In case you were hibernating or out of range of cell cover or WiFi during the last few days, you know that Amazon has made an offer to acquire Whole Foods.
This places the largest online merchant in direct competition with some of the largest retailers in the US – grocery stores – and continues Amazon’s move into “bricks and mortar” businesses.
On this blog Paul and I have been writing about the importance of innovation in platforms and ecosystems.
With this acquisition, Amazon is attempting to extend its platforms into the “real” world and link up its power in the online world with physical stores. Amazon understand a lot about attracting customers to its site, and does a reasonably good job at distribution. Amazon gains a trusted “bricks and mortar” company that is respected (or sneered at) by consumers. Whole Foods isn’t nicknamed “Whole Paycheck” for nothing, and there are some interesting dynamics between a company that isn’t concerned with profits and a company well-known for top of the line products and good customer service. But we aren’t here to evaluate the integration of these companies, as much as to identify an ecosystem gap.
Amazon and the last mile problem
The “last mile” problem was originally identified in utilities – water, electricity and landline telephones. That’s because origination and distribution were expensive but relatively easily solved, up until the “last mile”. That’s because the power, water and phone connections had to branch from central pipes to connect to each and every house. Large scale production and distribution sites aren’t hard to create, but connecting to each house is very expensive. This was true when high speed internet arrived – most communities still don’t have fiber to the curb and that’s why cities petition Google to be the next one that Google wires up. It is difficult and expensive to reach everyone in the last mile, even when the population is relatively dense (in cities and suburbs). It’s even more difficult when you get into largely rural areas.
But the benefit that the utilities have is that once the houses are connected, all that remains is maintenance of the lines or pipes. What Amazon and other online retailers face is getting products that customers order online to shoppers at home. To do that, they build large distribution centers and then rely on the Post Office, UPS, Fedex and others. Amazon created Amazon Prime to help people ignore or overcome shipping costs, and built large distribution centers in key cities to lower the delivery time for some items. But in a “want it now” world, getting a product from Amazon or any online retailer will take a few days.
Enter Whole Foods
Whole Foods may represent another step into Amazon’s entry to “bricks and mortar” and help it win a portion of the valuable retail and grocery business, but it isn’t going to solve the last mile problem. Whole Foods is primarily located in high end suburbs and large cities, places where Amazon already has plans for distribution centers. Moreover, unless Amazon reworks Whole Foods stores and distribution centers, these aren’t going to provide much more coverage or delivery capability. Amazon has its own reasons for wanting to compete with the likes of Kroger, Publix, Safeway, Giant and Wal-Mart, and Amazon has far less pressure to turn a profit. With the addition of Aldi and Lidl super-discounters from Europe, we could see a real price war in the States.
But we still face the last mile problem, and recall that others have attempted to solve this before. Many grocers have programs that allow shoppers to place orders on line and then pick up the orders at the store at the shoppers’ convenience. Walmart is experimenting with a new pod in its parking lot that allows a shopper to pick up groceries anytime. Further, back in the dot com boom Webvan and Peapod and others offered daily delivery of groceries to the home. Very little of that capability remains.
The missing ecosystem piece – last mile delivery
There’s a missing piece to this equation: the delivery to the home. Whether it’s groceries or clothing or electronics, Fedex, UPS and the Post Office run established, daily routes for general delivery and specialized delivery is too expensive. Promising a two hour delivery to the majority of the population will require another ecosystem player, a company with the flexibility to shift mobile delivery assets around, unscheduled and somewhat unsupervised.
Amazon and others are also making a critical mistake, in my view. That mistake is assuming that people will simply pop into a store, a Whole Foods or other site to pick up their purchases. This is something people are already trying to avoid. Paul and I have written before about the customer experience issues within a platform and ecosystem, and this is an important one. The customer experience doesn’t stop at the purchase of the goods, but at the consumption. Requiring a customer to make another trip, even a convenient trip, doesn’t add to customer experience.
If Amazon or other online retailers were really interested in solving the last mile problem, at least in the cities and suburbs, they’d go hunting for a potential partner that is now a wounded animal – Uber. Uber drivers could fill an important gap in unscheduled but near immediate delivery needs. On top of the regular deliveries by Fedex, UPS and the Post Office, Uber drivers could become a part of the “last mile” solution. The benefit of Uber is that unlike Fedex and UPS, the drivers use standard size cars for the most part that won’t interfere with traffic or cause as much congestion as the larger vans and trucks that the big shippers use. Plus Uber drivers are far more used to unscheduled “on demand” requests that shoppers may require.
This solution leaves out a significant portion of the population, however: the rural areas. 30-40% of the population in the US live in less dense locations and rural locations where Uber doesn’t exist and where companies like Whole Foods doesn’t compete. The last mile issue is heightened in the rural areas by the distance between houses and in some cases the roads and transportation links. Since few retailers exist in these small towns and rural areas, they appear to be at the mercy of WalMart – the largest retailer in many of these locations – or online retailers who can only reach them with the Post Office or Fedex or UPS. Quartz just published an article about the acquisition and noted that 34% of the population lives within 5 miles of a Whole Foods, which means that two-third doesn’t live within a convenient drive or delivery distance from Whole Foods. The last mile problem will remain acute in the ex-burbs and the rural areas, the places that were formed by ordering from Sears Roebuck originally. Strange how things come full circle.