Amazon’s Patience with Grocery Sales Growth Shows How Early Missteps are Hard to Overcome and Why a Grocery Spin Off Might be Coming

 

Amazon's attempt to break into the grocery sector, the company’s prolonged experimentation with various grocery models reveals a hard truth: early missteps in a highly competitive industry can be challenging to overcome, even for a corporate giant according to Steven Johnson Grocerant Guru® at Tacoma, WA based Foodservice Solutions®.

Today, Amazon’s food sector remains heavily reliant on cash from Amazon Web Services (AWS) to stay afloat, with its food sales focus constantly refined yet seemingly no closer to profitability. The food sector, requiring continuous cash infusions to test new models, has not provided the steady growth Amazon initially envisioned. As the pressure mounts to show consistent profitability across sectors, Amazon may need to consider spinning off its grocery ventures, particularly if they continue to strain overall profit margins.

Early Missteps and Prolonged Experimentation

Amazon’s grocery foray began over a decade ago, initially through AmazonFresh, which aimed to disrupt traditional grocery models with the convenience of doorstep delivery. However, scaling the grocery business presented more challenges than anticipated. Unlike its more successful retail segments, groceries are perishable, require complex logistics, and are extremely price-sensitive. These factors have historically hampered Amazon’s grocery growth, despite continuous adjustments. For instance, Amazon Fresh expanded slowly in the early 2010s, reaching just a handful of cities before losing momentum, underscoring the difficulties of scaling such a model profitably.

The acquisition of Whole Foods in 2017 marked a significant pivot, aimed at enhancing Amazon’s physical presence and adding a premium brand to its portfolio. But even Whole Foods hasn’t met expectations. Whole Foods’ high price points and limited store network have clashed with Amazon’s broader ambitions to serve all consumers, regardless of income. And while Whole Foods did bring Amazon into physical retail, it hasn’t translated into the grocery sales growth Amazon hoped for, highlighting the challenges of aligning a premium brand with mass-market ambitions.

AWS Funding Sustains Experimentation

Amazon’s grocery operations have largely been able to endure thanks to AWS, Amazon’s powerhouse cloud computing division, which has funded numerous ventures and experiments within the grocery sector. AWS accounts for the majority of Amazon’s operating profit, effectively subsidizing losses in the grocery division. Over time, AWS has grown faster and more profitable than any other division, fueling Amazon’s core e-commerce business and its grocery experiments alike.

This reliance on AWS cash flow, however, is a growing liability. As competitors strengthen their own cloud divisions and investor pressure mounts for diversified profit streams, Amazon’s grocery division looks increasingly vulnerable. Unlike AWS or Prime, which have both sustained high margins, grocery sales continue to deliver low margins due to intense competition, high operational costs, and low consumer loyalty. Today, Amazon’s grocery division is one of the few that has yet to prove it can be self-sustaining without AWS cash infusions.

Struggles to Define Its Grocery Focus

Despite these ongoing challenges, Amazon has demonstrated a strong commitment to refining its grocery strategies. This year, Amazon has introduced new Amazon Fresh stores, which have met mixed consumer reactions. The stores’ focus on cashier-less technology and streamlined shopping experience align with Amazon’s strengths, but they’ve been slow to gain traction in a market dominated by established giants like Walmart and Kroger. Furthermore, Amazon’s “Just Walk Out” technology, while innovative, has yet to make a notable impact on grocery profitability and consumer retention.

Additionally, Amazon is exploring a broader range of grocery delivery and subscription models, such as Prime Pantry, and continues to invest in fresh distribution centers. However, these models often overlap or compete with each other, diluting Amazon’s grocery brand and confusing consumers. This confusion has hindered consumer loyalty in an industry where loyalty and frequency are paramount. As Amazon continues to test and refine its grocery focus, it has yet to reach a model that resonates broadly enough with consumers to become profitable at scale.

