WALTER ISAACSON: Sometimes big changes can come in very small packages. Take baking powder, for example. It’s probably been a while since you’ve thought that much about baking powder. But in the late 1800s, a small red tin of baking powder would be responsible for disrupting the entire grocery industry. Up until then, if you wanted to buy baking powder, you went to a grocery store and told the clerk how much you wanted. He’d open a large container, scoop the baking powder into a paper bag, weigh it, and off you’d go. But it was a pretty time-consuming process. It was expensive, and you could never really be sure that what he was putting in that bag was the real deal.
But in the 1880s, two brothers, John and George Hartford, came up with a better way to sell baking powder. The family owned the great Atlantic and Pacific Tea Company, better known as the A&P. At the time, A&P was the largest chain of groceries in America. The Hartford brothers’ disruptive idea? To make their own baking powder. They hired a chemist to ensure it was high quality. Then they packaged it in red tins and stuck an A&P label on it.
A&P baking powder was cheaper and better than what was available elsewhere. And shoppers could trust what they were getting inside that tin. It was a big win for the customer and for A&P. Today we would call it a private label or house brand. But in the 1880s, it was more than that. A&P had created one of the first national brands of any kind. It was a retail revolution and launched an industry that would see incredible growth throughout the 20th century.
Today supermarkets are at serious risk of disruption by some new players to the grocery game, players who are rethinking the industry from the bottom up. I’m Walter Isaacson, and you’re listening to “Trailblazers,” an original podcast from Dell Technologies.
MAN 1: The mainstay of any food operation is the grocery department.
MAN 2: To help you in the vitally important work of selecting your family food.
MAN 1: And offer every type and description of food from all over the world.
WOMAN 1: Where’s all this competition we’ve heard so much about? You call these prices low?
WALTER ISAACSON: Those A&P stores where shoppers bought their tins of baking powder back in the 1880s may have been the biggest and best grocery stores in the country at the time. But they were not very impressive places by today’s standards.
Marc Levinson is the author of the book, “The Great A&P and the Struggle for Small Business in America”.
MARC LEVINSON: Up until 1912 or so, most people went to the grocery store that was down the street from them. they shopped in their neighborhood. They accepted the very limited selection of goods. And the prices were pretty high at these places. Grocers thought of shopping in terms of a markup, so if they bought something from the wholesaler for $0.10 and then sold it to a customer for $0.11, they would say they made a 10% profit on that transaction. That’s how they thought of things. This is really peculiar to modern ears where today, for example, you’d think about how long did that merchandise sit on your shelf before you sold it? But that was not much of a discussion in the early 1900s.
WALTER ISAACSON: The grocery industry was ripe for disruption. And in 1912 that disruption came not from an outsider, but once again from the biggest player in the industry, A&P. In Jersey City, New Jersey, the company opened the first of what it called their economy stores.
MARC LEVINSON: There was a lot of controversy about this because many people in the industry had the notion that you had to sell at a higher price to make more money. And John Hartford’s notion was no, if you sold at a lower price, you could sell a lot more and you would end up making a higher return on your investment. So John A. Hartford didn’t look at what the markup was between the wholesale price and the retail price. He looked at how much money A&P was making on its investment. And he figured out that the more customers he could pump through the store, the better the company would do, and that became the hallmark. A&P became the first great discount retailer.
WALTER ISAACSON: Fast forward to 1960. We’re in a store in Memphis with the unlikely name of Piggly Wiggly, where they have just launched a feature that will change the grocery business forever, self service, something that gave customers the ability to walk through the store and put their own groceries in their own baskets. Stores were able to reduce their labor costs by getting rid of counter clerks. By the 1920s, refrigerators were becoming commonplace in American homes and grocery stores. That meant that you didn’t have to shop as often as before. And stores could now stock a wider variety of meat and produce. And the growing popularity of the automobile meant that Americans were no longer confined to shopping in their own neighborhoods.
The first retailer to take advantage of these two important trends was a mid-level A&P executive named Michael Cullen. In the late 1920s, Cullen had an idea to take what the A&P was doing with its economy store and scale it up. He went to his bosses and told them that by paying attention to volume rather than markup, the economy store had come up with a great business model. The problem was that it focused on too narrow of a range of products.
BENJAMIN DAVISON: So Cullen had the idea you would effectively do this with everything by just sort of squeezing all of your possible suppliers by just saying, we’ll buy everything if you give me this bucket price. But none of his bosses really went for it.
WALTER ISAACSON: Benjamin Davison is currently writing a book on the history of the grocery store.
