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The Amazon Now Flows With Wine

Columnist: Tim Carl
September, 2017 Issue
Columnist

Tim Carl
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Amazon’s recent purchase of Whole Foods Market for $13.7 billion will decimate small wine and beer retail shops across the country and hasten the consolidation of wineries and distributors.

In purchasing Whole Foods, Amazon gained a mainstream grocery brand with more than 430 physical stores, a well-oiled supply chain, 330 liquor licenses across 41 states and a 10 percent stake in Instacart, a grocery-delivery startup.

Why brick and mortar?

Last year, Amazon reported that the U.S. market has room for up to 2,000 of its Amazon Fresh-branded grocery stores, referred to as Amazon Go. The first of these artificial-intelligence-filled stores opened for Amazon employees in Seattle earlier this year. Shoppers use an app, also called Amazon Go, to add products to a digital shopping cart, either while at the store or from home or work. No matter where the items are ordered, customers have the option of picking them up at the physical location (which means filling their own shopping bags, and walking out of the building without waiting in a checkout line, and Amazon automatically charges their account for items taken), or the items can be picked up later or delivered.

Another reason is that Whole Foods Market was vulnerable — its stock price had fallen as revenue growth slipped every year since 2012. The brand rose to prominence and flourished when consumers sought access to organic foods and health products, but over time competitors such as Trader Joe’s, Kroger and even Albertsons and Safeway have caught up, offering cheaper prices for many of the same products.

The nail in Whole Foods’ coffin was when activist-investor Jana Partners took a 9 percent stake in the company earlier this year. Partners is known for his ability to step in when a company is undervalued and then find a buyer quickly, making a hefty profit for himself in return.

What is the benefit of brick and mortar for Amazon?

First, these local stores can act as distribution and pickup points for the groceries, wine, beer and household items that customers can pick up or have delivered within hours via Instacart or other services such as their Amazon Fresh and Amazon Prime Now. Second, these locations will act as gathering places for customers to commune, eat, taste, test and explore other featured items and experiences. Third, the acquisition provides instant and massive direct competition to any nearby retail businesses but especially for grocery stores and wine and beer retailers. Last, this continues Amazon’s push to consolidate its business to be the single location where consumers can purchase any and all items they might need or want, including alcohol.

Can’t we all just get along?


When Amazon started selling books and music, many local stores shrugged. They believed that customers might buy the occasional book or CD from an impersonal online store but that most would continue to support their locally owned shops. However, they failed to realize that many customers were unable to resist Amazon’s lower prices, the thrill of shopping online or the convenience of having something delivered. Amazon also helped expand the e-book market, which ultimately forced the broad adoption of a $9.99 price point as the new normal for both electronic and printed books, resulting in many publishers and bookstores closing their doors. Similarly, the music industry, collaborating with Amazon and others to provide instant downloads, has seen a revenue decline of more than 50 percent, from a high of $14.6 billion in 1999 to $6.3 billion in 2009.

Since 2012, Amazon Wine allows customers to buy wines online. Amazon takes a large cut when a wine is sold on its site and often requires the producer to pay a portion or all of the shipping and handling. Recently Amazon has started to “collaborate” with wineries such as King Estate Winery based in Eugene, Ore., to produce unique lines of Amazon Go wine for their customers. Expect this type of collaboration to accelerate and prices to decline.

The future of wine sales with Amazon in command.

Distributors will need to find a way to work with Amazon or risk being pushed out of the picture. Of course there are complications for Amazon dealing with the mess of alcohol laws and regulations, but like book publishers, there will be distinct downward pressure on pricing and increasingly limited access for the smaller players. Wine, beer and spirit companies will find they face the same pressures but with the added pain of losing direct-to-consumer business and wine-club members as customers opt for comparable Amazon Go goods and services.

How does a winery survive in this changing world of Amazon’s dominance? That’s the billion-dollar question. Figure out how to play effectively in this new sandbox and you might have a river of your own someday.

 

 

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