When Amazon.com agreed to acquire Whole Foods Markets, there was a lot of chatter about the impact on major grocery chains such as Kroger Co.
But Tucker Herndon, a partner with Burr & Forman, a 300-person Nashville law firm, thinks the impact will be equally severe on the bev/al industry. The simple fact is, he said, Amazon has found a way to deliver alcohol, and to do so legally.
“It’s going to be the biggest game changer for the alcohol beverage space and the grocery space,” he said.
“It’s brilliant. People think Amazon’s going to acquire a grocery store because they want to get into the grocery business. I think that’s just scratching the surface of the reasoning,” he said. “It’s strategic and it’s well thought out. It takes the fact you don’t have that many brick-and-mortar stores, and you’re competing in a world that all your competitors are trying to get out of the brick and mortar store because the cost to operate them will eat them alive.
“What you’ve done is you’ve now taken an Amazon warehouse that’s 60 or 75 miles outside a major metropolitan area, and now you’ve got 15 different locations you can use as a staging area to distribute throughout the metropolitan area without having to buy the new bricks and sticks. And you’ve got storefront that’s self-sustaining. It’s incredible.
Cash-Flowing Machine
“The ability to have a cash-flowing machine that’s already and not have to go find the bricks and sticks and build what you want – now you’ve got an operational business with a grocery store in a specific area you’re already familiar with because you’re dealing with the group of individuals that have the net worth to pay for higher end groceries, you have the people who are very interested in eating healthy, you’re dealing with the trendy space, the urban society. You’ve got all this in the consumer base for whole Foods and now you’re rolling out the Amazon culture and you’re saying ‘Look, we can do all these other services’.”
Herndon noted that you can currently order a limited number of things, but you can’t get eggs and milk from Amazon “because it’s sitting in a car for 45 minutes to an hour, and that’s just if you’re the first stop.”
Amazon Prime gives you the ability to get two-day shipping. But in around 15 cities, you can have guaranteed delivery within two hours. He noted that one of his boys got hot and wanted an oscillating fan. Herndon looked it up on Amazon Prime Now, made a couple of clicks and the fan was dropped off in about 1-1/2 hours. “Didn’t have to interrupt my Sunday afternoon play time with my kids. The convenience factor is incredible.”
“Right now,” he notes, “Amazon can’t have a delivery service for wine or liquor. But by buying Whole Foods, Amazon has the ability to have an off-premise license. Retailers in Tennessee have the ability to deliver now, so all of this is happening very, very quickly.”
This impacts not just off-premise retailers, but also some of the hotel operations. “I can go into a hotel and have the ability to order not just a pizza from Dominos, but Dominos will go pick up my wine from the point of sale.” Who needs expensive room service?
It’s not just the entrance of Amazon into the grocery space. Amazon now has brick-and-mortar stores to use as the staging hub for delivery services for everything.
Wal-Mart Impact
We wondered how this impacts impacts Wal-Mart. “Big Blue will adapt,” Herndon said. “Big Blue will figure out a way at the end of the day to be competitive. I think this erodes more of your local grocery stores, the chains that might be limited to one state or region, but I think Wal-Mart Bentonville is an amazing system, and is more of a logistics company at the end of the day. They will figure it out.”
Costco, he said, will have to adapt a little bit more. In terms of size, between Costco and Wal-Mart, you’re talking apples and oranges.
Pressure on Three-Tier System
Amazon’s acquisition of Whole Foods puts pressure on the three-tier system, Herndon said. You will always have to make sure you’re not playing in the tier above you. States are working very hard to make sure there’s not bulk buying.
“Just because you’re buying hundreds of thousands of dollars on a weekly basis doesn’t mean you can get a significant discount that’s not available to the mom-and-pop store. To be sure, you can always get a significant discount if you buy for a specific location, but the exact same rate I can get has to be available to the small-time business owner.”
Herndon says the mom-and-pop retailers have to become more competitive. They have to figure out how they can stand out and make themselves different from the retail chain.
Five years ago, in Tennessee, you could only have one liquor store. Now Kroger has 100 licenses, Wal-Mart has 150 licenses. The laws are changing favorably for the big institutions. It’s all about making the state’s budget increase to improve schools and roads.
Southern Glazer’s should cash out now, Herndon said. It’s going to be very lucrative for the wholesalers because they have the logistics and relationships in place. Wholesaler contracts are harder to separate than the most complex divorce.
In five years, Herndon sees a legislative battle. In 10 years, the playing field is set. In 15 years, everything is online, whether it’s through Wal-Mart. Wal-Mart’s going to figure out a way to compete with Amazon. The question is, do we get to the point where the drone drops the box into my front yard.
You can here the interview here: