First, Amazon destroyed retail -- now, it's coming for Starbucks

It was a foregone conclusion that Amazon was going to kill retail. Now, your favorite coffee store is in its sights.
Written by Jason Perlow, Senior Contributing Writer

Video: Next, Amazon will come for Starbucks

Over the years I have been predicting the death of brick-and-mortar retail stores, especially mall-based businesses.

The past five years, in particular, have been a transformative period in how people prefer to buy their goods. Department stores have been among the worst hit -- as have other segments that have been in a protracted malaise for years like retail electronics.

For the most part, this has only affected durable goods, not things that are perishable. But with Amazon's acquisition of Whole Foods, this is going to change significantly.

Amazon's main superpower is that it has a very good understanding of how to run a distributed supply chain, and how to categorize SKUs and target products according to mined data from its customer base. Its loyalty program, Prime, is also second to none. Nobody else has anything comparable.

While there are many categories of retail businesses at risk of being squashed by Amazon, by far the ones that have the most to worry about are those with significant investments in brick and mortar infrastructure.

I'm talking about chain businesses, and some of the largest chain businesses are those which are in the food and beverage service industry.

Other than companies that participate in fast food, which I doubt is an immediate target for Amazon, the largest chain QSR (quick serve restaurant) is Starbucks.

Why would Amazon want to squash Starbucks? Well, because Starbucks has a highly engaged fan base, and also it has a loyalty program. But, mostly, it exists, and by virtue of that, it needs to be exterminated, like an infestation. And since they share a customer base with similar income profiles, they are competing with each other.

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Let's look a bit at how Starbucks works. It has retail stores that serve expensive coffee drinks and sell a few other different SKUs of food products. It has centralized roastery operations and sources coffee from different parts of the world, and it packages and ships the products for sale to its company and franchise locations and participating partner retail stores.

In terms of Starbucks being a growth business, it has limited potential. It could be argued that the company has already reached peak retail saturation and there really are no other opportunities for it to do many other things at its existing locations. It could build more locations, but it already has far too many stores to begin with.

There are already clear signs Amazon is making moves in food and beverage, especially in the coffee space. In June 2016, it launched its own brand of coffee, Happy Belly, as part of an overall strategy to move into the larger snack and beverage space.

I've purchased the Happy Belly brand of coffee beans and it's really good stuff for the price. It's freshly roasted in Canada, is shipped direct to the customer, and it doesn't sit on the shelf very long.

The roast profile for its coffees is on the medium side, and for those of us that hate that burnt and acrid taste of Starbucks in latte drinks with its signature ultra-dark espresso roast, Amazon's coffee is a refreshing change.

The Whole Foods acquisition adds an additional layer of distribution for all Amazon food and non-food products. And, if I was Starbucks, I would be very concerned about this.

As of 2016, there were nearly 7,900 company-owned Starbucks stores and about 5,300 licensed stores (kiosks, etc). Whole Foods has approximately 450 locations.

On paper, that doesn't sound like much of an existential threat. But let us continue.

Certainly, Amazon can use Whole Foods locations as cafes and places to pick up web-based or app-based coffee orders. That's a given. But it can also use them as distribution points for doing local delivery of virtually anything Amazon wants to sell to an end-customer and also partner businesses.

Starbucks engages its customers two ways: One, at the individual company and licensed store locations, and also through product sales at partner stores like supermarkets that carry its coffee.

Let's look at their customer engagement model. A typical customer might make a coffee at home with whatever system and brand of coffee they have (hopefully Starbucks) and perhaps pick up a drink at a Starbucks store on the way to work.

If they are particularly addicted, they'll buy a few during the day, but they'll have to leave work to get their fix. And then, perhaps, get one on the way home.

It's inconvenient having to get to a Starbucks to get your coffee. If there's one in your office building, great. But if one is more than a few blocks away from you, it's a pain in the ass. And if you are really time driven, you'll want to do web orders and pick up your drink, because waiting in line at Starbucks sucks.

Amazon can actually transform all of this. First, it has the ability to engineer its own home coffee machine/system with Happy Belly that can be tied into Prime.

And while Starbucks has tremendous purchasing power in the overall coffee supply chain, it doesn't have monopolization of it by any means, so I don't see the company having any way to easily price-squeeze Amazon.

There are all kinds of ways Amazon can incentivize their customers to buy and use their brand of coffee at home using Prime. There's Subscribe and Save, and there's Prime Pantry. There are also Amazon Rewards points, just to scratch the surface.

So, yeah, expect a total assault on Starbucks as a coffee brand at home: "Alexa, make me a cappuccino."

But what about on the front lines? At store locations?

In addition to the Whole Foods locations, which can act also as distributed roastery sites in order to ensure peak freshness of the coffee, Amazon can enlist any food service business via Amazon Restaurants to become an Amazon Coffee partner. They just need the coffee equipment and the supplies delivered to them.

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Amazon already sells commericial coffee equipment. Putting a partner under contract to use a standardized system with Amazon's beans (using coordinated deliveries of local dairy supplies) with an included service plan is all that needs to be developed as an overall package offering to a food service business looking to increase its customer reach.

Amazon doesn't have to exclusively use its own brand of coffee either. At Whole Foods locations, it can roast and distribute to partners beans from any supplier it deals with in order to give a local or a boutique flavor to the product.

In every city you visit, you'll be able to get superior coffee drinks from Amazon -- made with local partner brands.

By virtue of being part of this retail program, in addition to Amazon's brands of coffee and snacks, these partners can also offer up select items from their own food menus in the app.

That's something Starbucks cannot currently do.

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And, yes, delivery through the Amazon Restaurants program is totally going to be a huge part of this, whether it is done by drone, driverless electric vehicle, or just good ole humans who want to make some extra money. Coffee is going to get Uberized.

So, when you need your coffee fix at work or on the road, all you would need to do is ask Amazon in its app or with the Alexa app to make you a coffee based on your preferences.

Using GPS, Amazon will be able to dispatch that order to a local partner, where you can then go pick it up. That pickup location could be in your office lunchroom or anywhere within close walking distance.

Amazon could also park Whole Foods/Happy Belly coffee trucks in front of the lobby of every office park, which could stock other pre-prepared items and bring coffee (and breakfast/lunch) right to your receptionist.

It is already well on its way to office integration and disrupting Staples and Office Depot with its growing office supplies business.

Maybe Starbucks isn't going to die tomorrow. But I would not bet on the company's long-term survivability if Amazon indeed does have it in its sights.

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