Amazon could help fix its troubled grocery business — by expanding it

Professor Dhruv Grewal says that Amazon needs another chain with a less expensive reputation than Whole Foods to gain traction with grocery.

• Amazon has spent years building its grocery business through Whole Foods and Amazon Fresh.
• But a professor who has studied Amazon says the company has one more potential acquisition to make.
• The retailer could acquire more supermarkets by looking at smaller grocery chains, he said.

Amazon's surprise 2017 acquisition of Whole Foods shook many traditional supermarkets, with concerns that its step into selling groceries in physical stores would make the Seattle-based giant dominant in food — in the same way it had cornered the book market, for example.

But Amazon, which has also spent four years opening Amazon Fresh stores and trying to build its grocery delivery business, hasn't been as disruptive to existing players like Walmart and Kroger as some feared it would be. Even though it has also revamped some aspects of its food business, including introducing a new Whole Foods store format as well as closing some Amazon Fresh stores, it's not the grocery Goliath that many had expected.

But while store revamps or even "downsizing" elements of businesses are part of every company's playbook, one professor who has studied the company has another suggestion: Amazon could give its grocery business a boost by actually making another acquisition in the space.

Dhruv Grewal, a professor of marketing at Babson College, told Business Insider that Whole Foods still has an expensive reputation, even if years of Amazon cutting prices at the grocery chain has made it more affordable.

Whole Foods customers are willing to pay more for food, especially high-quality ingredients, Grewal said. Amazon Prime customers, meanwhile, often look for value, he added.

"I'm not fully convinced that the Amazon Prime customer is the same as a Whole Foods customer," he said.

To better serve the middle, Amazon could consider acquiring a grocery chain that already exists to boost its store network, Grewal said.

Buying Kroger, or even a prominent regional chain like Publix, would likely be too big a financial burden even for Amazon, Grewal said. But Amazon could acquire a chain that claims a smaller part of the market.

"They could figure out: What is the number three chain in each state?" he said, adding that it could make sense for Amazon to buy a chain "that's not doing that great" but could benefit from an overhaul.

Besides selling groceries, Amazon could use the stores to fill pick-up and delivery orders, much as they already do with Amazon Fresh and Whole Foods.

"You put the customer data that they have, the delivery data behind it," he said. "You just need some level of distribution from stores."

An Amazon spokesperson declined to comment for this story.

Others have also said that acquiring more stores could give Amazon the boost it needs to succeed in the grocery business.

Last year, analysts at Bernstein suggested that Amazon could pick up some stores that Kroger and Albertsons will have to sell as part of their proposed merger.

By adding a bunch of pre-existing supermarkets quickly, the analysts wrote, Amazon could quickly expand its physical grocery footprint instead of opening stores itself — as it has done with Amazon Fresh.

Around the same time, Amazon CEO Andy Jassy said in his annual letter to shareholders that the company needed "a broader physical store footprint given that most of the grocery shopping still happens in physical venues."

This year, Jassy used his letter to highlight the potential for Amazon's same-day fulfillment centers to deliver perishable groceries, such as milk and eggs.

Do you work for Whole Foods, Amazon Fresh, or another part of Amazon's retail operations and have a story idea to share? Reach out to this reporter at abitter@businessinsider.com