Amazon Go Wants to Streamline Your Grocery Shopping

February 21, 2017

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In this episode of TechTalk, Dave Katz, Senior Audit Manager in EisnerAmper’s Technology and Life Sciences Practice, and Richard Colloca, Partner-in-Charge of EisnerAmper’s Food and Beverage Group, discuss Amazon’s plan to use “Just Walk Out” technology to remove the lines, checkout counters and cash registers from your food shopping experience. The pair looks at the technology behind Amazon Go, potential speedbumps including cybersecurity, and what it could mean for other bricks-and-mortar grocery chains.

Also discussed is the valuation of the Amazon Go technology and whether Amazon can generate revenue from licensing it to other grocery stores and retailers. Will the technology make a company more efficient and, more importantly, make it more profitable?


Transcript

Dave Plaskow: Hello and welcome to EisnerAmper’s technology podcast series. With more than 500 technology clients we’re always interested in the latest industry trends and developments, as well as any related business and accounting opportunities and challenges. Today we’re talking about Amazon entering the bricks-and-mortar grocery business. I’m your host Dave Plaskow and with us today is Dave Katz, Senior Audit Manager in EisnerAmper’s Technology and Life Science practice. We like to call this TechTalk. Dave, as always, welcome and thanks for being here.

Dave Katz: Thanks, Dave. Good to be here.

DP: Dave, did I mention we have a special guest today? We’re pleased to have Richard Colloca, Partner-in-Charge of EisnerAmper’s Food and Beverage Group, to add a little “flavor” so to speak to our conversation. Dave, let’s start with you. Amazon is descending from the cloud to open a chain of grocery stores. What’s going on here?

DK: Yes, so Amazon is testing a location in Seattle, and there have been talks of as many as 2,000 locations over the next 10 years, but recently Amazon has dialed back a little on that estimate. To put that in perspective – Albertson’s, one of the largest grocery chains in the U.S., has 2,400 stores. So Amazon is certainly aiming very high with this one.  

DP: Okay. So how does Amazon plan on competing?

DK: It’s by doing what it does best, leveraging technology. The stores, called Amazon Go, will utilize a “just walk out” technology that would offer no lines, no checkouts, no registers. The system would utilize a network of sophisticated sensors, machine learning, RFID, computer vision and artificial intelligence. So, essentially, you enter a store, you open and scan the Amazon Go app, you take an item from the shelf, and the technology detects what’s been taken and its price. If you change your mind, you can put the item back and that removes it from your virtual shopping cart. And when you’re finished, you simply leave and your credit card will be automatically charged.  

DP: Okay, Richard, let’s get you in on this. Give us a lay of the land, so to speak, on how competitive the grocery business is and what Amazon Go might be up against.

Richard Colloca: Sure. The industry itself is about $800 billion. Currently, ecommerce accounts for about 1% of that industry. Estimates say Amazon is somewhere between 20% and 25% of that 1%. So, relatively speaking, it’s a small fraction, but as we can see consumer consumption patterns are going more and more toward ecommerce. Most of the retailers that I’ve spoken with believe there are some challenges. It’s technology that theoretically can be deployed by almost any retailer. Amazon’s probably well ahead of the curve in terms of preparation and technology.   DP: Similar to when you go to Walmart or Target and you have a self-checkout aisle. There’s no staff person there.   RC: That’s correct.

DP: But for now, is Amazon is a little fish in a big pond?

RC: Overall, yes. If you think about a similar type of technology – not necessarily in food – but if you look along the lines of what Netflix did when it first came out. It came out with a concept of basically packaging a DVD, you rented the movie, and then you mailed it back. That seemed like a very long process to go through to watch a movie. Fast forward 15 or 20 years from when it first introduced the concept and now Netflix is a leading provider of streaming.   DP: Right.

RC: So Amazon very well could be just building a customer loyalty base in anticipation of where it thinks future consumption patterns are headed. 

DP: Dave, tell us a little bit about what the in-store experience would feel like.

DK: Initially, we’re looking at 1,800 square-foot locations – pretty modest – that offer convenience, in-store-type prepared food, staples, and Amazon meal kits that would compete with the likes of a Blue Apron where you have prepared meals that you cook on your own. But, going forward, locations may eventually reach the 35,000 square-foot range of a fully stocked grocery store. 

DP: Now, Rich, what are you hearing from your grocery clients. Are they worried about this development? What are their knee-jerk impressions?

