Amazon was already experimenting with convenience stores before the news of its $13.7 billion purchase of Whole Foods Markets. The deal is a way for the online retail giant to truly enter the food and beverage retail business—a $700 billion-plus industry into which e-commerce is making inroads.
That’s the obvious play here. Using just a small portion of the company’s resources, Amazon can acquire a storied brand with hundreds of locations and learn a great deal.
But Amazon has a strategy that may go beyond selling aged manchego to yuppies. Aside from the aforementioned convenience stores, Amazon has also opened physical bookstores. Now the company is adding a big bricks-and-mortar grocery footprint. So CEO Jeff Bezos could be assembling the components of a Richard Scarry book. Or he could be working out a new way to solve a challenge that has vexed all businesses that promise to deliver a good or service to anyone living in the United States: the last mile. As Dennis Berman of the Wall Street Journal tweeted, Amazon “just bought 431 upper-income, prime-location distribution nodes for everything it does.”
The global logistics system is really fantastic at moving immense amounts of goods over long distances to and from distribution points around the world: We can load up a ship with a huge number of containers, transfer them efficiently to trucks and railroads, and store their contents at high-tech distribution centers. But it’s that last mile—bridging that final small distance from distribution hubs to individual customers—that’s a challenge. Especially to those in the business of delivering fresh goods, which can’t simply be left to rot on customers’ doorsteps while they’re at work.
Given the way most Americans live—in single-family homes, often with significant amounts of space between them—it takes a lot of resources, labor, and customer time to complete the final mile of a delivery marathon. Distributions gets progressively more challenging, and less efficient, the closer you get to the customer and the more individualized the service is. It’s hard to get economies of scale. In my small cul-de-sac in suburban Connecticut, I can watch a series of delivery trucks (from the Postal Service, UPS, Federal Express) roll through over the course of the day, often delivering only a single package to a single home. And as they go about their rounds, delivery people have to grapple with traffic, accidents, the need to fuel up, and roadwork. (Of course, drones could solve some of this problem, which is why e-commerce companies, including Amazon, are experimenting with airborne delivery.)
Getting through the last mile is linear and iterative—a delivery person can literally only deliver one package or service to one customer at a time. There are other complications for companies seeking to deliver groceries and fresh food. The cost of shipping is directly related to both weight and volume, so shipping things like 50-pound bags of dog food or 12-packs of paper towels doesn’t always make sense. In addition, fruits, vegetables, and meats have to be handled with more care than electronics. You can’t just leave the groceries on people’s doorsteps, where they will be exposed to the elements or to animals. We’ve been using Peapod for more than a decade, and we have to be home in the two-hour window that the company gives us. This inconvenience is a barrier to use.
But what physical stores have always done is to make the store the last mile. With brick and mortar, it is the customer who invests the time and energy to travel the to the store—or the mall, or the strip mall, or the big-box retailer—to pick up the goods and deliver them to his or her own home. And there are a lot of efficiencies for operators of stores: You can carry a lot of inventory on hand, you save on shipping and labor, you can serve dozens of customers at the same time.
So imagine the possibilities. You, an Amazon Prime customer, can shop for groceries at Whole Foods on Amazon and then choose an option to pick up the groceries on the way home. (Maybe there’s even a discount for doing so.) And, of course, you might then be offered the option to order a bunch of other stuff on Amazon (a couple books, some socks, garden tools) and choose to pick those things up at Whole Foods at your convenience. And when you go to pick up the goods, you might also drop off a jacket you bought on Amazon that needs to be returned. Whole Foods may well be about to become Amazon’s second user interface.
As of now, Amazon absorbs all the costs for the last-mile activities described above. But if you have a bunch of well-lit, large distribution nodes in excellent locations with lots of parking, or that are bypassed by lots of foot traffic, and if you can encourage some of your customers to pick up and drop off from those places, then the customers are picking up a large share of those costs.
Amazon isn’t just buying a bourgie grocery chain, in other words. It’s also acquiring the labor of its customers to get its goods where they need to go.