Amazon tinkers with its grocery store formula

Amid companywide cutbacks, Amazon CEO Andy Jassy told Wall Street analysts that the company continues to see grocery as a strategic pillar of its retail business—and as a growth vehicle.

In a conference call on fiscal 2022 results late last week, Jassy noted that Amazon already has built a large grocery business and is now developing its brick-and-mortar offering to deliver more compelling omnichannel proposition. Currently, the Seattle-based e-tail giant operates 44 Amazon Fresh supermarkets and 30 Amazon Go convenience stores, as well as 535 specialty grocery stores via subsidiary Whole Foods Market.

“We think grocery is a really important and strategic area for us. It’s a very large market segment, and there’s a lot of frequency in how consumers shop for grocery,” Jassy said late Thursday in a Q&A with analysts during the call, according to a transcript from financial services site Sentieo. “We also believe that, over time, grocery is going to be omnichannel. There are going to be a lot of people that order their grocery items online and have it delivered to them, and there are going to be a lot of people who continue to buy in physical stores. But you’re going to also see a hybrid of those, where people pick out what they want online and pick it up in stores. Or people are in stores, and there’s something that’s not in inventory in the stores, so they go to their app or to a kiosk and order it to be delivered from online. So I think having omnichannel is going to really matter.”

Amazon fell well short of analysts’ earnings-per-share estimates for the fourth quarter and fiscal year ended Dec. 31, with a net loss for the full year. Overall net sales rose 8.6% for the quarter and 9.4% for the year, but online sales—Amazon’s core business—declined 2.3% in Q4 and 0.9% for fiscal 2022.

But physical-store sales, which include Whole Foods, climbed 5.7% in the quarter and 11.1% in the year.

“We have a pretty significant-sized grocery business. I think people sometimes don’t realize that, and that we’ve been building for a long time. It’s continuing to accelerate, and I kind of see it broken into a few pieces,” Jassy said. “If you think about the online grocery offering, we have a very large business there. It looks different from the typical mega physical grocery store. But if you think about the aisles in a grocery store—from packaged food, to paper products, to canned goods, to pet supplies, to health and personal care items, to consumables—we have a very large business that continues to grow at a rapid clip and then we think will continue to grow.”

“We’re doing a fair bit of experimentation today in those stores to try to find a format that we think resonates with customers,” Amazon CEO Andy Jassy told analysts. / Photo courtesy of Amazon

Amazon’s Q4 brick-and-mortar store sales, also including two Amazon Style apparel and footwear stores built on year-over-year increases of 10% in the third quarter, 12.5% in the second quarter and 17.1% in the first quarter. The company’s physical stores posted sequential gains in two of fiscal 2022’s four quarters.

In grocery, fresh foods are where Amazon is pushing to grow its food retail business, according to Jassy.

“It doesn’t have a big market segment share in perishables, and if you really want to have significant market segment share in perishables, you typically need physical stores,” he explained in the call. “We have kind of two different offerings there. For what I think is the very best organic physical-store experience and selection, we have Whole Foods, which is a very significant-sized business that’s continuing to grow. I really like the progress that business has made on profitability in the last year. And I like what I see in front of it, and I think that’s a premium product. It’s a good business for us in the grocery space. I think if you want to have a mass physical-store offering, you need a different offering. And that’s what we’ve been working on with Amazon Fresh, and we have a few dozen stores so far.”

In fiscal 2022, Amazon opened 32 new U.S. grocery stores, including 21 Amazon Fresh and 11 Whole Foods locations. Austin, Texas-based Whole Foods aims to accelerate expansion. CEO Jason Beuchel said last month at the National Retail Federation’s Retail Big Show convention that the chain is looking to open 30 new stores on an annual basis and has 50 stores in its development pipeline.

But there are some speed bumps for Amazon’s grocery expansion. In early January, Amazon confirmed published reports that it aims to raise a planned 10,000 job cuts to more than 18,000, including retail store personnel. Jassy said in a blog update that the job reductions will come mostly from the company’s Amazon Stores; People, Experience and Technology (PXT); Amazon Devices; and Amazon Books units.

Amazon’s efforts to balance growth and mitigate costs in the face of an uncertain economic outlook also manifested themselves in the Amazon Fresh grocery store business. After a steady flow of openings in the United States over the past couple of years, Amazon Fresh’s expansion appears to have stalled, with a number of sites for planned new stores sitting idle, according to published reports.

Chief Financial Officer Brian Olsavsky said in the Q4 conference call that Amazon recorded impairments of property and equipment and operating leases, “primarily related to our Amazon Fresh and Amazon Go physical stores.”

Amazon also has put a rein on the expansion of Amazon Go c-stores, known for "Just Walk Out" shopping. / Photo: Shutterstock

Olsavsky told analysts, “We’re continuously refining our store formats to find the ones that will resonate with customers, will build our grocery brand and will allow us to scale meaningfully over time. As such, we periodically access our portfolio of stores and decided to exit certain stores with low growth potential.”

In the fourth quarter, Amazon took a $720 million impairment charge on capitalized costs and associated values of its leased buildings, Olsavsky reported.

CFRA Research Analyst Arun Sundaram said the announcement of the stores slowdown was somewhat expected.

“There were rumors that Amazon paused the rollout of its Amazon Fresh stores, so the announcement by CEO Andy Jassy wasn’t overly surprising. The company is in the midst of a major cost-restructuring strategy, so it’s not surprising to hear they paused the brakes on Amazon Fresh, which probably isn’t profitable at this time,” Sundaram told Winsight Grocery Business in an email.
 
“Investors are wondering whether this is good news for other grocers or a sign that Amazon could get even more competitive in the future. We have a feeling Amazon is committed to staying in the grocery business, so the fact that they paused the brakes to come up with a better strategy could spell trouble for other grocers down the road,” he noted. “Amazon has no problem taking its time to figure out the perfect equation, which is not something other grocers can afford to do.”

Jassy reiterated in the analyst Q&A that Amazon will continue to rethink and fine-tune its brick-and-mortar grocery formula.

“We’re doing a fair bit of experimentation today in those stores to try to find a format that we think resonates with customers. It’s differentiated in some meaningful fashion and where we like the economics,” he said. “We’ve decided over the last year or so that we’re not going to expand the physical [Amazon] Fresh doors until we have that equation with differentiation and economic value that we like. But we’re optimistic that we’re going to find that in 2023. We’re working hard at it. We see some encouraging signs. And when we do find that equation, we will expand it more expansively. But I think that we have a very significant opportunity in the grocery segment. We’re building a pretty broad grocery network across online and physical, and you’re going to see us continue to work on it.”

Amazon’s propensity for innovation also could bring a new twist to physical-store food retail in today’s omnichannel context, Sundaram added.

“I don’t think the current Amazon Fresh and Amazon Go store formats are necessarily unsuccessful. Instead, I think Amazon is looking for a truly differentiated grocery experience, rather than offering an experience that is somewhat similar to what every other grocer is offering,” he said. “The technology and automation in these Amazon Fresh stores were differentiated, but the core product offering wasn’t. The toughest part for Amazon will be finding a differentiated grocery offering that can also be profitable, as food retail margins are already razor thin.”