case three years from now if they don’t start building more modern and relevant brand equity and focusing on a customer-first approach, accelerating technology adoption and becoming more end user-friendly in their approach and offerings.

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Publicis Sapient is a management consulting firm focused on digital transformation. It is part of the multinational public relations and advertising conglomerate Publicis Groupe S.A., which is based in France.

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