The Cost of Grocery on Profit Margins

As Amazon faces increased pressure to achieve sustainable growth, its grocery division remains a low-margin sector that dampens the profitability of its overall retail business. Historically, the grocery industry operates with thin profit margins, typically in the range of 1-3%, with companies relying on high volume to drive profits. However, Amazon’s high-tech approach has raised costs in an industry that relies heavily on efficiency and low operational expenses. Additionally, consumer preferences in grocery shopping remain resistant to dramatic changes, with many consumers sticking to established brands and brick-and-mortar stores over Amazon’s various offerings.

In contrast, Amazon’s high-margin divisions like AWS and advertising continue to perform well, and both require less operational complexity and risk compared to groceries. Investors increasingly question whether groceries align with Amazon’s broader profit structure and are beginning to view the division as a drain on resources that could be deployed elsewhere. In a high-growth industry, there is growing concern that Amazon’s grocery sector may ultimately require a spin-off to free Amazon from the burden of sustaining a low-margin, high-complexity business.

The Case for Spinning Off Grocery

Given the continued reliance on AWS and advertising revenues to bolster Amazon’s bottom line, spinning off the grocery sector could be a pragmatic move for Amazon’s future. This strategy would allow Amazon to concentrate on its profitable divisions while giving the grocery segment the independence to innovate without the pressure of sustaining Amazon’s profit margins. In a historical context, companies such as McDonald’s have spun off real estate holdings to drive shareholder value, while corporations like eBay divested PayPal to let both businesses focus on growth. A similar approach could give Amazon’s grocery division the freedom to carve out its own niche while preserving AWS’s and retail’s profitability.

Think about this, while Amazon’s patience in refining its grocery strategy is commendable, its early missteps underscore the difficulty of breaking into a complex, low-margin industry. AWS’s ongoing financial support has allowed Amazon’s grocery sector to persist, but the sector remains an operational drain that limits Amazon’s potential. If Amazon hopes to satisfy growing investor demand for profitable growth, the grocery sector may be the first to go—allowing Amazon to return to its core strengths while freeing its grocery division to find its own path in a challenging market.

Who Might Want to Buy Amazon’s Grocery Business – And Why

Foodservice Solutions® Grocerant Guru® believes  that Amazon's grocery business, encompassing Amazon Fresh, Whole Foods, and other grocery-related ventures, represents an extensive infrastructure of physical stores, proprietary technology, and customer data. Despite Amazon’s extensive investment, the grocery division has struggled to achieve profitability, highlighting challenges in scaling a low-margin, high-complexity business. If Amazon were to divest its grocery sector, it would likely attract significant interest from companies or investment groups poised to leverage its established assets. Here are three potential buyers who may be well-positioned to acquire Amazon’s grocery business, along with insights into why they might take an interest.

1. Walmart: A Strategic Opportunity for Domination

Why Walmart Might Buy Amazon’s Grocery Division

As the largest grocery retailer in the U.S., Walmart has an inherent advantage in grocery, where it already holds around a 25% market share. Acquiring Amazon’s grocery assets could provide Walmart with a robust opportunity to reinforce its dominance and eliminate one of its biggest retail challengers. By acquiring Whole Foods, Walmart could broaden its presence in the premium grocery space, an area where it currently lags. Amazon Fresh’s locations and technology could also bolster Walmart’s own in-store technology initiatives, making Walmart the unrivaled leader in brick-and-mortar and online grocery retail.

Food Industry Facts

·         Walmart’s food and grocery sector accounts for over 55% of its annual revenue and is a major driver of in-store foot traffic.

·         Walmart already has a strong logistics infrastructure that could efficiently incorporate Amazon’s grocery distribution centers, making scaling easier than for many competitors.

What Walmart Stands to Gain

This acquisition would enable Walmart to integrate Amazon Fresh stores into its grocery network, enhancing its geographic reach, particularly in urban areas where Amazon Fresh has gained a foothold. The addition of Whole Foods would further diversify Walmart’s customer base, appealing to higher-income shoppers. The synergy between Walmart’s pricing power and Amazon’s grocery infrastructure could lead to an unparalleled competitive advantage in terms of reach, customer loyalty, and pricing.

