The current posting shows a PESTEL analysis for the grocery market, applied to Amazon, Inc (NASDAQ: AMZN). As I stated in a different posting, the science behind writing a successful strategic plan is not industry-specific but may have industry flavors. PESTEL is one of the processes leading to the development or adjustment of a strategic plan. For the presentation’s simplicity, the posting contains the theories applied and the findings and does not show the lengthy technical analysis leading to conclusions. This presentation will be adequate for executives. To place the right perspective, the analysis approaches the decision of Amazon to enter the grocery market and the reaction taken by the industry at this news.
Thompson, Peteraf, Gamble, and Strickland (2016) described the analysis of the external environment of the company via the PESTEL method:
- Analysis of the political factors (P)
- Analysis of the economic conditions where the company performs (E)
- Analysis of the sociocultural methods (S)
- Analysis of the technological factors (T)
- Analysis of the environmental factors (E)
- Analysis of the legal and regulatory conditions (L).
Now, why in the world would Amazon choose to compete in the grocery market? The explanation is simple. The grocery market is probably the largest consumer market in the US, and Amazon just wanted a slice of it, even though it would get in competition with Walmart, Kroger, and Target, to name just a few of the top players in the U.S. grocery markets. But what makes them think they would have success in this market? PESTEL analysis gave us the answer to it. In the last decade or so, sociological conditions changed in the US, with many shoppers living in the suburbs and having higher education and life preferences, including a healthier lifestyle, not necessarily met by the market’s incumbents. Until a few years ago, Walmart looked like a warehouse. Kroger, Target, and the local brands, with a few notable exceptions of higher-end stores at Kroger (such as Hen House), competing based on price, and the competition in the industry was fierce. Though, the new shopper was savvy of new technologies and already used for years shopping online with Amazon. Why not shopping online groceries, though, if the potential competition cannot run an online operation properly?
Based on socio-cultural and technological factors changing, Amazon decided to enter the market. Not having the industry expertise or the required infrastructure, Amazon chose to invest in purchasing Whole Foods Market, a higher-end brand suited for the type of customer targeted by Amazon. The idea was to combine Amazon’s operational excellence with the location and the clientele of the stores, many of them already Amazon customers. Amazon managed to enter this market, started slashing the cost of its organic products, and got directly in completion with the likes of Kroger, already having a brand of organic food (Simple Truth). The company successfully penetrated the market, and it resists until today, combining online operation and store experience. Amazon became even more successful during the Coronavirus epidemic, when the demand for food delivered at the door increased considerably, offering the company a competitive advantage.
It is interesting to see the reaction of the incumbent of the market, which was furious. Walmart vowed to slash its grocery prices, betting on a huge supply chain, and adjusted its strategic plan accordingly. Walmart started at a disadvantage, not having an organic product line, but did not lose any base customers, lured mainly by the low price and low frills of the stores. Walmart increased its online footprint preventively to prevent future interference by Amazon, preserving its competitive advantage.
Kroger, though, had a totally different approach, being in direct competition with the Whole Foods Market via its Simple Truth brand. Besides revving up its online operation by offering online ordering and curbside pick up of groceries for free, Kroger started a campaign of rearranging its stores with the end goal of retaining and attracting higher-end clientele by including medical clinics, food court, and bars serving alcohol to its store offering. Kroger started partnering with local farmers as well, boosting the local pride.
The PESTEL analysis for the grocery market shows that Amazon’s entering the market rearranged the market, with the customer being the main winner. The pricing of organic food became more reasonable with the new entrant in the market, but not everyone was a winner in the new situation. The victims are local companies offering organic food in areas where Whole Foods Market stores operate, unable to compete in the new circumstance.
Dr. George Gafencu, DBA, PMP, DTM
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References to PESTEL Analysis for the Grocery Market
Bensinger, G., & Stevens, L. (2016, Oct 12). Amazon to expand grocery business with new convenience stores; retailer to build brick-and-mortar locations and offer curbside pickup for online orders. Wall Street Journal (Online) Retrieved from https://www.wsj.com.
Clark, T., & Garciga, C. (2016). Recent inflation trends. Economic Trends (07482922), pp. 5-11.
Fry’s. (2017a, May). Store details. Retrieved from https://www.frysfood.com/stores/details/660/00698
Fry’s. (2017b, May). Discover fresh. Retrieved from http://discoverfresh.frysfood.com/
Haddon, H., & Nassauer, S. (2016, Oct 12). Wal-Mart, Kroger strive to counter Amazon’s grocery challenge; traditional retailers are rapidly expanding their online grocery services, particularly curbside delivery services known as ‘click and collect.’ Wall Street Journal (Online) Retrieved from https://www.wsj.com.
Haddon, H. (2017, Mar 09). Grocery heavyweights expand delivery services; Meijer and Shipt started testing deliveries in Michigan; Wal-Mart and Kroger plan to expand curbside pickups. Wall Street Journal (Online) Retrieved from https://www.wsj.com.
Haddon, H., & Nassauer, S. (2017, Apr 20). Wal-Mart brings price war to groceries, boosting pressure on big food retailers; the world’s biggest retailer is spending to beat competitors such as Amazon.com. Wall Street Journal (Online) Retrieved from https://www.wsj.com.
Kaplan, R. S., & Mikes, A. (2012). Managing risks: A new framework. Harvard Business Review, 90(6), pp. 48-60.
Kroger Co. (2017, May). Grocery retail. Retrieved from http://www.thekrogerco.com/about-kroger/operations/grocery-retail
MarketLine. (2017, May). Kroger Co.: SWOT analysis. Retrieved from Business Source Premier database.
Stevens, L., & Safdar, K. (2016, Dec 06). Amazon working on several grocery-store formats, could open more than 2,000 locations; Amazon go is just one of at least three formats the online retailer is exploring, sources say. Wall Street Journal (Online) Retrieved from https://www.wsj.com.
Thompson, A., Peteraf, M., Gamble, J., & Strickland, A.J. (2016). Crafting & executing strategy [ebook]. New York, NY: The McGraw-Hill Companies.
Wilkie, D. C., Johnson, L. W., & White, L. (2015). Overcoming late entry: The importance of entry position, inferences and market leadership. Journal of Marketing Management, 31(3-4), pp. 409-429. doi:10.1080/0267257X.2014.981567