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How Grocers Can Survive the Amazon/Whole Foods Takeover

June 29, 2017, 4:18 PM UTC

Amazon’s ability to shatter the grocery industry—following its purchase of Whole Foods earlier this month—is far from a fait accompli. The industry—with its fresh food and complex delivery system—isn’t Blockbuster or Borders. But if there was a wake-up call, this is it. Large public companies with slim margins rarely embark on radical reinventions, but that’s precisely what is needed now.

The nation’s more than 60,000 stores selling groceries are sitting on millions of square feet of real estate designed for an analog world. These incumbents should begin their shift by strategically closing locations and creating a web—not a hub-and spoke-system—of stores.

Today, about 98% of grocery sales still occur in physical stores. Grocery companies should redesign these stores to serve as automated pick warehouses, armed with robots loading baskets that shoppers can scoop up with the ease of a drive-thru. These locations can also become mini-warehouses for home delivery e-commerce as that behavior evolves.

This notion is not far-fetched. Several retailers, including industry giant Kroger, have expanded into “click-and-collect,” where customers buy from their devices to pick up curbside. Consumers love it, but it could be far bigger. Amazon just opened two stores for grocery pickup called AmazonFresh Pickup, and you can bet if Bezos can fulfill orders with robots, he will.

Click-and-collect and e-commerce do come with business risks: the need to store items in different temperatures; the difficulties of delivery; and the loss of impulse sales by shoppers walking the aisles and using the traditional checkout process. But all are surmountable. Grocers should try more delivery partnerships with companies like Lyft and Uber, such as the pilot program currently run by Walmart.

Armed with choice locations, retailers need to redesign the rest of the store for this new shopper experience. People want fresh and prepared food. Whole Foods, of course, does this well, but so do many grocers—and they could do more.

Even with in-store grocery shopping, the key to the future, as Bezos knows, rests in data. Most grocery stores now have smart digital tools in place. The tens of millions of shoppers who use mobile apps—think Target’s Cartwheel or Safeway’s Just For U—are customers with whom retailers have direct, digital relationships through personalized promotions and in-store specials.

That’s a big opportunity, made possible by an enormous amount of real-time, purchase data. Amazon doesn’t have that type of in-store data, and Whole Foods, with its 466 stores, is a sliver of the industry.

Traditional grocery stores’ digital relationships are critical to how this plays out. Beyond elevating the in-store shopping experience, the industry can convert these shoppers into e-commerce customers. Shoppers want this, so why should the incumbents sit back while Amazon figures out the best model for online grocery sales?

Amazon has long received a pass for its big bets from Wall Street, which views them as a wager on reshaping the order of things. That’s why Wall Street cheered the Amazon announcement and pummeled the grocery retailers. Investors never cheer the disrupted.

This new strategy will require lots of capital, and it won’t initially deliver the quarterly sales and earnings growth that Wall Street demands from old-guard companies. That’s why a historic reset will require a new set of investors—shrewd equity groups that see the opportunity in reshaping this trillion-dollar industry.

Such investors and strategists are more likely to make hard calls: Shuttering stores that don’t fit the new norm, investing the real-estate proceeds in e-commerce and click-and-collect strategies, and revitalizing the stores themselves. Those bold retailers that come out on top will enjoy a healthy share of the market for decades to come.

Mir Aamir is president and COO of Quotient Technology and a former grocery executive in charge of digital technologies and data. Walmart, Kroger, Safeway, and Target are Quotient customers.