2. Aldi: A Low-Cost Leader’s Ambition for Market Expansion

Why Aldi Might Buy Amazon’s Grocery Division

Aldi, known for its no-frills, low-cost grocery model, has been aggressively expanding in the U.S. in recent years, aiming to reach 2,500 stores by 2025. For Aldi, acquiring Amazon’s grocery assets would fast-track its expansion, giving it access to a network of premium stores and new urban markets where its presence is still limited. Aldi’s simplified supply chain and operational efficiency could be effectively applied to Amazon Fresh and even Whole Foods, allowing it to achieve profitability where Amazon has struggled.

Food Industry Facts

·         Aldi has grown 10% in grocery market share over the past five years, capitalizing on its low-cost, high-efficiency model, which appeals to cost-conscious consumers.

·         U.S. consumers have shown increasing favorability toward discount grocery chains, and Aldi’s model has been particularly successful in low-margin environments.

What Aldi Stands to Gain

By leveraging Amazon’s grocery infrastructure, Aldi could expand its reach in dense metropolitan areas, where real estate prices and logistics have typically posed barriers to entry. Aldi’s operational efficiency, coupled with Amazon’s assets, would create a streamlined grocery experience that could challenge conventional players like Kroger and Target. Additionally, Aldi could use Amazon’s tech innovations to refine its customer experience, perhaps adopting cashier-less technology to lower operational costs.

3. Apollo Global Management: A Hedge Fund’s Play for High-Value Assets

Why Apollo Might Buy Amazon’s Grocery Division

Apollo Global Management, one of the world’s largest private equity firms, has a history of acquiring distressed or undervalued assets and turning them profitable through restructuring. Amazon’s grocery business, while not distressed, fits the profile of an asset that could benefit from operational reorganization and increased efficiency. Private equity groups like Apollo often target businesses with potential for streamlining operations and cutting costs, making Amazon’s grocery business a prime candidate for such an overhaul.

Food Industry Facts

·         Apollo has acquired companies across a wide range of sectors, from Albertsons to Hostess Brands, showcasing its familiarity with both the grocery and consumer packaged goods industries.

·         The grocery industry’s market value is projected to grow 5% annually over the next decade, offering high-return potential for firms that can optimize operations and control costs effectively.

What Apollo Stands to Gain

Apollo could restructure Amazon’s grocery business, dividing it into smaller entities or consolidating it with other grocery assets to streamline operations and maximize profitability. Whole Foods, with its strong brand identity, could operate independently under Apollo’s management, with investments focused on sustainable growth in higher-income neighborhoods. Amazon Fresh, meanwhile, could either be sold to other grocery chains or transformed into a high-tech, low-cost model focused on efficiency and profitability.

Why a Sale Could Be Advantageous for Amazon

The grocery business has proven more complex and cost-intensive than Amazon likely anticipated. The grocery sector’s low margins are incompatible with Amazon’s broader financial model, which prioritizes high-growth, high-margin divisions like AWS and digital advertising. By selling its grocery business, Amazon could focus on its profitable segments while freeing itself from a sector that continues to demand cash flow without promising comparable returns.

Think about a little bit more, Amazon’s grocery assets represent a compelling opportunity for strategic buyers or investment groups interested in gaining market share, expanding operations, or investing in high-potential assets. Whether by a dominant player like Walmart, an efficient operator like Aldi, or a private equity giant like Apollo, acquiring Amazon’s grocery business could enable these entities to reshape the grocery market, making the sale a promising prospect for both Amazon and potential buyers.

For international corporate presentations, regional chain presentations, educational forums, or keynotes contact: Steven Johnson Grocerant Guru® at Tacoma, WA based Foodservice Solutions.  His extensive experience as a multi-unit restaurant operator, consultant, brand / product positioning expert, and public speaking will leave success clues for all. For more information visit GrocerantGuru.com, FoodserviceSolutions.US or call 1-253-759-7869