BENJAMIN DAVISON: By the time the depression hit, thought, Cullen got kind of lucky because he was based in New York. He opened his first store in Queens. And all of the warehouse men and distributors in New York were dying. They couldn’t sell any products. So Cullen basically took out a loan and just bought up all this stuff, went to an old, essentially, at that point, an abandoned warehouse, and opened up a store and just sold everything as cheaply as he could. He could still make a killing because of just pure sales volume.
WALTER ISAACSON: Michael Cullen opened his first store in 1930 in the suburbs of New York City. It was not conveniently located, especially for people without a car. It was considerably larger than other grocery stores. But shopping at Cullen’s store was not a pleasant experience. Many of them were in abandoned warehouses in undesirable parts of town where rents were cheap. Goods were stacked to the ceiling on wooden pallets. He knew that shoppers in the midst of the Great Depression didn’t care about aesthetics or convenience. They wanted low prices. And by squeezing his suppliers and taking advantage of economies of scale, he was able to undercut his competition by about 10% to 15%.
He called his stores King Kullen, and the Smithsonian considers them to be the first supermarkets.
BENJAMIN DAVISON: His genius really was that he just–he knew how to take advantage of a moment when consumer spending was plummeting. And there were all of these distributors throughout the greater New York area who just need to move product and were willing to just take a hit knowing they could at least bring in capital.
WALTER ISAACSON: Michael Cullen had hit on a winning formula. Consumers wanted size, selection, low prices, and they were perfectly happy to get into their cars and to drive wherever they could find those things. The great wave of suburbanization after World War II accelerated the growth of the supermarket. They were big, bright, and very car friendly.
The introduction of universal product m or UPC, in the 1970s meant stores could better control their inventory, sales, and distribution. They now had data to track shifts in consumer behavior. The stores expanded to meet new demands, adding things like health and beauty products that had never before been available at stores where food was being sold.
Paul Ellickson is a professor of marketing and economics at the Simon School of Business at the University of Rochester
PAUL ELLICKSON: So between, like, 1974 and 1990, you have a tripling of the number of products from something like 5,000 to 15,000 products per store, and then another doubling that over the next 10 years. Now you have stores that have 100,000 products in their store today.
WALTER ISAACSON: The 1970s and 80s marked the golden age of the American supermarket. Chains like Kroger, Safeway, and Albertson’s continued to expand and remained highly profitable. Supermarket sales accounted for about 90% of all food purchases. Today that number down to about 60%. Where did all those shoppers go? They’ve migrated to many different places. Some have moved online. Many others do some of their shopping at the roughly 20,000 chain drugstores, 100,000 convenience stores, and 15,000 dollar stores in the United States that now sell of various types of groceries.
But the main source of disruption for the supermarket came from a store that wasn’t even on their radar, a store called Wal-Mart. Wal-Mart had already been around for decades by that time but hadn’t gotten into the food business. That all changed in the mid 1980s when Wal-Mart went looking for areas to expand their business.
PAUL ELLICKSON: I think what happened is they kind of looked at the trajectory of where the farm was going and sort of realized that they’d saturated the market for general merchandise or mass merchandise, the kind of traditional business model that they were in of clothes and dry goods and hardware and whatnot like that, and kind of looked over at this grocery industry. And they said, hey, people are spending half a trillion dollars over there. There’s a lot of money to be made. And we’re exactly the kind of firm that can easily pivot into this because we’re already operating giant big boxes with a super-efficient hub and spoke distribution system.
And so I think it was a fairly low cost pivot for them in the sense that they already had a lot of assets in place to make it an easy move.
WALTER ISAACSON: Today more than half of Wal-Mart’s total sales come from food and beverages. They are the largest food retailer in the country, accounting for about 14% of the $750 billion spent every year on groceries in the United States. The grocery business is intensely competitive operating on razor thin margins of about 1.5%. It’s not a business for the faint of heart.
But now the grocery coaster ride just got a whole lot scarier. In June of 2017, Amazon, the world’s largest online retailer, announced it would pay $13.7 billion to acquire more than 460 Whole Foods stores. Whole Foods Market is a brand that has traditionally appealed to customers prepared to pay a premium for quality, particularly natural and organic foods. But in recent years it has struggled, losing market share to Kroger, Wal-Mart, and other chains that were able to sell similar goods at much lower prices.