RC: I think that Dave touched on it earlier saying that Amazon does what it does best. So, from that perspective, you’ve got a competitor that has name and branding recognition based on its reputation of how consumers purchase items. There are concerns on things such as cybersecurity.  Basically there’s a shopping cart with an identified number to it, meaning your Amazon account, and now what if someone gets access to that account number? Dave also alluded earlier to what if you load items into your cart, take them out and then put them on a different shelf. Some of the other challenges would be basically considering what type of average order size would you be looking at? Most retailers’ average order sizes vary. If you go into the big box chains, the Costco’s of the world, their average order sizes are certainly much larger than your traditional retail grocery store. But there are other things in terms of what types of products would be offered. You probably would not have the variety there. And you would also have to give strong consideration in terms of total consumption patterns by different segments. Consumption patterns change all the time. Many years ago, you had really nothing between the retailer and the restaurant. Now you have an intermediary like Blue Apron. That changes the consumption pattern for a retailer because now those groceries are not sold by the retailer. That has to be acknowledged in terms of how the total impact is going to be across the entire segment.       

DP: Dave, tell us about some of the other tech bugs that Amazon would have to work out with this.

DK: Rich touched on some of these, but Amazon has to figure out how to offer food, such as produce, priced according to weight. Again, you can’t rely on shoppers to always put back items in the right spot. What do you do if they put it in a different location? Will it register that they’ve returned it. And how do you account for the various fraud scenarios that Rich touched upon. A lot of different issues are certainly out there.

DP: Richard, I think you had some other thoughts on this?

RC: Yes. The retailers that I have spoken with – the concern would be monitoring shrinkage. Will the RFID technology track items properly? There will be an element of shrinkage of possibly removing items from the cart, putting them in another cart or putting them to something that’s not traceable or trackable, stock essentially walking out the door. So there’s heavy reliance certainly on the technology. The other consideration that retailers have is curbside pickup technology, which is basically ordering and then providing curbside pickup. So, the underlying consideration is does the brick-and-mortar store take that curbside pickup out of the equation, or is the curbside pickup direct competition for the brick-and-mortar store. Either way, the consumer has to travel to the store location. In one instance, the shopping is already done and you’re just basically picking up the products and loading them up in your car. And in the other one, you have to go into the store and spend the time picking and putting things into your cart.

DP: Richard look into your crystal ball a little bit. Do you see this as being a game changer?

RC: I think it’s very early in the process. Certainly, strong consideration has to be given to Amazon’s client base. I do think there has to be a lot of consideration given to consumption patterns from various consumers at different geographical, age and other segments. Certain consumers like the touchy-feely experience. Certain consumers, if they enjoy going to the grocery store like me, may want to make it a situation where they’re going and buying a lot of product at once so they don’t have to go every three days. However, there could be a change in consumption patterns where people may want to go to the grocery store every other day. So, I think those consumer spending patterns and forecasting ahead are things that not only Amazon but really the entire retail grocery market have to give a lot of consideration to.

DP: This question is for both of you. What does this mean for the business advisor, for what you guys do? Dave, why don’t you go first?

DK: One interesting accounting area might be the valuation of this technology – whether Amazon can generate revenue from licensing it to other grocery stores and retailers. And, as we have spoken about at length, there are plenty of opportunities for cybersecurity advisors to make sure good guys aren’t getting incorrectly charged and the bad guys aren’t getting free groceries.     

DP: Richard, what about you? Where do you see this fitting into your practice area?

RC: It’s really looking at the profitability for clients. The thought is technology will make your company more efficient, make you more profitable. On the surface, that seems to be the case. However, which personnel may get eliminated as a result? Those costs may be replaced by additional costs of technology.  Companies will see they’ll have to give strong consideration ultimately on how it affects their level of profitability. Also, they should give some consideration to the size of their brick-and-mortar store. Real estate is expensive. So, if you’re considering a traditional 60,000, 70,000- or 80,000 square-foot typical retail grocer, maybe in the future that becomes 30,000 square feet. By taking all of the data, you see consumption patterns changing and evolving. All that has to be given strong consideration so ultimately they can assess what their profitability levels will be.

DP: Do you envision a scenario where the traditional bricks-and-mortar grocery stores would come to business advisors, such as EisnerAmper, and say “help us get this off the ground.”

RC: Sure. There are various components of getting it off the ground. Technology is certainly a very big component. When you think of typical food consumption 10 years ago, for example, you wouldn’t think technology had a strong play into the food sectors themselves – outside of research and development and other things. Now, you’re mirroring technology and consumption patterns that affect the retailers and the distributors. Everything is getting merged together so there has to be a very strong element of understanding how the technology plays across the sector. 

DP: OK. Well, gentlemen, thank you very much for your expertise and your insight on this interesting topic. And thank you for listening to TechTalk as part of the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics and join us for our next EisnerAmper podcast when we get down to business.

About Richard Colloca

Richard Colloca, EisnerAmper Audit Partner with over 20 years in the public accounting profession, provides audit, accounting, tax and business consulting services to clients, including closely held and publicly traded companies.

About John Pennett

john Pennett is the Partner-in-Charge of the National Technology and Life Sciences Group, and is a member of the Special Purpose Acquisition Company (SPAC) services team. H

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