Amazon.com as a Foodservice Titan: Not So Fast

by: Bob Goldin | Barry Friends

February 4, 2019

We have the utmost respect for Amazon.com (Amazon). Perhaps more than any company in the recent past, it has and is fundamentally reshaping how business is conducted. No one can ignore their influence or underestimate their effectiveness and innovativeness. They have built “best in class” systems and distribution infrastructure. They clearly have significant untapped potential in many huge verticals, including $6 trillion wholesale distribution market.

We estimate that Amazon currently does $1.5 – 2.5 billion in foodservice sales, which would rank them among the Top 10 broadliners. They have reached that impressive volume level with no focused effort – their success has been primarily due to the convenience and variety they offer. One can convincingly argue that they are in the embryonic stage of development in foodservice.

Most industry analysts and participants expect Amazon to dramatically expand their presence in foodservice and believe they will be a true “disruptor.” While they certainly have a lot of headroom and will grow in foodservice, we believe Amazon’s potential will be more modest than many expect for a variety of reasons:

65 – 70% of operator purchases are perishables (refrigerated or frozen foods), which are extremely difficult and costly to handle (as Amazon is learning from its Fresh initiative). Established distributors, including produce houses, dairies, seafood specialists, etc. appear to be far better positioned to handle this volume. Under any scenario, perishables, especially refrigerated, will be a huge challenge for Amazon.
Foodservice is a (too) SKU intensive business. Broadline distributors regularly inventory 8,000 – 12,000 SKUs (the vast majority of which are “moving”) and have access to another 5,000 or more. Within virtually every category there are multiple brands (including regional/local brands, private labels and chain custom products) and price tiers. While Amazon is certainly the master of massive assortment and long tails, they would definitely need to add 100,000+ SKUs. They may decide the added burden and complexity is counter to their business interests and overall efficiencies.
Major (Top 100) chains account for 30% of industry volume. These chains have unique service and inventory requirements and are very well-served by their existing distributors. We think it is highly unlikely that Amazon would be able to penetrate this segment to any significant extent. One could make a similar case for a few other niche segments like c-stores.
In most markets, operators have a vast number of quality suppliers available to them, including major and local market broadliners, specialty distributors of all types, cash-n-carry and club stores, and manufacturer direct. Our research and anecdotal evidence strongly suggest that operators are highly satisfied with the options available to them. Perhaps more importantly, they are also highly satisfied with the service they receive from their distributors. In particular, as we have repeatedly noted, operators value their relationship with distributor sales reps (DSRs). This adds to Amazon’s challenge of establishing penetration. Yes, they could buy their way into the market, but we do not see that as a likely development.
As the Amazon “threat” has been evident for quite some time, distributors have redoubled their efforts to “cocoon” their key customers through a combination of (even better) service, greater transparency, technology enhancements and special services. And other companies like WebstaurantStore., Costco.com and Walmart/Jet.com are already major third-party online distributors.
Established distributors like Sysco, US Foods and the like are extremely formidable, well-financed, effective and aggressive. They will not cede any share without a “big fight.”
Finally, Amazon may determine that the foodservice market available to them is unattractive relative to other B2C and B2B opportunities.

While we do not expect “hyper-growth” from Amazon in foodservice, they will provide a viable alternative route to market for many manufacturers and continue to serve as a model in areas related to customer engagement, logistics and multi-channel effectiveness.