So it came as no surprise that Amazon, which has built its brand on value, cut prices on a wide range of food products immediately after the sale was approved. And that’s just the beginning of what Amazon has planned for its newest acquisition. The company has already been in the food business for about 10 years, operating an online delivery service called Amazon Fresh, but that never achieved much traction. Their purchase of Whole Foods means that, like A&P at the turn of the century, Michael Cullen in the 1930s, and Wal-Mart in the 1980s, the company now sees a hole in the grocery landscape that they believe they can fill. And if they’re right, the results might be equally disruptive. That hole is online shopping.
Amazon has already had great success convincing shoppers to break their brick and mortar habits for products like books and clothing. But convincing them to buy meat, produce, and other groceries online may not be so easy. Brittain Ladd is a grocery industry consultant who worked for Amazon from 2015 to 2017.
BRITTAIN LADD: Shopping for food is by far the most personal thing that shoppers do. And what I mean by that is when a consumer walks into a grocery store, they want to inspect and select certain food items, meat, milk, eggs, dairy products, fruits, vegetables, and baked goods. They want to pick up the apple and see if it’s bruised. They want to thump the watermelon. They want to look at the bananas. Are they brown? They want to pick up the meat and they smell it. Is it fresh? You can do none of those things if you order your groceries online.
WALTER ISAACSON: Amazon became the leading bookseller in America without ever buying a bookstore chain. They didn’t buy a clothing store when they became the leading apparel retailer. But in order to get people comfortable with online grocery shopping, Brittain Ladd believes a different strategy was called for.
BRITTAIN LADD: The reason why they acquired Whole Foods is that they wanted access to those customers who were and continue to prefer the grocery store experience. And so Amazon is going to be putting a lot of time and effort in changing the grocery store format, the assortment in the store. And what Amazon will do is begin to change the assortment to better match what is it those consumers really want to buy when they come into a Whole Foods store.
And what Amazon will do is duplicate the Whole Foods experience online so that the customer who one week says, I’m going to go to the local Whole Foods store and they buy their groceries, the following week they may say, I’d rather just buy everything online. And the trick will be, does Amazon give them the confidence to interact with Whole Foods in any number of ways? Will it be physical, where they walk in? Will it be online? Or will it be they order their groceries online, but then they actually drive to the store and pick them up? That’s what’s going to be interesting. Is Amazon able to gain the trust of consumers that, regardless of the method for how they interact with Whole Foods, do they have confidence that the experience will be the same?
WALTER ISAACSON: Amazon may be the biggest company to try to solve the online grocery puzzle, but it’s hardly the first. Kroger, Wal-Mart, and their various competitors have spent heavily in recent years to expand their online presence, anticipating Amazon’s inevitable arrival.
But the company with the most experience in online grocery shopping began life back before most people even knew what the internet was. And remarkably, it’s still going strong.
THOMAS PARKINSON: My name is Thomas Parkinson, and I’m the founder and chief technology officer of Peapod, and I founded it with my brother Andrew Parkinson.
WALTER ISAACSON: In 1989, Thomas and Andrew Parkinson were a couple of 20 something Chicagoans looking to get a start in the business world.
THOMAS PARKINSON: So back then, in ’89, my brother and I, we realized that the 90s was going to be all about convenience because there was two working families and just everybody was becoming really busy. And so one of the things we thought about in the very beginning was delivering pizzas and videos at the same time. So that was kind of like the original thing we started thinking about.
So I said to my brother, you know, we should think about maybe, instead of having order takers for the video and pizza, let’s do that where they can dial up on their computer with a modem. Then we can kind of reduce that labor of the order taking. Then we started thinking about, well, maybe we could do that for grocery shopping. And we were thinking, yeah, we could create something like an online mall where we could have all sorts of things that we could sell. But let’s focus on grocery shopping because we know that industry, and we also knew that it’s usually the anchor tenant of a mall.
WALTER ISAACSON: And so the Parkinson brothers set out to do what no one else at the time was doing, start an online grocery business. But there was one pretty significant problem with their plan. There weren’t that many people online in 1989. University researchers were talking to each other through the internet, but it was not yet on the public’s radar screen in any meaningful way. The Parkinsons, however, could see a future where not only would people communicate online, they’d also shop there. They called their company Peapod, and they’d go to supermarkets dressed up as peapods and hand out brochures urging people to try their service. But that was just the beginning.
THOMAS PARKINSON: First of all, we gave out disks. So that was something you don’t do anymore. So it was a 5 and 1/4-inch floppy disk. And then a lot of people didn’t have modems. So I would just go over to people’s houses and I would help them install it. And there were two kinds of modems, the ones that were the external modems, and then there were the ones where you had to open someone’s computer up and actually slip the board in and tip switches and all of that. I probably went to 1,000 homes installing modems just to get them up online on Peapod. So it was real block and tackling hard work to get people online.
