Amazon's Grocery Strategy: A New Direction

This week Amazon announced it's shutting down its Amazon Fresh and Amazon Go Grocery Stores and refocusing its grocery strategy around Whole Foods delivery and a more Walmart style operating model. On the surface that sounds like a retreat. It's not. Grocery was one of the most logical expansions that Amazon could make. High frequency, massive share wallet and daily customer behavior. But what's interesting isn't that Amazon closed some formats. What's interesting is how they expanded, why they built first, why they bought Whole Foods and why Whole Foods won, as well as why they're now copying Walmart. So today on Business Lunch, we're going to break down all of that and by the end we're going to give you a simple framework that you can use to decide how to expand and when to pivot in your own business. Welcome to Business Lunch. I'm Roland Frazier and our co host today is Richard Lindner. Richard, how are you?

And I'm great. I'm excited to talk about this today. I think there are so many great.

What do you like about it?

Well, I love that if we look about, look at it. I think you said it, you nailed it. This, this isn't a retreat. Right. Whole food sales are up 40% since Amazon acquired them in 2017. They have what, 550 locations. They're going to open another hundred stores and they're going to add 10 of those smaller footprint daily shop formats by the end of 2026. So it's not a retreat, it's market expansion with capital allocation discipline. Right. And I think that's just such a great lesson to look because it's easy to kill things that aren't working. It's really difficult to kill things that are when you can't do everything. I think it's especially difficult for entrepreneurs and I think the larger companies when really you're dealing with money factoring and capital allocation, at the end of the day it can be an easier decision to make. But I think as entrepreneurs looking at that decision and bringing in sunk cost bias and a bit of emotional ownership of things and saying what lesson can we bring? Because again, killing a loser and shutting down something that's not working is easy.

Yeah, yeah.

But reallocating and stopping something that is, that's hard to do.

So let's, let's look at the story here. So Amazon already dominated. They had non perishable goods, long tail selection, infrequent but large baskets. What they didn't really fully own was daily purchasing. They didn't have a household habit, they didn't really have food spend which is one of the biggest categories there is. And Amazon is the everything store. So grocery wasn't really for them I think so much an adjacency as it was a frequency and wallet share expansion. So that's an important distinction because they didn't say what's nearby to what we already do. They said what do our customers already buy all the time that we don't currently touch? Which is a really good question to ask. So I think the insight to start with here is that the smartest expansions usually target one of three things. It's either higher purchase frequency, greater share of the customer wallet, or some sort of built in structural lock in to customer behavior that's already going on. And this one hit all three for them. So I'd like to kind of from an operational perspective and I want to bring in some of the stories of, of the businesses that you run with us and that we have or that we run together and that, that I think could really help people. My first question for you is like when you're asking yourself where should I go next? And you're. I guess the question would be what do my customers buy far more often than my current product? That would be a good place to start. Do you agree?

I agree, yeah. One of my favorite questions to ask that I think is incredibly self serving is what is a problem or a constraint that's keeping my ideal customer from being able to purchase or experience the full value of the product I'm already selling them. Because if you can answer that in expansion, then you're expanding revenue for your core product line and bolting on another one. So if it's financing, right, it's scalable. When we ask that question at Scalable, what we'll come up with is things like growth capital recruiting, it's employees, it's team members. So they don't have the right talent to be able to fully integrate our systems and apply our different models for scale. So they are willing, able and actively purchasing. We can't fix that at Scalable. We can teach them some strategies for recruiting and hiring and things like that. But if we were to say what is adjacent, that would not only solve a problem that our existing customer already has, but would make that customer more valuable to the core business. That's I think the super breakthrough. So if we were to go and start or acquire an executive recruiting firm or partner with someone or acquire a company on growth capital, then that's. Those are great examples of things that would solve very real Problems that our ideal customer has. And those problems are keeping them from going deeper in the core business with Scalable. So it's not just what do they buy far more often. I love that question. And you know what, where are they already spending? That kind of surrounds our business. But how can we solve two problems at once, the customer's problem and the core business problem of revenue expansion. That's the sweet spot for me.

So how would you say, looking at some of the examples within the group of businesses that you run, how has that manifested itself? Where have you looked to find things and where are you looking right now?

