By Joshua Cummings

Voice-activated devices such as Amazon’s (NASDAQ:AMZN) Alexa are set to disrupt how U.S. consumers shop for groceries, creating potential headwinds for incumbent supermarket chains that have failed to foresee and prepare for such a digital revolution. Research Analyst Josh Cummings discusses the prospect of permanent and radical change to the $800 billion U.S. grocery market following Amazon’s purchase of Whole Foods.

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We expect grocery to be a battle ground industry over the next several years. US grocery is approximately an $800 billion industry. E-commerce adoption within grocery is still very low. We estimate in 2017, this was about a $20 billion or 2-1/2%. Groceries also the category that consumers purchase most frequently.

So why is this? Previous digital options were mostly just expensive third-party delivery solutions. And incumbent grocers had very little incentive to push these because they represent less profitable forms of transactions for them. But Amazon’s purchase of Whole Foods last year put the industry on notice. We think the big challenge for incumbent grocers is that grocery has become a strategic imperative for Amazon and it’s all about frequency. We estimate that at least half the households in the US are currently Prime members representing at least 70% of consumer spending. So the growth algorithm for Amazon going forward is to increase that spend per household and we believe that grocery is an obvious way for them to do that. As we often see in industries facing structural change, the disruptors have a different set of financial incentives than the incumbents. Driving per capita spending through the Amazon ecosystem will help them leverage their supply chain, sell other goods and services and will likely make it a more attractive advertising platform. The discreet profitability of their grocery sales may be less important. That’s a problem for incumbent grocers who now must simultaneously defend physical store traffic while investing in digital which brings us to voice commerce.

Recent data suggests that home speaker penetration and usage are beginning to surge in ways that remind us of mobile several years ago. Survey data suggests that approximately 25% of US households already own a home assistant. And while most are not yet using these for shopping, for those who do, groceries and consumables are emerging as two of the more popular use cases. This makes sense to us as the typical household shopping list doesn’t vary much from week to week. There’s really very little shopping going on. It’s more like a physical search process where you have to load your own items. Why spend all that time in grocery stores week after week buying the same items when Alexa can automate that for you and give you that time back? What we’ve seen across other categories is that consumer perception begins to change rapidly once a better way becomes economically viable and we believe we’re reaching that point with voice commerce and grocery. The point of sale effectively moves from the store to a customer’s home allowing the owner of that home speaker or that ecosystem to own and capture and control that data. So what does the mean for brands? It’s a potential positive for number one or number two brands but a potential negative for third and fourth tier brands. The use of home assistance also gives companies like Amazon the opportunity to substitute their own private labels for branded products.

We think the evolution to voice commerce is going to put pressure on the incumbent grocers and most likely lead to consolidation. And while consolidation may enhance profitability of the survivors, we’re not necessarily sure this is going to be the case if voice commerce and Amazon continue to put pressure on the industry. Home speaker adoption clearly skews toward millennials. And as that cohort enters their peak spending years, it’s going to drive significant change in the grocery industry.