WALTER ISAACSON: Peapod’s offer was pretty simple. Send us your grocery order online. We’ll go to the grocery store, buy your groceries, and deliver them to your house. And against all odds, it worked. 1,500 households signed up in the first year. Many of them were busy professors from nearby Northwestern University.
THOMAS PARKINSON: I would say our first set of customers were probably desperate customers, dual income families, or just super busy people, or they can’t even get out of their house because they’re disabled. So the not being able to squeeze my tomatoes just didn’t matter to them. But when they did get the order, we had produce specialists.
So the produce was picked originally by a guy named Jack, who was great. He would pick the produce section of your order. And that was different than the people who shopped the rest of the order. So this was a person who looked for the quality tomato. And so we built the trust of Peapod with our customers because we delivered fantastic produce.
WALTER ISAACSON: Since 1989 Peapod has delivered more than 40 million grocery orders. The company now operates in 24 markets and has more than 2,000 full time employees. Peapod went public in the late 1990s, and in 2001 it was purchased by Dutch food giant Ahold Delhaize for a reported $35 million. Today its business model remains largely unchanged. It now fills your order from its own giant warehouses rather than local supermarkets. But delivery is still done by a uniformed driver employed by Peapod.
Peapod has learned a lot about the online grocery business over the past 28 years, and that’s a big reason why Thomas Parkinson is not as worried as you might think he would be by Amazon’s purchase of Whole Foods. He’s outlasted many well-financed competitors, and he thinks that Amazon will discover, as others have, that delivering groceries presents challenges unlike those found in other retail sectors.
THOMAS PARKINSON: They’re incredible at logistics. I admire that company big time as a consumer who gets my hard goods delivered. But there’s a big difference between delivering books or all the merchandise that they deliver and delivering frozen food and delivering perishables like dairy, meats, and produce. And so that’s what’s new to them.
And then the second thing that’s new to them is it’s their own drivers. So you need to now hire a driver force. And before that they’ve used FedEx, UPS, they’ve outsourced all of that. And it’s a personal experience that you’re managing. You don’t think of a person at Amazon. You just think of the big machine.
And with Peapod, it’s an actual person that’s coming to your house and who has a relationship with you and knows your dog’s name and your kids’ names, et cetera, because you get the same driver all the time.
WALTER ISAACSON: Thomas Parkinson is not downplaying the threat that Amazon poses to his company. It’s just that he knows better than anyone that the biggest challenge in online grocery shopping is not stocking a huge warehouse full of food or in picking the perfect tomato, but in delivering that food precisely where and when the customer wants it.
THOMAS PARKINSON: I’m not sure people really understand what does constrain the growth of online grocery shopping because we’ve never had a problem with demand. What we’ve had a problem with is growing the local labor force to flex with these peaks and valleys of demand.
To give you an idea, so with Amazon, they ship via UPS. You order a product. And in the old days it might take two or three days to get to you. But it was UPS, and it wasn’t like a specific two-hour delivery window. With Peapod or online grocery shopping, you need to receive an order that’s got, like, say, 60 items on it. So we need to guarantee a two-hour window. And everybody wants Saturday morning delivery. So it’s very, very hard to scale up for all your business to be done on a Saturday.
So the real challenge in grocery shopping is how do you move demand across the week so that these warehouses that you’ve built can be maximized across the week, not just for Saturday? It’s sort of like building the cathedral for Easter Sunday. The rest of it is kind of empty during the rest of the Sundays. So that’s been a real challenge for us, and for any anybody in this business, is that you don’t have unlimited resources.
WALTER ISAACSON: Amazon doesn’t have unlimited resources, but it often acts like it does. The company lost money for more than 20 years before turning its first profit and didn’t really care that it did. It favored growth over profits, choosing to sink money into developing the infrastructure that allowed it to eventually become the king of online retail, leaving a string of failed brick and mortar stores and other online competitors in its wake. And that’s exactly what’s worrying the grocery industry today.
PHIL LEMPERT: This the most exciting time in the grocery industry. And the reason is that what Amazon is going to be doing, not only creating a whole new shopping experience, but they’re going to attract a lot of new people, a lot of new talent.
WALTER ISAACSON: Phil Lempert is a Los Angeles-based food industry analyst who writes the influential industry newsletter, Supermarketguru.com.
