The end battle in Amazon’s war against grocery stores has begun: Amazon Fresh is opening brick and mortar locations. Four stores have launched in California, with more coming in Illinois, offering everyday low prices for all customers (not just Prime members). That’s the same value proposition that pushed 95% of U.S. consumers to shop at Walmart.

But Amazon Fresh is not Walmart. It’s aimed at high income consumers that want quality at low price, currently offered by the likes of Aldi or Trader Joe’s, but also desire more product choices as offered at Walmart or Kroger. In essence, Amazon Fresh is filling a gap for young families and professionals that want the Walmart Experience, but can’t shop there for its poor treatment of workers.

Amazon Fresh is not in a hurry to pick a fight; it’s taking the time to get the formula right. The number of new “Amazon Fresh” related jobs at headquarters has not changed since stores opened in October compared to previous months, indicating they’re still testing waters.

Amazon is nevertheless planning dozens of new Fresh stores across the U.S. according to its Store Career Listings. It’s a sign Amazon Fresh wants to see how different demographics and regions react to its offering. Learn, iterate and perfect before scaling.

I want to shop for food in person, and not spend my whole paycheck

Americans who shop for groceries online mostly do so for convenience and time saving. Those customers however remain a small subset of parents with children and adults with household incomes above $100,000. To them, the added convenience and time savings overcomes the typical barriers to online grocery shopping of high delivery fees and volatile quality of produce.

The fact Amazon Fresh is building stores reflects the fact that overwhelmingly, Americans prefer to get their bananas and milk in store. 81% of Americans have never ordered groceries online according to a Gallup survey done before COVID. Even during COVID times, 62% of consumers still favored buying groceries in person at the store. Product selection, availability, convenience, and low prices are the top factors driving consumers into stores. This means online grocery services like Amazon Fresh or Prime Now have a relatively low plateau, and physical stores are critical if Amazon wants to gain market share in groceries.

Whole Foods is also not the answer. Its products are too expensive to successfully gain market share from rivals. Products from Kroger grocery stores are 12% less expensive than at Whole Foods. Grocery cost overall has also reportedly risen faster than overall inflation in the past 10 years. Considering 30M Americans report not having enough to eat during COVID because of rising cost, price is and will continue to be an important factor to where people decide to shop. Therefore, Amazon needs to sell cheaper groceries if it wants to win over the 70% of Prime members that don’t shop at Whole Foods.

Amazon Fresh Store is the answer offering low prices and in a high-tech brick and mortar format.

If you’re addicted to Amazon now, wait till you shop in their stores

Amazon Fresh Stores will improve the e-commerce giant’s grocery profit margins by enabling more impulse buys. One survey reports that 71% of shoppers spent $50 or more when shopping in store compared to online. Causal factors include a higher chance of customers making impulse buys in store than online, as well as the ease with which shoppers can find the cheapest brand or option for a product when shopping online. Supporting this evidence, another survey reports that 29% of shoppers made less impulse buys while shopping for groceries online than in store.

Amazon Fresh’s Dash Cart will play a key role in maximizing customer spending. Retailers have so far relied on traditional research (hypothesis testing), such as this one by Wharton, to understand who makes impulse buys when, and to a certain degree why. The Dash cart blows that away. The smart cart knows who you are (from your Amazon account), what you’re buying, and most importantly, where you picked it up from. The last data point can be used by store designers to optimize placement of products to optimize impulse buys.

The Dash cart’s screen could also advertise “something else you might like” when you are close to it, based on your shopping history and path taken. This type of in-store personalized shopping experience would enable Amazon to put into practice the latest learnings on impulse buys: Tailor offerings by demographic, shopping purpose, etc. It would also enable AB testing of store designs. The Dash Cart data gives Amazon a clear edge over the competition: While other stores can only hope customers notice their promos and displays, the Dash Cart can prompt personalized recommendations while a person is shopping.

The cherry on top comes in the form of a microfulfillment center in the back of Amazon Fresh stores. This allows Amazon to quickly fulfill online orders for delivery or pickup nearby. Making its grocery stores mini grocery fulfillment centers. Walmart is taking that strategy as well, using its stores to fulfill orders, but it’s relying on thousands of human order pickers (see data below) that are less efficient and prone to fatigue and emotions.

Filling a Gap for High Income Shoppers Looking for Value, Convenience, and Choice.

Americans like to have their grocery stores closeby. One study found that when shoppers are not looking for a specific assortment or brand of grocery products, convenience in the form of geographic proximity determines where people shop.

