Bloomberg Intelligence Senior E-Commerce & Athleisure Analyst Poonam Goyal joins the Live show to discuss Amazon's plans to expand its grocery store footprint.
RACHELLE AKUFFO: Amazon CEO Andy Jassy committed to expanding the company's physical grocery footprint in his shareholder letter today. Jassy writing, "While we're pleased with the size and growth of our grocery business, we aspire to serve more of our customers' grocery needs than we do today. To do so, we need a broader physical store footprint, given that most of the grocery shopping still happens in physical venues."
Joining us now is Poonam Goya, Bloomberg Intelligence senior e-commerce and athleisure analyst. So Poonam, I first want to read more of what Jassy wrote in that shareholder letter for you. He said, "Whole Foods is on an encouraging path, but to have a larger impact on physical grocery, we must find a mass grocery format that we believe is worth expanding broadly. Amazon Fresh is the brand we've been experimenting with for a few years, and we're working hard to identify and build the right mass grocery format for Amazon scale." Now, from what he's saying, it seems like Whole Foods might not be worth expanding further. At the same time, Amazon Fresh doesn't seem to be taking off. So what is the play and the solution here, then, for Amazon?
POONAM GOYA: You know, it could be a combination of both, or it could be just expanding their grocery footprint. If you think about the scale that they have today with grocery, it's tiny compared to other grocers, looking at Kroger as an example. So 500 Whole Foods stores or a little over 500 isn't enough, right? People go out to the grocery store three to four times a week, as he said. And the grocery is a $800 billion industry. So, really big, and Amazon owns a tiny, tiny piece of it.
How do they expand those stores? There's really three ways. You grow more organically, you acquire, or you partner. Those are the three options they have at hand. If they grow it organically, Whole Foods or Amazon Fresh, which is a younger concept of theirs that they've invented, is the way to go, or they need to create a new brand for grocery, which is, I think, a harder feat to accomplish because that would need now recognition and marketing.
The other is to acquire. Would Amazon acquire another grocer? Would they be allowed to acquire another grocery? Those are questions that I think we would need to ask if that's the route that they choose.
DAVE BRIGGS: Yeah, fairly certain the Biden administration isn't exactly in the move to approve transactions like that at the moment. It's interesting. I have an Amazon Fresh that was supposed to open in my tiny little neighborhood. It's been sitting untouched. They poured millions into this building, and it's been untouched for more than a year. Are they opening new locations of Amazon Fresh? And what's your best bet? What do you think they'll do in this space?
POONAM GOYA: They are opening locations, but at a very, very slow pace to the extent that you just talked about. I think the problem really here is not that they can't open more stores. It's, I think they really need expertise to open these grocery stores. Grocery is a very different business and an in-store business, right? Amazon is an online retailer. They don't have the expertise that you need to open grocery at scale.
So the question that what I would be looking for is for them to hire that expertise, hire someone who knows the grocery business inside out and knows how to build it with scale. You have to have location, right? You need to know where to open the stores. You need to be able to open stores fast. That's not something that they do. They had smaller stores. They had bookstores that they closed down and Amazon Go stores. They're very small store footprints, right? To open a grocery store, you need a larger footprint. You need strip centers that are attractive. And I think they just need the expertise in that area to really scale this further if they want to.
RACHELLE AKUFFO: And this is coming at a time when consumers are being a lot more careful about their spending, a lot more strategic. So then as we're sort of waiting for this US retail sales data to come out, what are your expectations there?
POONAM GOYA: So retail sales are likely to slow just because the consumer is feeling a little more pressured than it was in the past. We've seen that in card data that we tracked through Pfizer. We were expecting a slowdown across the board. I think they'll still, keeping on grocery. Grocery is the one area that people will still spend on. They'll trade down to lower price points when they feel a pinch, but we do think that the consumer is going to the grocery store. They're also traveling, right?
So even though we hear all this about a slowing consumer environment, potentially a recession, the consumer is out traveling. Airline fares, restaurant sales, they're all up, and they're flourishing still. So I'd say the consumer is choosing where to spend, rather than completely shutting down on spending.
DAVE BRIGGS: And connecting that to what Andy Jassy said in their shareholder letter, quote, "we see a lot of trading down. People are trying to save money wherever they can. They are very deal conscious." Is that the type of sentiment that you think we'll hear throughout this quarter when it comes to retail?
POONAM GOYA: Yeah, it's either going to be deals, or it's going to be unique product, right? So if you're going to sell me something that I can get anywhere, then I want a deal on it. And I think we'll be hearing more of that all year. Now, if you have a product that speaks to the customer in a unique way and is truly differentiated, then the consumer will pay up for that.
RACHELLE AKUFFO: And we've been talking a lot about cloud services as well when it comes to Amazon. What are your expectations there? Because, obviously, Jassy setting the scene there, setting expectations for what we can expect with AWS.
POONAM GOYA: Well, it's not surprising. AWS slowed in the last few quarters, and we're expecting muted results in AWS again. But all of that is really near-term choppiness, weakness, as you'd like to call it. Longer term, we agree with him. There's plenty of runway for AWS. It's about 40% of the infrastructure cloud market, and on their software side, even smaller. So really a lot of opportunity, especially as they embed AI into cloud even more. So we think long-term, 10 years from now, cloud will get even bigger in the next 12 months. There probably is some concern for cloud to continue because businesses are pulling back on spending amid uncertainty on the macroeconomic environment.
DAVE BRIGGS: It should be an interesting quarter. Poonam Goya, thanks so much. Appreciate that.