In the past couple of weeks, the news from the United States has been filled with headlines about Amazon’s pending acquisition of Whole Foods.
Amazon’s current bid for Whole Foods is the largest acquisition deal attempted by far. CEO Jeff Bezos is paying a premium price ($13.7bn USD) for a marginally profitable retailer who has not been growing. And the price may go higher if other suitors consider higher offers for Whole Foods in order to block Amazon’s acquisition of a nationwide retail food store chain.
As omnichannel shoppers continue to seek convenience of home delivery, a major obstacle has been the vexing problem of the “last mile” – moving quality fresh food from the warehouse to the customer’s house. Will this be the magic marriage that enables Amazon to leapfrog the competition? Or is Amazon’s move to owning stores a recipe for failure by reaching too far beyond its core business?
In this piece, we explore the pros and cons of the Amazon deal with a perspective by Context’s Global Managing Director Adam Simon, and omnichannel strategist Chris Petersen.
Reasons why Amazon’s acquisition of Whole Foods is a recipe for failure – Adam Simon
- Amazon’s business model is ecommerce, not running stores
Amazon has built a tremendously successful model based upon online ecommerce. It specializes in warehouse, distribution and logistics to deliver items directly to consumers. Aside from a couple of pilot stores, it has no experience, team or systems in place to turn around a chain of 440 bricks and mortar stores with relatively flat growth and marginal profitability. Rather than be saddled with a retailer’s legacy systems and real estate, Amazon would be better off growing its own version. Or it could have acquired a chain with smaller format stores which would have better fitted the click and collect model.
- Whole Foods is upscale pricing and not consistent with Amazon’s strength for the masses
The standing cliché is that when people shop at Whole Foods they spend their whole paycheck. By design, Whole Foods offers very unique items and fresh organic foods at premium prices. Amazon is aggressively competing with Walmart in the US who is focused on the mainstream and value pricing. Whole Foods product range and high prices do not offer Amazon a competitive advantage in acquiring stores with broad customer appeal. Whole Foods brand and pricing is also inconsistent with Amazon’s own “Fresh” approach already in market.
- Mixing Amazon and Whole Foods cultures are like oil and water
Previous Amazon acquisitions like Zappos were designed to expand categories (shoes and apparel) but were also consistent with and built upon Bezos philosophy of “customer first” and ease of use. It’s not that Whole Foods is anti-customer, but the stores and culture were built around product differentiation and segmentation. The management philosophy and pay scales of Whole Foods are quite different from Bezos’ empire in Seattle.
Why Amazon’s acquisition of Whole Foods is brilliant retail disruption – Chris Petersen
- Bezos is investing for 2024 … the play for Whole Foods is not about grocery stores
If you follow Jeff Bezos the CEO of Amazon, he operates with a long-term vision. He has discussed how teams are in the process of planning the first half of 2024 today. Dennis Berman from the Wall Street Journal perhaps best summarized the Whole Foods acquisition:
“Amazon did not just buy Whole Foods grocery stores. It bought 431 upper-income, prime-location distribution nodes for everything it does.”
To underscore the value of an Amazon total integrated play, Whole Foods 440 stores gives Amazon to refrigerated warehouses within 10 miles of the about 80% of the US population. That kind of reach goes a long way of delivering fresh food the last mile to your door.
- Whole Foods enables Amazon to rapidly disrupt with its ecosystem
The Whole is greater than the sum of the parts [pun intended] and the parts of the Amazon ecosystem are formidable. Amazon has 100 million Prime members. Imagine what they could offer Prime subscribers in terms of preferred discounts and services in 440 stores. Amazon just announced a $20 version of an Alexa device built for ordering food and getting recipes … a perfect recipe for the Whole Foods concept and persona of fresh and organic.
- A core category of all households and the Prime subscription model is “food”
Half of Walmart’s core business is food and consumables, and it drives more than 100 million customers through its doors every week. It makes perfect sense why Amazon would buy grocery stores as opposed versus another type of retailer. As far as Whole Foods notoriously high prices, Amazon is the world’s best at shrinking supply chain costs and negotiating with suppliers. What better way to launch retail stores than to go after a category that drives weekly traffic and is synonymous with a subscription model augmented by Alexa and Dash reorders.
The future of retail is “hybrid”. Bricks and mortar retailers have been racing to build an online presence. Ecommerce realises the need to build a physical presence to complete the customer experience and establish an outpost for the last mile, especially in categories like food.
Will the Amazon big bet of 13.7 billion USD on grocery stores pay off? Chances are we won’t have to wait 7 years to find out. The “food wars” are already underway and we have a ring side seat.
It’s a great time to be a consumer! A very challenging time to be a retailer bridging both the digital and physical world.