To that effect, Amazon Fresh appears to be targeting high income young singles and young families. All four of Amazon’s launch stores in California are found near a Trader Joe’s, which attracts demographics aged between 25 and 44 making $80K+ a year. North Hollywood has the lowest median income of all four neighborhoods, but it is fast developing into a hub of new urban apartments and office buildings for young urban professionals.

Median IncomeCompetitors Nearby
Woodland Hills, CA$89,946Trader Joe’s, Costco, Sprouts
Northridge, CA$67,906Trader Joe’s, Whole Foods, Sprouts, Ralphs (Kroger)
Irvine, CA$100,969Trader Joe’s, Albertsons, Sprouts
North Hollywood, CA$42,971Trader Joe’s

Amazon Fresh is betting it can beat all neighborhood grocery stores, including Trader Joe’s, on convenience. Customers unattached to Trader Joe’s house brands or in-store experience may very well jump ship. The trend may accelerate under COVID as Trader Joe’s smaller 15,000 sq. ft. stores and lack of online shopping options are dragging down competitiveness and sales.

By comparison, Amazon Fresh’s 35,000 sq. ft. stores have a much wider selection of products. COVID-era customers who seek to limit their trip to one store for groceries will certainly appreciate the larger assortment of products including both Whole Foods’ 365 products and junk food from Coca-Cola or Kellogg’s. That beats Trader Joe’s less than 4,500 unique products.

Amazon is in effect offering Walmart’s low price grocery experience to high income millennials. These millennials are mindful of their social responsibility, health, quality customer service, and worker welfare. Dimensions on which Walmart has much work to do.

The switching cost from neighboring grocery stores to Amazon Fresh may also be lower than we imagine. Potential customers are likely already part of the 68% to 81% of Americans aged 18 to 54 that are Prime Members. In the end, Amazon may not be trying to beat Trader Joe’s as much as convince the 70% of Prime Members that don’t shop at Whole Foods to buy groceries from its Fresh stores.

Cannibalization of customers from Whole Foods may also be limited. Only one of the four Amazon Fresh stores are located close to a Whole Foods location: The Northridge, CA store may very also be strategically positioned to test the impact of cannibalization. The hypothesis is that the 70% of Prime Members not currently shopping at Whole Foods either can’t find one nearby, or perceive its prices at too high. They will hopefully be won over by Amazon Fresh’s everyday low price.

From analyzing competitive offerings below, It becomes clear that Amazon Fresh is targeting Trader Joe’s customers who want more choice beyond their house brands. Not Walmart shoppers. Not Whole Foods shoppers.

Amazon FreshWhole FoodsTrader Joe’sWalmart
Product DifferentiationConvenience, Low Prices, Large Choice: Dash Cart enables cashierless checkout and data on shopping behaviorLarge Choice of High Quality Healthy Foods Like a small Costco, it offers Lower Price House Brand, Limited Choice, Social Store Experience.Low Prices, Large Choice, and plenty of products for life beyond food.
Target Customer DemographicsHigh income young singles/families, especially existing Amazon Prime / Alexa users that don’t shop at Whole FoodsHigh income young singles and families, especially millennials who are willing to pay more for quality.High income young singles.Low to Middle-Income middle-aged families and older adults.
Growth TrendsFlat growth of  ~1%, and potentially declining sales during COVIDEstimated slow growth of ~2%Slow growth of 2-3%
Market Share~2%n/a~25.9%
Switching Cost to Existing CustomersLose convenience of cashierless checkout, 365 BrandLose access to quality foods, including 365 BrandLose access to low cost healthy food under house brandLose access to wide selection of low price products, one-stop shopping

Gain Real Estate by Increasing Omni-channel Competitive Pressure

Challenges facing the Amazon Fresh Store team include finding real estate. The good news is that there are a number of large retailers with 30K sq. ft. locations that have closed in the past couple years. Amazon is taking advantage of that. Previous Toy r Us and grocery stores like Fairway are now being converted into Amazon Fresh per HNGRY.

It is our belief that the more Amazon can make it convenient to shop for groceries, online or offline, the more competitors will struggle to fight back. In turn, it may open up further opportunities to take over the lease of top individuals. It’s also possible Amazon may acquire smaller regional chains, but building a high-tech store is likely easier from scratch, without legacy equipment or management.

Amazon Fresh Store will be led by Jeff Helbling, a past Bezos protege. He has no experience in grocery. His time spent shadowing Bezos likely prepared him in launching and managing businesses. Amazon Fresh will be his big test.