PHIL LEMPERT: Actually, the food industry, and the grocery industry in particular, has never been known as being the cool kids. Now what we’re going to do is we’re going to be attracting the topnotch talent from Silicon Valley. We’re going to life hack the supermarket, and we’re really going to see them looking at the supermarket a whole different way.
WALTER ISAACSON: Phil Lempert believes that the supermarket is ripe for disruption for one simple reason. People don’t like shopping there.
PHIL LEMPERT: Consumers have been dissatisfied with grocery stores for probably 20, 25 years. This 40,000 square foot supermarket– I think it’s extinct, it’s a dinosaur– has been the same. You walk into the produce department you go up and down the aisles. You wait online to check out. This is not a great experience. You talk to consumers, and “Adweek” did a survey a few years ago that found something like 65% of people didn’t like supermarket shopping.
Well, when you dig down into the survey, what you find is they don’t like the checkout. They don’t like going up and down the lanes. They do love talking to that meat manager, the fishmonger, the produce guy. That’s the great, fun experience of shopping. So what we’ve got to do is figure out what’s fun for people, what’s empowering for people, what can get people to eat healthier, what can get people to save money, and that’s the store that we can create.
WALTER ISAACSON: So what will the supermarket look like five or 10 years from now? Amazon is already hard at work with a pilot project at a grocery store in downtown Seattle. It’s a store that has the potential to revolutionize the entire shopping experience. Customers enter the store, take food off the shelves, and then walk out without ever having to stand in a checkout line. It uses a service called Amazon Go, which utilizes sensors to track what people pick up off the shelves and an app that charges those goods to their account. The disruptive potential of bringing this kind of Silicon Valley thinking to the supermarket has the potential to change everything.
But it’s not just technology that’s driving the change. Demographics are at play as well. Millennials have different priorities when it comes to food, and they prefer their produce locally grown and preferably organic. They’re much less interested than their parents were driving out to a massive suburban supermarket and having to choose between 10 largely indistinguishable brands of macaroni and cheese. And that’s bad news for those supermarkets, and bad news for all those brands of macaroni and cheese.
If the next generation of shoppers is looking for smaller stores selling mostly natural, organic products, Whole Foods may be the chain best positioned to deliver it to them. But it won’t be a slam dunk. Brittain Ladd says in the struggle for the hearts and minds of millennial shoppers, Amazon will have some very serious competition.
BRITTAIN LADD: Whole Foods was a failing retailer. That’s why Amazon was able to acquire it at such a low price. And even though customers are going into Whole Foods stores today, the competitors are not going to just stand idly by. And I believe what we will see is Wal-Mart, Kroger, Target, and these Costco. These are the companies no. And I’ve been quoted on this as well. Wal-Mart, under no circumstances, can lose the grocery wars to Amazon. Well, the same thing can be said about Kroger as well. Kroger, under no circumstances, can lose the grocery war to Amazon.
So these companies are going to make big investments. They’re going to become very innovative. And they’re going to be doing everything they can to keep customers and to grow organically and to bring new customers into their stores. And if any one of them do that better than Amazon Whole Foods, they’ll win. That means someone has to lose. And there’s nothing that says Amazon has to be successful simply because they acquired Whole Foods. That’s why this could turn out to be good for Amazon, but if they’re not careful it can turn out to be very bad.
WALTER ISAACSON: After all this, the one thing we can probably conclude with a reasonable degree of certainty is that the supermarket’s nearly 100-year reign at the top of the grocery retailing ladder is finally coming to an end. Grocery shopping in the future will be more local and urban, less homogenous, smaller in scale, more focused on convenience, price, and quality. And yes, more of it will surely be done online.
But while the broad outlines of the future are now coming into view, it remains unclear which of the current players will be able to adapt to it. All eyes are on how Amazon’s purchase of Whole Foods will shake out. But will it be a game changer? Or will another disruptor transform our next grocery run?
I’m Walter Isaacson, and you’ve been listening to “Trailblazers”, an original podcast from Dell Technologies. If you enjoyed the show and want to hear more, visit delltechnologies.com/trailblazers16. That’s trailblazers, then the number 16.
Next episode, we’ll be looking at the world of package delivery. From the first known courier services of ancient Egypt to the promise of Amazon packages delivered by drones, we’ll look at how technology has radically shifted how we ship goods around the globe. You can subscribe to “Trailblazers” in Apple Podcasts or wherever you get your podcasts. And if you like it, please leave us a rating and review. It helps new listeners discover the show. Thanks for listening.