Reviving “The Milkman Model” for the Grocery Business

“Costco is the latest retailer to see dips in its stock on the news that Amazon’s buying Whole Foods for $13.7 billion.”

–Fortune.com

[Editor’s Note:  The views expressed here are solely those of Ross Kaplan, and do not represent Edina Realty, Berkshire Hathaway (“Berkshire”), or any other entity referenced. Edina Realty is a subsidiary of Berkshire.]

Count me amongst the skeptics when it comes to Amazon’s latest foray into the grocery business, via its just-closed purchase of Whole Foods.

That’s based on two observations:

One. Home-delivered groceries seems like a step back, not a step forward (the word “anachronism” comes to mind).

I can still remember, as a (very) small kid, milk deliveries on our front stoop.

Those went by the wayside decades ago, because it was cheaper and more efficient to bring customers to the food (and milk), than it was to bring the food to the customers.

It still is.

I’m hard-pressed to see how returning to that model — even with ubiquitous mobile app’s, high-tech storage coolers, etc. — delivers savings to consumers.

Which raises issue #2 . . .

Two. Low margins.

Yes, Amazon’s Jeff Bezos famously remarked that his “competitors’ margins are his opportunity.”

The catch?

The margins in the grocery business are already razor-thin — supposedly, around 1%.

That means that Bezos somehow plans to achieve previously unimagined economies of scale — and the monster market share that that would require — or alternatively, that Amazon is prepared to absorb sustained losses in its bid to drive out rival grocers.

Once upon a time, the latter tactic was called “predatory pricing,” and was proscribed by antitrust laws.

Meanwhile, any company that rang up sustained losses — at least a publicly traded one — was disciplined by its shareholders and Wall Street.

So far, however, anyone who thought Amazon would be constrained by such things has been decidedly wrong.

See also, “Does Amazon Violate U.S. Antitrust Law?”;  and “Parsing Amazon’s Q2 2017 Results (Pssst! Don’t Bother Calculating the P/E Ratio).”

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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