Strategic conflicts and distractions may however arise. Jeff Helbling will need to partner closely with two other executives in charge of Grocery Delivery and Grocery Tech, Stephanie Landry and Wei Gao respectively. Landry shadowed Jeff Wilke (Boss of Amazon’s Consumer Business), while Gao shadowed Bezos just like Helbling before her. Deciding how much investment, what initiatives to launch and expand, in what markets may become points of contention. For example, should Amazon incentivize customers in a given market to purchase online or in-store? Should Amazon invest into Fresh Stores’ design and experience, or expand its online order fulfillment capacity?

Strategic conflicts may be more prominent if each executive is responsible and incentivized for their specific unit of the business, but less of an issue if the executives work as one team and are jointly responsible for growing Amazon’s entire grocery market share.

Fending off Amazon Fresh won’t be easy for competitors. Walmart, while not sharing the same target customers as Amazon Fresh or Whole Foods, is actively counter-attacking with free grocery pickup at the store, free same-day grocery delivery with Walmart+, and a new partnership with Instacart. It wouldn’t be surprising that Trader Joe’s is also scrambling to build up an omni-channel capability using software like ThryveAI to manage online orders, or exploring partnerships with Instacart.

The challenge will always be to attract top tech talent to lead omni-channel programs. On that point, Amazon may be more appealing: It is a tech company that happens to sell stuff; while traditional grocery stores are retail companies that use tech. Which one sounds more exciting? If competing stores decide to outsource their technology product development to external partners, they will increasingly be at the mercy of software vendors. The road ahead will be challenging.

150% of Whole Foods revenue in 5 years

By 2025, we estimate Amazon Fresh to have generated $29B in sales per logic and assumptions in the table below: Almost 50% more than Whole Foods’ sales of $20B in 2019. That represents an annual growth rate of close to 25% for Amazon’s physical grocery store sales, a feat Whole Foods seems incapable of achieving as its sales plateau.

Amazon Fresh EstimationLogic / Data Source
Store Size35,000 Square FeetExisting stores range from 35,000 sq. ft. to 40,000 sq. ft.
Annual Sales($680 + $1,700) / 2 = $1,190 per sq. ft.
$1,190/sq. Ft. * 35,000sq. Ft = $41.7M
Let’s assume Amazon Fresh can perform at the mid-point between an average grocery store like Kroger that pulls in $680/sq. Ft.  to Trader Joe’s industry leading $1,700+/sq. Ft. Amazon Fresh is more convenient and has better analytics than Kroger, but it’s also double the size of a Trader Joe’s.
*This estimate doesn’t even account for Amazon’s online grocery delivery business.
# Stores in 5 years700Let’s assume Amazon Fresh plans to grow as fast as another store that’s taking American by storm with low prices, efficiency and convenience: Aldi (Trader Joe’s parent).
Aldi is working on a plan to open 700 new stores between 2017 to 2022.
Sales in 2025$41.7M * 700 = $29.2B
Table: Estimating Growth Opportunity of Amazon Fresh

Whole Foods and Amazon Fresh (we won’t consider Amazon Go convenience stores) could place Amazon at #4 in terms of market share in 5 years, right behind Albertsons and Kroger. That’s up from #8 or #9 depending on the source. Amazon Fresh’s market share rank may even be higher depending on whose sales it’ll steal.

Amazon may not even want to be the #1 grocer. With antitrust cases arising against it in Europe and potentially in the U.S., its goals may be to stay the #3 or #4 market leader. Being #1 or #2 could give politicians reason to break Amazon apart, and put the entire conglomerate at risk.

What we as consumers are experiencing is an increased dependency on giants like Amazon across multiple facets of our lives, effectively monopolizing our time and attention throughout the day: from online shopping to groceries, to lunch, to pharmacy service, to healthcare, to entertainment, all the way to the data servers used for our work. This high degree of penetration in all areas of life is in our opinion uncompetitive behavior. Yet when analyzed from the perspective of individual industries, e.g. just pharma sales, Amazon is far from the top leader. Amazon is in essence a horizontal monopoly, not a traditionally vertical monopoly.

It’s becoming very difficult for consumers to switch away from the ecosystem of apps they use from a single vendor like Amazon or Google. To force Amazon to be more competitive, lawmakers would have to change the definition of a “monopoly” to a company that captures X% of the median population’s time and attention, or total spending: Normalize against individual consumer spending or time, rather than market share in a vertical industry.

We believe Amazon is at the start of its journey to become a top three grocer in the next decade. Its competitive advantage is rooted in the hyper-convenience Amazon’s technology enables, the low prices it can negotiate with vendors, and the fact that more than 88M Prime customers (70% of 126M American Prime Users don’t shop at Whole Foods) are waiting for a Fresh store to open nearby. We believe the combination of convenience, low price, and choice will prove a winner.