Pardon the Disruption is a column that looks at the forces shaping food retail.
Last April, in the middle of pandemic pandemonium, Amazon began leasing a large distribution center in Central Florida.
The news didn’t generate much buzz beyond local media, since empty shelves and toilet paper shortages dominated business headlines at the time, and because news of Amazon further building out its sprawling distribution network is about as eye-catching now as a retailer saying they’re adding pickup service or plant-based burgers.
But there were signs the Orlando site was no ordinary supply chain pickup. The building is massive at 1.1 million square feet. It formerly belonged to Winn-Dixie and is outfitted with multiple temperature zones to support storage of ambient, chilled and frozen products, according to supply chain consultant Marc Wulfraat, who tracks grocery distribution facilities. Situated in the heart of Central Florida, it provides a supply line to markets in one of the most dynamic and competitive grocery battlegrounds in the country — a state where Kroger just planted its own massive online distribution center in nearby Groveland.
As Amazon builds out its Fresh grocery chain, questions have swirled over its potential size and the company’s commitment to grocery — an industry where it has taken plodding, tentative steps up until recently. Despite the ineffectiveness of its online grocery efforts and failure so far to inject life back into Whole Foods, there’s a sense that these efforts are just the tip of the iceberg for a company with near limitless capital and institutional patience. Beneath the waves, Amazon seems to be marshaling a gigantic push into the industry.
A huge distribution center dedicated to groceries would indicate a large buildout of stores coming to the Southeast, and likely across the country, as well. Recent reporting from Bloomberg has tabbed dozens of Fresh stores to come, but a large distribution network would signal hundreds more stores are in the works. It would also underscore that Amazon is committed to becoming as ruthlessly efficient in grocery as it is in other retail industries.
Wulfraat, who heads up MWPVL International and probably follows Amazon’s distribution network closer than anyone else outside the company, says his research definitively shows the Florida facility will become a grocery distribution warehouse for Amazon. He declined to specify his methods. Asked to confirm that the Florida site will be used for grocery distribution and what its grocery supply chain strategy involves, an Amazon spokesperson would only say, "We don’t comment on rumors or speculation."
If Amazon fires up one large-scale grocery distribution facility, you can bet more are probably coming. Wulfraat said he expects Amazon to build, lease or buy between seven and 10 facilities ranging from several hundred thousand to just over a million square feet over the next few years. These facilities would target key markets like Chicago, Los Angeles, New York and Seattle. He estimates that such a push would cost Amazon between $1.5 billion and $2 billion.
Amazon currently owns distribution facilities for its Fresh and Prime Now brands, along with Whole Foods. But Wulfraat characterized these as woefully inadequate to support a broad-scale push for its Fresh stores. The e-tailer also has deals with distributors SpartanNash and United Natural Foods, Inc. (UNFI). However, Wulfraat called these “bridge strategies” to tide the company over until it has its own facilities up and running.
"[Amazon] needs to have greater control over the supply chain. And to do that they need more volume, more regional density," he said.
Wulfraat expects Amazon will use its own grocery DCs to supply core grocery products for Fresh and possibly Whole Foods stores, leaving distributors to fill in specialty products around the margins. UNFI, which counts Whole Foods as its main customer, seems to have anticipated this future by acquiring SuperValu and building out its retail client base. Whole Foods recently re-upped its contract with UNFI until 2027 — a contract extension of just two years atop its existing deal.
The SpartanNash partnership, meanwhile, which grants Amazon the ability to take a 15% stake in the company, is a bit of a head-scratcher, Wulfraat said, since its distribution facilities are mostly located in low-density areas that don't overlap with Whole Foods and projected Amazon Fresh markets. SpartanNash's military distribution facilities are too specialized to supply Amazon's stores, he said. The move could indicate Amazon's move into low-density markets or another grocery-related project entirely.
“Why would they do that? It’s still a mystery to me,” Wulfraat said.
A long-anticipated move
This is all speculation on Wulfraat’s part, but I don’t think it’s much of a stretch. Amazon owns distribution across many of its retail categories, so it only makes sense that it would do the same in a grocery category it increasingly covets. According to Brad Stone’s “Amazon Unbound,” which chronicles the company’s evolution over the past several years, the e-tailer has come around to grocery sales in recent years as a way to boost the value of its Prime membership program and glean valuable data from grocery’s frequent, recurring purchases.
Owning distribution facilities cuts out middleman costs and gives companies more control over their supply chain. But building out a large-scale supply network is incredibly complex and costly, Wulfraat said, which is why grocers have sold off more distribution centers in recent years than they’ve acquired in order to quickly generate cash in the low-margin, brutally competitive industry. Exceptions include some of the largest chains in the industry, including Walmart and Kroger. Ahold Delhaize and Dollar General are now shifting into self-distribution as they seek to leverage their size and capital prowess.
For the company with the wherewithal and resources to build out large-scale distribution in grocery, the opportunity can pay enormous dividends, said Wulfraat. And that’s certainly Amazon, whose capital spending totaled $34 billion last year. Wulfraat said he’s anticipated Amazon’s move into self-distribution ever since the company acquired Whole Foods in 2017.
Moving into self-distribution would herald Amazon’s arrival as a national grocery player. However, building out its supply network will take time. Amazon has loads of retail distribution and technology expertise in-house, Wulfraat said, but not much that’s grocery-specific. Turning a profit on perishable goods requires deep industry knowledge, technology, trucking routes and partnerships that Amazon still needs to build out, he said.
"It's not an overnight exercise," Wulfraat noted. "This is kind of where Walmart found themselves when they first got started building out their first food stores back in the early '90s."
For now, Amazon is focused on establishing the Fresh brand and building out stores, of which there are now more than a dozen. The stores don't have much "wow" factor beyond the Dash Cart, its patented smart cart for small shops, with conventional store layouts selling a familiar assortment of mainstream brands along with a smattering of local ones. Competing grocers shouldn't get complacent, though, because there's more innovation on the way, including smaller boxes and checkout-free builds, according to reports.
Bill Bishop, chief architect with Brick Meets Click, told me recently that Amazon has fashioned omnichannel stores built to outlast the mounting price battles, bankruptcies and consolidation that promise to further unsettle the industry in the years ahead.
Amazon also has the consumer data and built-in loyalty to fuel the enterprise, notes Peter van Stolk, CEO of Freshlocal Solutions, which operates online and physical grocery stores in Canada along with an e-commerce service that’s worked with grocers like Carrefour and Walmart Canada.
"Who's got all the customers? Who's got all the data? Amazon. And they have so many more resources than other grocers, like Prime and [Amazon Web Services]," he said.
Aside from lofty ambitions, Amazon’s move into self-distribution also underscores the increasing power that large players hold in grocery. As industry disruption continues to play out across stores and e-commerce, the companies with an advantage will be those able to invest in leading-edge technology, cost-cutting and expansion. Independent retailers and regional players will be stuck playing catch-up.
An outlier in the industry given its massive capital resources, look for Amazon to take the reins on distribution in the coming years as it moves upstream and further girds itself for the grocery battles ahead.