I'll tell you. Scalable's mere existence is an example. So Scalable was born from Digital Marketer. And at Digital Marketer, at its core, we gave proven marketing systems, tactics and campaigns to entrepreneurial business owners and marketers. They worked. They worked. They gave them growth. At some point, they grew. And the person who was the internal champion, the customer for Digital Marketer then ascended, whether that was the founder stepping into the founder role or that marketer stepping higher up. But we also created another problem with that growth. The growth increased headcount and customers, and all those are good things. But we never taught anyone that we usually caught fairly early in their business journey how to run a business. We were teaching them marketing. So in successfully teaching them marketing, we created internal chaos and didn't give them a way to solve it. That's when scalable was born. We had the same problem. You know, we were very naive in the beginning and thought kind of marketing was the answer for everything. You can grow your way out of any problem and really you can grow your way into a lot of problems and internal chaos. So for us, Scalable, the system, the operating system that we use, was born from an internal need and only deployed on our companies and our portfolio companies. We took it to the marketplace because of what we were seeing at Digital Marketer, it worked. But then our customers, even if they did want us, they didn't need more growth because it was fueling the new problem that we had created in solving their other problem. So Scalable was born from answering this question and looking and saying, what can you know, what's a another product or service we could go into? What's another problem we could solve that the people we already have are experiencing. And it's a real pain point right now. Now it's Scalable. It was a completely separate brand. It wasn't an extension of Digital Marketer. But there are plenty of times where we've gone in and added product line extensions or service extensions to a product company for that same reason. Or we've rollin, we've gone out in the marketplace and with acquisition targets to acquire companies that solve these problems because we know we have a built in user base. I think scalable is probably the best example of that.

So one that I like a lot and we talked about it quite a bit at Digital Marketer was we are teaching people how to market, excuse me, and training them up. We were certifying them and that training and certification was interesting. But as things were evolving in the world we kind of were like, well, certifications are becoming less important. Training itself is becoming less important. The decision a pivot work was made to stop doing that.

Correct.

And start doing some other things. And we'll talk about kind of the, some more details about that, but especially around deciding what those other things were. I'd like to kind of explore that a little bit. And so we had talked about, hey, we've got a bunch of marketers. Marketers are always looking for more marketers. Like when we were representing agencies that were businesses of marketers, we were like maybe we could do recruiting and we talked about doing a job board and stuff like that. I love that technology basically gave us the answer. But let's talk a little bit about kind of those, those thoughts of where to expand as they evolved over time and what we ultimately decided to do and why.

I think it's, it's kind of twofold and they're very basic questions. I mean if we're starting with, you know, jobs to be done or problems that need to be solved, like what is the core problem we're solving and are we solving it in a way that is moving with the flow of the trends or are we moving against it? And at Digital Marketer, the scenario you're talking about right now, we were not only moving against the trend, but we were leaning into a shrinking industry. Right. Altogether. So which I think is good because.

I think a lot of people do they start with what do our, you know, what do we not do now that our customers want to do but they don't think about wallet share and is it a habit? Like I really like those, those extra things to layer in.

Yeah. I mean habit is so is such a fantastic question. Buying frequency, are you having to invent a new habit? I mean if you think about just habit creation, 66 days is how long it takes for the average human to install a new habit. 66 days of consistency. How hard would it be to get Any customer to do something for 66 days in a row. So if we can go and look at things that have a higher frequency, that habits are already installed both in the way that the sale and the frequency that the sale happens and in the way that they purchase. I'm always looking at other markets and trying to model what people are comfortable with and what they have had. Habit purchasing. I mean forever ago in Digital Marketer we moved over and we got one of the biggest increases in sales on one of our annual site wide sales just by mirroring the purchasing process and the buttons of Groupon because it was Groupon was a big deal then and we changed all the buttons to just say claim this deal and it got over a 20% increase that I think is relevant to the habits, right? Not just the habit of frequency of purchasing, but the comfort and the habit of doing something that feels familiar. So it always what are we solving? How frequently is that solved? How valuable is it to solve that? Are we going to do something that's going to require us to get a brand new customer every single month or create a new habit, introduce this problem that needs to be solved that they don't agree with? So it's not just adjacent that's such a big deal. I'm sure there are plenty of things that our customers are buying that we can't influence and that maybe happen annually or semi annually. Just because they're buying it doesn't mean that it's going to have a massive lift on your business and it's going to do anything more than increase operational inefficiencies.

Yeah, I like that. So the three questions that I feel like we came up with and we can kind of discuss and refine them if we need to here. So for you guys that are listening or watching, what do my customers buy more often than they buy my current product or service that they're selling that they're buying, what spend already surrounds my business that I don't participate in? What this is typically like bd, what we call BDA products. What are they buying before, during and after the time they buy from us? And if I owned this category, this new category, would retention and lifetime value naturally improve? Would it, would it actually help that? And so some KPIs to look at would be purchase frequency per customer, wallet share by cohort and cross sell and attach rates. And so I'd like to, you know, first, do you have any comments or thoughts on that? But, but especially drilling down into whatever set of these things that we, we think about is there any other thinking that you think would help people to, to really take this and operationalize it?

