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3 big reasons why Amazon needs Whole Foods

Carlo Allegri | Reuters

Amazon's announcement that it will buy Whole Foods, the upscale grocery chain, for $13.4 billion has led to widespread speculation about how the online retailer will shake up the food retail industry.

Will Amazon decimate traditional supermarket stores, like it did with brick-and-mortar booksellers? How will a high-priced supermarket chain, like Whole Foods, fit into Amazon's attempt to sell consumer goods online for the lowest price, like Walmart does? Is this even a profitable move for the company?

After all, Amazon has been trying unsuccessfully to break into the grocery industry for 10 years. It launched AmazonFresh in Seattle in 2007 to see if it could persuade consumers to buy bananas online the same way they buy toothpaste online. While AmazonFresh has expanded to Los Angeles and San Francisco, it hasn't really caught on across the country.

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Meanwhile, regular supermarket chains have been experimenting with online sales and delivery, such as the Peapod service from Giant. Online-only grocery providers, such as FreshDirect, are also trying to win the market. None of them seem to have found a successful formula. But there's a reason they won't give up: Whoever gets it right will make a ton of money.

Here are three recent trends that explain Amazon's decision to push further into the grocery world.

1) Americans spend a lot of money on groceries

Americans, on average, spend about 6 percent of their income on food, and it's one of the few purchases people make on a regular basis. In 2015, the US grocery industry recorded $602 billion in sales — more than the auto industry and smartphone industry. In fact, Americans have been spending more on groceries each year (mostly in line with the cost of inflation), according to a report by the Food Marketing Institute.

In 2016, Americans spent more money on groceries than ever before — $110 a week. That was the first time in decades that the rise in spending outpaced the rise of inflation. It could have something to do with the spike in prices at restaurants last year, according to the report. Or it could be a sign that more people would rather eat at home.

Whatever the reason, the truth is that the grocery industry remains a lucrative, reliable investment. The biggest change now reflects how consumers buy their groceries. Those who can respond to this change stand to make a lot of money. This is what Amazon wants.

2) Millennials are proving that online grocery shopping is profitable

While e-commerce has changed the way most Americans shop, most consumers still seem to prefer shopping for groceries at a brick-and-mortar store. This has a lot to do with consumer desire for fresh, quality produce, which is hard to deliver the Amazon way (from fulfillment warehouses scattered across the country).

Even now, most Americans would still rather get into a car, drive to the store, and scour the supermarket aisles each week.

But last year, something shifted. It's what the Food Marketing Institute called "a tipping point" for online grocery shopping. In a survey conducted by the research group, nearly half of millennials (ages 18 to 38) said they buy groceries online — a huge increase from 2016, when only 28 percent did.

"Millennials appear finally to have moved from curiosity to comfort with this channel," researchers stated.

The habits of millennial consumers are closely watched by industry analysts to identify areas of business growth. And online grocery shopping appears to be the next big thing. It is estimated to bring in $100 billion in sales by 2025, which is equivalent to the sales of about 3,900 supermarket stores.

For Amazon to keep growing, it needs to get customers to buy groceries online.

3) Consumers are still wary of buying fresh food online

While millennial consumers are starting to feel much more comfortable buying groceries online, they still only buy certain grocery products that way. They tend to buy baby food, pet food, snacks, and cleaning products from their phones and computers. But they would still rather buy meat, vegetables, bread, and milk from a brick-and-mortar store.

Among the reasons people give for shopping at a particular store are these: It's easy to find out a product's ingredients, where food is coming from, and how fresh it is. People surveyed (about 77 percent) said they trust certain stores to impose strict safety standards on their suppliers.

For an online retailer like Amazon, which wants to be the place where consumers buy everything, grocery shopping is the one clear area where it needs to expand. It needs to figure out how to get consumers to feel comfortable buying fresh food from an online corporation. In purchasing the Whole Foods stores, Amazon is hoping the chain's customers will make that leap.