October 6, 2022

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Amazon’s Physical-Stores Business Struggles to Grow

  • Amazon’s physical-store openings have significantly fallen behind schedule.
  • Costs, dysfunctional team culture, and tension with Whole Foods partly explain the expansion delay.
  • The team wants to more aggressively license the cashierless technology to third-party retailers.

In summer 2020, as the coronavirus pandemic swept through the world, Dave Clark, Amazon’s retail CEO, told his team to scale back its Fresh grocery-store openings.

Foot traffic and sales at Amazon’s physical stores were sharply declining, and the looming second wave of COVID-19 made Clark wary of an aggressive expansion plan. He asked for a “more conservative” three-year road map, taking into account a “relatively pessimistic scenario,” according to internal documents obtained by Insider. Amazon cut the store projection by 30%.

But even with the revision, Amazon was still bullish for the long term. For the ensuing two years, Amazon forecast a significant rebound, projecting 54 Fresh stores in the US by 2021 and a whopping 280 Fresh stores by 2022, internal documents show.

Both of those estimates turned out to be woefully off. Amazon has just 27 Fresh stores open in the US, or less than 10% of the projections it made in 2020 for this year.

Amazon’s struggles to reach its Fresh store-expansion goals is emblematic of the challenges it’s faced in the physical-retail arena. While Amazon has perfected the art of e-commerce efficiency, the company is facing a much tougher reality in the brick-and-mortar space, driven by the high cost of the stores, a dysfunctional internal culture, and tension with Whole Foods, according to current and former employees and internal documents. These people spoke on the condition of anonymity for fear of retaliation from Amazon. Their identities are known to Insider.

And as Amazon nears the fifth anniversary of its Whole Foods acquisition, some employees are questioning whether the company will ever excel in the offline shopping space.

“We had a ton of projections that were way too rosy,” one of the people said. “They’re figuring it out as they go.”

Amazon’s physical-store sales, which include Whole Foods, have remained stagnant, hovering around $17 billion since 2018. Even after the 2017 Whole Foods acquisition, Amazon’s grocery share hasn’t improved much. As of March, Amazon and Whole Foods accounted for just 1.6% and 1.3% of the US grocery market, respectively, falling way behind Walmart’s 21.3% share and Kroger’s 10.2%, according to the research firm Numerator. Both Walmart and Kroger grew their shares since late last year, while Amazon and Whole Foods largely remained flat.

For years, Amazon pursued a scattershot approach in physical stores, having opened an array of store formats, from groceries to bookstores, and, recently, an apparel store. But last month, Amazon abruptly shut down dozens of bookstores, pop-up stores, and four-star stores, signaling a change in direction.

Now, Amazon’s brick-and-mortar strategy mainly centers around its Fresh grocery stores and “Just Walk Out” technology, an in-store checkout system that allows customers to automatically pay for things without having to go through a cashier lane. Amazon wants all of its grocery stores to be JWO-enabled, as well as a growing number of Whole Foods stores, under a previously unreported project code-named “Dorothy.” It also wants to more broadly sell the JWO technology to other retailers, as seen in a deal last week to use it at the home stadium of the MLB’s Houston Astros.

At an internal all-hands meeting earlier this week, Amazon’s senior vice president of physical stores, Tony Hoggett, reaffirmed the company’s commitment to physical stores, despite the recent shuttering of bookstores and four-star stores.

“It’s difficult to close businesses down,” Hoggett told employees, according to a recording of the meeting reviewed by Insider. “But it’s important to look at this in the long term. We’re absolutely committed to the physical-store business.”

Amazon’s spokesperson didn’t respond to requests for comment.

‘Reducing Just Walk Out tech costs’

It’s not just the Fresh grocery stores that have fallen behind schedule. Amazon Go, the company’s small, cashierless convenience stores, are also behind internal projections, and other initiatives, like its UK expansion and joint cafés with Starbucks, are equally moving slower than anticipated, Insider previously reported.

Part of the scaling issue has to do with the high cost of cashierless technology.

In 2020, Amazon estimated each Fresh store would cost $3.92 million in Just Walk Out technology and construction costs, according to internal documents. The company is hoping that cost will drop to $1.44 million by 2023, still a huge amount, Insider previously reported. Meanwhile, each of the smaller Amazon Go stores cost more than $4 million in operating expenses alone in 2017, though those costs have dropped significantly in recent years, Insider previously reported.

Under the code name “Grace,” Amazon wants to significantly expand Fresh cashierless stores and retrofit all existing stores with JWO as well, Insider previously reported. The company is also rolling it out to Whole Foods stores under a project code-named “Dorothy,” documents show. Those costs will add pressure to the economics of its grocery stores, an industry already known for thin profit margins. 

For years, Amazon’s physical-stores team faced pressure to reduce the store costs and find a path to profitability, the people Insider spoke with said. Last year’s planning document, for example, says Amazon’s vision is “to further reduce annualized JWO costs for all sizes.” In 2020, the physical-stores team wrote that JWO costs “continue to be a challenge.” Cost cuts were also listed as one of the vice president’s goals for the division.

