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Photo composite by Adweek

In June 1974 Marsh grocery stores -- anchored in Indiana -- introduced scanning technology to retail. On May 11 this year Marsh filed for bankruptcy protection. Several Marsh stores have since been purchased by Kroger and other operators. The remaining stores are expected to close before the end of July.

Walmart was not yet selling groceries when that packet of Spearmint gum was scanned. Today Walmart sells at least twenty-five percent of the groceries purchased in the United States. Sam Walton succeeded largely by leveraging logistics with information technology, facilitated by that scanner expressing an early whisper of "digital demand".

In about one decade Walmart transformed grocery pricing by transforming the efficiency of grocery procurement and distribution.  Marsh and many others were not even in that game. Some that were (see: Fleming (and here)) tried to challenge Mr. Sam and failed dramatically. In the Indianapolis market Marsh had recently fallen to a distant fourth place (7.8%) behind Kroger (37.6), Walmart (22.6%), and Meijer (13.3%). Meijer is a regional chain with meaningful merchandising expertise.

Kroger is headquartered in Cincinnati. It has been a big regional grocer since the 1930s.  It was testing scanning technology even before Marsh and deployed it just after Marsh.  It has been close to a national grocery operator since at least the 1960s.

Kroger responded to the Walmart effect by making substantial improvements to its supply chain management, staying ahead of Walmart on merchandising, and cultivating innovation.  Many of Kroger's innovations have been merchandising-related.  Complementing groceries with pharmacy and fuel has been very effective  and widely copied.

In the 1980s Kroger responded more quickly than many others to Walmart's explosive seizure of grocery market share.  Maybe because it was already big, Kroger was able to claim a cost-to-price structure similar to Walmart's.  Then it pushed to seriously differentiate its customer experience.  In the United States Kroger is the second-largest grocer and retailer (behind Walmart).  It has survived and serves a very sustainable market segment.  Kroger is better positioned than Walmart in affluent urban markets.

Walmart spent decades in retail before it took on grocery.  Some of its early forays into grocery -- especially fresh products -- failed.  But grocery was always seen as the ultimate prize of mass market retail.  Walmart's eventual success with grocery cemented its lead in every other category.

While grocery is an increasingly concentrated market -- in most places dominated by no more than five or fewer big players -- it is also very competitive.  Recent grocery price-deflation reflects the intensity of the fight (here and here).

Today the fastest growing big retailer in the United States is Amazon.  But despite various grocery plays -- such as Amazon Fresh and Amazon Go -- the online behemoth is not yet a major grocery operator. Most estimates give Amazon no more than 1.1 percent of the US food and beverage market... and online grocery altogether, not much more than 2 percent.

Given Amazon's success in disrupting the book, fashion, and electronics industry, the grocery sector has been very attentive to Amazon and other online food ventures (see Blue Apron and Sun Basket). But the ambitious plans of Aldi and Lidl have, perhaps, presented a more urgent threat to Walmart, Kroger, Albertson's, Publix, Ahold, and other current industry leaders.

Then last week Amazon announced its intention to purchase Whole Foods for $13.7 billion. Whole Foods is a top-ten grocery retailer.  According to the consulting firm Cowen, an Amazon-Whole Foods combo would become the fifth largest grocery retailer by sales-volume behind Walmart, Kroger, Costco, and Albertson's/Safeway.

The combination of Amazon and Whole Foods strikes me as a brilliant move. Both are especially well-positioned with affluent urbanites.  Amazon needs some way to scale its grocery operations. Whole Foods needs to re-brand itself from "Whole Dollar" into something affordable, accessible, and sensible.

By the end of this year Amazon could have more than 400 forward operating bases for urban grocery delivery and pickup and a much expanded grocery supply chain. Whole Foods will -- if the deal is done -- have a privileged place on the Amazon platform where millions of consumers are already habituated to perceive comparative value on price, customization, and convenience.

I assume the Amazon team is having serious talks with United Natural Foods, the largest Whole Foods supplier.  Investors have initially assumed the merger is bad news for UNFI. There might well be some pinched margins, but there is also a huge upside if greater density and volume of demand results from the combination.

Despite the initial disclaimers, don't be surprised if Walmart makes a rival offer to the Whole Foods board.  Given the potential of the competitive threat, it is just due diligence to consider how to stop this powerful new competitor from forming.

But for Walmart the real threat from Amazon is less about battling for share in every metro market and much more a matter of fundamental strategy. Walmart roared out of Arkansas to become the world's largest private enterprise by organizing supply to maximize profits. It was a great strategy well-executed.  Amazon aims to facilitate, empower, and essentially "own" digital demand. Two very different worldviews. Is one right and the other wrong?

Let's go back to Indianapolis, home to 860,000 people, the fifteenth most populous city in the United States. The metro area has about 2 million residents.  Today there are two Whole Foods: one on the north side of the city-proper, the other in an affluent northern suburb.  Amazon Fresh already operates in the city.  The metro area hosts four Amazon fulfillment centers, with related transportation support from UPS, USPS, Fedex and others. Very significant capacity.

There are more than a dozen Walmart Supercenters or Neighborhood Markets in the Indianapolis metro area.  Kroger has even more retail outlets in the area.  Both operate huge webs of supply in every direction with all the attendant distribution infrastructure. The next Whole Foods is in the outer suburbs of Chicago. For groceries in particular, Kroger and Walmart have enormous advantages in volume and density -- with fundamental implications for pricing.

As noted above, Kroger is the market leader by a considerable margin.  In Indianapolis, Kroger has gone head-to-head with Walmart and thrived. Arguably it did this by recognizing it needed to improve where Walmart was most threatening and then differentiating itself with consumers.

Consumer behavior is increasingly connected to digital activity.  Demand is increasingly informed, stimulated, expressed, and fulfilled through socio-technical networks.  We have come a long-ways from the digital scanner as an inventory tool.  The smart phone and related social media have created network-flows that can suddenly self-organize in unexpected velocities.  Catch the wave and beauty abounds.  Failing to see the wave building can get you killed.

Amazon owns a huge proportion of online sales (making big waves).  It gave online more and better attention earlier.  As an enterprise, it is native to the net and is enjoying founder privileges.  Kroger and Walmart need to improve their network (not just digital) strategy (and execution) and integrate online services with their off-line advantages.  They know this.

But these legacy leaders are a bit like long-time mussel diggers who are now being expected to also host surfing expeditions.  It is -- especially in transition -- an awkward functional, strategic, and conceptual mix.  Attitudes and worldviews adapted to one activity are not always optimal for the other activity.

In 2016 Amazon generated revenues of about $136 billion, Kroger generated $115.3 billion, Walmart recorded $485.9 billion.  None need to  go the way of Marsh.  Each can be profitably serving millions of customers in 2027.  But... to avoid the fate of Marsh, A&P,  and many more, the current leaders need to recognize and embrace the emerging realities of their time and place.

In another ten years this sector will be barely recognizable.  It is and will still be about supply and demand, but the focus of attention is shifting -- quickly -- from a 5000 year-old stare at supply to youthful fascination -- and constant discoveries -- regarding the networking of demand.

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This is my first post in eight weeks.  It has been a extraordinary Spring season for supply and demand networks.  Several factors long under development are converging.  The summer will be at least as busy.  For my own benefit -- as well as yours -- I hope to use this space to collect the emerging narrative. But given the pace of other work I don't expect to add much to the narrative for the next few months.