No, I think those are the questions. When you look at the spend that's surrounding your business, think about if you had to sell advertising. This is just, I try to think of it in a scenario base. If you had to sell advertising and if you had to get a hundred thousand dollars worth of advertising revenue on the books, let's say this quarter, who would you go to first? Because you know that they would be a special kind of stupid not to give you money for you to put them and their message in front of your customer. Your customer's already buying it. It's a different way of thinking about it. But you'll come up with three to five companies right away. And what will probably happen is a couple of those companies do the exact same thing. That's a really great way to answer that question, is in that surrounding spend. Yeah, I like that. For me it's helpful to go to a scenario based question sometimes versus just that broad based question. And if you had to sell $100,000 worth of advertising, who would you go to?

Okay, I like that. So then the second thing is going to be, okay, now we've got this idea that we want to go into this new area. The, the next decision is really build or buy. And so Amazon did not start with buy, they started with build. Probably because they felt they could build it better. Why spend billions of dollars to acquire something if you could spend billions of dollars to make it better? From the start, they were good at technology, they had distribution in place. I think that, that, that made sense to them at the time. They had logistics, they had data, they had prime already. Right. And so they believed that technology and scale was going to reinvent grocery. Kind of like Webvan, if you remember that terribly flawed failed company. Now obviously Amazon had momentum which, and an audience which Webvan did not have either of. So it wasn't like a reckless decision like, like Webvan was. I think it was just classic builder logic. And where it broke down was that grocery is operations first, not interface first. It's kind of like Tesla saying we're a tech company, not a car company, but you're also a car company. Right. It was local, not centralized. They weren't used to that. It was dependent on labor. There were perishables which most of the durable goods that Amazon sold were not perishable. And it was also built on both trust and habit, not the novelty of we can now buy everything online. So they Tried to really solve an operating system problem like it was a product problem, which I think is a, a common mistake. What would you say are the, the two different ways that like most founders fail at this point?

This builder by decision, really with Amazon. Just comment on that. I think there were also two other factors in their build versus buy and I think the biggest one is they see themselves as disruptors and innovators. And if you look at the concepts that they're now shutting down, that was an innovative approach to the grocery shopping or buying experience. So I think for them innovation is a driver. So they want to innovate and you've seen that within Whole Foods in a more appropriate innovation. And I don't hear anyone complaining about the self checkout lanes and Whole Foods and the way it's integrated with the Amazon app. I think there's innovation within a model versus completely flipping a model on its head and trying to innovate. So I think Amazon really went innovation first on their decision of model.

They were thinking disruptor, but really they needed to think more innovator.

Right? Yeah, that's a much better way to put it. I completely agree. And for, I think there's the, the way that you laid it out on what are, what are your competitive advantages? What are you dealing with? Are, are you, are you, is capital a competitive advantage? It's another thing that Amazon had, right? Do you have capital? Do you have team? Do you have technology? Do you have the ability to innovate? Do you have a giant loyal customer base? What are the things that you're going to, you're going to leverage whether you build or buy. And then as you look at those, which one is going to give you a competitive advantage? Obviously capital is going to give you a competitive advantage in both places. But the speed of capital deployed in an acquisition, the speed to just the turn on that revenue because you're not going to buy pre revenue, right? I think that's modeling this out after listing your, your advantages and what you're dealing with like is massive. Do you have a team? Do you have a team that, that is, that has capacity to move beyond the core business, duplicate themselves and leave someone to grow the core business and go focus on another one? If not, then building can be incredibly dangerous. Buying. You've got to believe that at some point it's going to come with competent people. May not be all the people you want or need, but it's not going to be zero and it's not going to tax the core team. So I think the Biggest place that we underestimate in our buy versus build is capacity, internal capacity. And an accuhire can be amazing not just for what the company you're hiring for, but the ability to move that talent around within other companies potentially and experience additional benefit from smart talent that was acquired. So I think the first question is do we actually have the, the bandwidth and time resources to build? What's our budget?

It's even, it's an identity thing again, right? If I, if I see myself as an innovator, if I see myself as a disruptor, I'm, I'm going to be biased towards disrupting. If I see myself as a builder, I'm going to be biased towards that. If I see myself as a private equity roll upy kind of, you know, person or company, then I'm going to be acquisitive. And, and so I think that you see a lot of founders that fail because either they just keep building forever because they identify as builders and they're emotionally attached to we'll just build it, we've got talent, we can move them around, we can make it happen. But the talent might not have the right set of skills to go and do a completely different kind of business. And then the, on the other side of the extreme is that they're rushing to buy because execution feels hard because they don't feel like they have those teams. And if you enjoyed this, we would love for you to share it with a friend. Give us a review. If you have questions, thoughts, want to share something, feel free to reach out to Richard or to me. We are at our names on social media and we'll see you next time on Business Lunch.

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