“To meet profitability targets for physical retail businesses, we need to continue reducing Just Walk Out tech costs,” the document says.

One person described last year’s planning session as “the most stressful time I’ve been at Amazon” because of the pressure to cut costs and generate additional profits to make physical stores self-sufficient. To diversify its physical-stores revenue channels, Amazon has embarked on several projects, including in-store advertising, a new point-of-sale system that can be licensed to other retailers, and a smart refrigerator that uses some of the JWO technology, Insider previously reported. It also considered selling pharmacy products and lottery tickets and, at one point, mulled selling gas through a partnership with BP.

“In terms of pressure coming from leadership, frugality will definitely be an objective of the program,” one of the documents says.

Amazon Fresh store London, UK



Grace Dean/Insider


‘Schedule chicken’

The cost concerns were partly because of the physical-stores team’s dysfunctional culture, the people Insider spoke with said. 

For example, until last year, the team didn’t have a formal budgeting process, which led to a lot of confusion and inaccurate numbers, according to these people and documents obtained by Insider. Employees repeatedly brought up concerns of the manual budgeting process, which mostly relied on disparate Excel spreadsheets instead of automated software, the documents show. In December 2020, the team asked for “directional alignment” with the company’s leadership on its budgeting strategy, saying it could hamper expansion plans. 

It took roughly 30 hours, one of the documents says, to gather and research the budget details of each store, which involved contacting 10 teams to get all the needed data. The team had “no established process to create detailed store level budgets,” one of the documents says.

“Today our process of creating budgets and measuring against actuals is very manual and is not scalable with the projected growth of store builds,” it adds.

COVID-19-related problems have also deepened the problem. Multiple people said supply-chain issues, like shipment delays of certain store components, were rampant amid the pandemic. Labor shortages for in-store personnel were also a top concern last year, one person said. The first Fresh store in the UK was initially scheduled for August 2020, but because of these issues, it wasn’t able to launch until March 2021, another person said.

Amazon’s Fresh grocery team, which works closely with the physical-stores team, has also seen growing dissent from its workforce. In an internal all-hands meeting last year, employees slammed the Fresh team’s work culture and accused it of lacking innovation, calling its service “subpar” compared with some of the smaller startups it competes with. 

“The key concern is that our org has become considerably bureaucratic,” an employee said during the all-hands, Insider previously reported. “And there’s significant focus on perception management rather than actual output.”

Stephenie Landry, Amazon’s vice president of grocery, disagreed during the meeting, saying she didn’t think Amazon’s grocery service was inferior to others but didn’t add specifics.

Amazon physical stores VP Dilip Kumar

Dilip Kumar, Amazon’s vice president of physical stores.

AP Photo/Ted S. Warren


The physical-stores team also experienced some bizarre, unforeseeable delays.

In 2020, it found that some of the key hardware components used in its cashierless stores were stuck in a warehouse in Hong Kong. The supplier, it turned out, was under police custody on “alleged smuggling charges,” according to an internal document. Amazon’s physical-stores vice president, Dilip Kumar, quickly sent an email to his team, chastising them for failing to prepare for the unforeseen event.

“Why didn’t we order these many months ago to avoid last minute issues? I don’t like playing schedule chicken,” Kumar said in one of the emails seen by Insider.

Tension with Whole Foods

The Whole Foods acquisition was supposed to supercharge Amazon’s growth in physical stores. But Amazon’s tie-in efforts with Whole Foods haven’t been the easiest, according to people familiar with the matter. 

Whole Foods was overly sensitive about its brand image. For example, in-store promotions and advertising were a source of contention because Whole Foods had a reputation for being “anti-monetization,” one of the people said. The Whole Foods mobile app didn’t feature any ads until early 2020 because the grocer was vehemently against it.

On the flip side, Whole Foods employees grew frustrated with Amazon’s growing interference. Another person said one of Amazon’s first moves post-acquisition was to pare down Whole Foods’ in-store products and move them online to Amazon’s marketplace. That raised frustration over revenue recognition at Whole Foods, as Amazon started counting the sales of those products as their own online revenue rather than Whole Foods revenue, this person said.

Prime membership revenue also caused disgruntlement. Amazon generates billions of dollars from its over 200 million Prime members each year, but none of that trickled down to Whole Foods, people said. That was part of the reason Whole Foods added a $10 delivery fee last year, one of the people said. Prime members received free Whole Foods deliveries before the change.

Whole Foods Just Walk Out Glover Park



Courtesy of Whole Foods Market


This tension may explain why Whole Foods was slow to implement Amazon’s JWO cashierless technology in its stores, these people said. Discussions for adding cashierless tech to Whole Foods stores started as early as 2020, documents show, and JWO was expected to roll out in the second quarter of 2021. But concerns over the “in-store experience” took a long time to settle because of topics such as store space and security requirements, as well as product selection, according to internal documents. 

Internal projections had hoped to have five Whole Foods stores with JWO in 2021 and another five in 2022. Whole Foods opened its first cashierless store earlier this year in the Washington, DC, area.

“They are very precious about that Whole Foods brand,” one of the people said.

‘It’s a land grab’

When Amazon acquired Whole Foods for $13.7 billion in 2017, its competing grocery retailers saw their stock prices crater. But investors no longer seem too worried about Amazon eating its competitors’ lunch. Target’s stock, for example, is up more than 350% since the Whole Foods acquisition, while both Walmart and Kroger more than doubled their share prices.

Amazon’s physical-stores unit now wants to double down on its Fresh grocery stores and JWO cashierless technology, with a heavier focus on licensing it to third-party retailers as a software package, called “Just Walk Out as a Service,” according to internal documents and people familiar with the matter. It also wants to sell other in-store technologies, like the Amazon One palm-reading payment system and its smart shopping cart called the Dash Cart to retailers, though that service has seen usage drop in recent years, Insider previously reported.

“Key focus areas in 2022 are continuing to scale JWO for large format (35K+ square feet (SF)) grocery Amazon Fresh Stores (AFS), innovating JWO for small format (<3K SF in front of house (FOH)) stores to meet lower cost targets, and further commercializing and launching Just Walk Out as a Service (JWOS), Dash Cart and Amazon One to scale these technologies across hundreds of 3P retailers and store locations,” one planning document for this year said.

Part of this shift was driven by the pandemic. The team saw a huge spike in global demand for its JWO technology as more people embraced contactless shopping. In the early part of the pandemic, Amazon had expanded its JWO candidate countries from 23 to 81 and held discussions with some of the largest retailers in the world for licensing deals. Those brands included Morrisons in the UK, Casino in France, Lawson in Japan, Woolworths in Australia, and E-mart in South Korea, internal documents show. But it took until late last year for Amazon to announce its first international third-party JWO customer, the UK grocer Sainsbury’s.

“It’s a land grab — COVID has exacerbated the demand for cashierless retail technologies, solutions are popping up all over the world and several large players have announced partnerships with competitors,” one of the documents says.

Selling JWO to other retailers is important for Amazon because it’s more profitable than running stores. But some of the retailers, especially those in the US, have been reluctant to use Amazon’s technology in their stores because they don’t want to partner with their largest competitor — in what would essentially mean handing Amazon customer data — one of the people Insider spoke with said.

“US retailers, in my opinion, view Amazon as bad-faith competition,” this person said.

Jeff Bezos holds up hands and raises eyebrows while speaking on stage



MARK RALSTON/AFP via Getty Images


Amazon’s leadership, meanwhile, continues to be vocal about its support for the physical-stores business.

In November, during an internal all-hands meeting, CEO Andy Jassy was asked to share the “innovations” he’s most excited about at Amazon. Jassy called out the grocery and JWO business, alongside the healthcare unit, saying it “radically changes” the shopping experience.

“I think the way that we’re trying to reinvent the grocery-shopping experience and physical stores is very exciting,” Jassy said, according to a recording of the meeting obtained by Insider. “That is not a simple endeavor.”

Amazon’s founder, Jeff Bezos, who had previously opposed ideas surrounding brick-and-mortar stores, has recently turned into one of the business’ biggest advocates, people said. Partly inspired by JWO’s potential, Bezos at one point expressed his desire to have Amazon establish a physical-stores footprint rivaling that of Starbucks, which has more than 15,000 locations in the US alone, a person familiar with those talks said.

Amazon also poached Hoggett, a 30-year veteran of the British supermarket giant Tesco, last year and made him its senior vice president of physical stores. Hoggett’s first major move at Amazon was to shutter the bookstores and four-star stores, which surprised many employees. Those stores, however, were “always playing second fiddle” to the JWO stores and garnered very little attention from the core physical-stores leadership team, one person directly familiar with the team said.

Wall Street seems equally upbeat about Amazon’s potential in the physical-stores space. In a note published last month, the financial firm Evercore mentioned Amazon’s grocery and JWO business as part of the company’s “four underappreciated elements.” 

“A lot of grocery shopping happens offline and we believe that the Just Walk Out technology will enhance user experience, drive foot traffic, enable Amazon to gain market share, and drive customer loyalty,” the note said.

But frequent delays and missed benchmarks have nettled employees. Internally, Amazon’s patience has been wearing thin for a while.

Bezos showed a side of his frustration during an internal all-hands meeting in 2019. At the event, an employee asked Steve Kessel, the physical-stores boss at the time, when the “future of retail” was coming. As Kessel went onstage to give his response — “innovations happen by continued focus on smaller innovations over time,” he said — Bezos briefly stopped him, with a cryptic smile.

“It’s a good question. I think they just want you to hurry, Steve,” Bezos said, according to a recording of the meeting reviewed by Insider. 

Kessel left Amazon later that year.


Do you work at Amazon? Got a tip? Contact reporter Eugene Kim via the encrypted messaging apps Signal or Telegram (+1-650-942-3061) or email ([email protected]).

https://www.businessinsider.com/amazons-physical-stores-business-struggles-to-grow-2022-4