The 3 REAL Reasons Amazon Bought Whole Foods

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Sean KervinSean Kervin June 21, 2017
Amazon didn’t buy a grocery store… it bought something much more disruptive

Amazon did it again. By purchasing Whole Foods, Amazon is set to disrupt the $800-billion grocery market in the same way it upended the publishing and consumer electronics industries.

Now Amazon is right where it wants to be: everywhere. It has surpassed its original goal of being the “everything store” and is fast on its way to becoming the “everything everywhere” store.

When Jeff Bezos started Amazon in 1994, he immediately acquired the www.relentless.com domain name, which to this day redirects to Amazon.com. He decreed that every day at Amazon would be “Day One.” Twenty-three years later, the company continues to run in startup mode.

Deftly side-stepping anti-trust laws through years of nonstop growth, Amazon has captured 30% of the overall retail market. Today, Amazon sells six times as much merchandise online as Walmart, Target, Best Buy, Nordstrom, Home Depot, Macy’s, Kohl’s and Costco—combined.[1]

Every step of the way, Wall Street has rewarded Amazon’s fast-growth, low-profit-margin business model with constantly higher valuations. And that’s given Bezos a war chest for acquisitions to turbocharge his organic growth.

If Jeff Bezos’s overarching market power frightens you—and it should—it’s important to understand why Amazon’s acquisition of Whole Foods is about a lot more than the purchase of a grocery store. In fact, there are three important reasons this latest acquisition may be his biggest disruption of all:

#1: Amazon just bought 430 Restaurants

People will always want to pick their own peaches… but many are also turning to a new service that’s really taking off: home meal delivery. A host of companies like Blue Apron, Plated and Peach Dish have been getting traction among consumers.

To compete successfully in this space, you need an inspected food preparation facility with highly trained staff, plus website and delivery capabilities.  Whole Foods’ prepared foods capabilities are top-notch. In fact, many people view Whole Foods as more of a restaurant than a grocery store. Amazon, with a website and delivery capabilities, just acquired 460 food production facilities, complete with trained staff, conveniently located in populous areas. All of which could make it a formidable competitor in the delivered meals space.

#2: Amazon just bought a Perishable Supply Chain

Amazon has wanted to enter the fresh-food business for years but struggled (some would argue failed) handling perishables. Amazon Fresh and Prime both offer fresh food delivery, but only 4.5% of its shoppers made online grocery purchases last year, a scant increase from 4.2%[2] in the previous year.

The biggest reason Amazon hasn’t expanded faster is that the perishables business doesn’t fit into Amazon’s supply chain model very well. To run a produce supply chain, you need relationships with growers in California, refrigerated trucks and special climate-controlled distribution centers with ripening rooms. Most importantly, you need experienced people who know how to make it all come together. While Amazon is all about automation, no company to date has ever successfully automated the produce supply chain.

Amazon currently partners with Sprouts, a “Famers Market” type of grocer and the partnership allows people to buy groceries online and have them delivered to their home in under two hours, but the true know-how of handling perishables stayed with Sprouts.  With the Whole Foods acquisition, Amazon just bought all the people, relationships, and 11 perishable distribution centers necessary to make a perishable supply chain work – farm to front door.

#3: Amazon just bought a successful Private Label

Amazon has been working to build out its own private-label food business, slowly rolling out products over the past year. But it’s been taking time. It introduced Happy Belly Snacks and Momma Bear Baby Food in 2016 and now offer Wickedly Prime snacks, but it also wants to get into the cereal business.  The Whole Foods acquisition just gave Amazon a complete suite of carefully formulated and recognized own-brand products to offer consumers – everything from cereal to salad dressing. I would expect the first thing we’ll see when the acquisition is complete will be the Amazon home page featuring the Whole Foods and 365 Everyday Value brands and private-label products.

The Big “If”

All three of these impacts will be important, but I expect #2 will prove to be the most valuable to Amazon. Building a perishable supply chain from the ground up is a daunting task. Target has been working on theirs for 10 years and still struggles to get it right. If the merger is done well, it could rocket Amazon ahead by 10 years in the perishables delivery business.

However, that is a big “if.”  Amazon has never completed an acquisition this big, and the skillsets of the two companies couldn’t be more different. I predict it will be a long, difficult journey for the two companies to get in sync with each other, which will give the competition time to strengthen.

Just when I thought retail couldn’t be disrupted anymore, we get news like this.  It’s a very interesting time to be in retail, for sure.

 

[1] Robinson Meyer, “When Does Amazon Become a Monopoly,” The Atlantic, June 16, 2017, https://www.theatlantic.com/technology/archive/2017/06/when-exactly-does-amazon-become-a-monopoly/530616/

[2] Spencer Soper, Olivia Zaleski, “Inside Amazon’s Battle to Break Into the $800 Billion Grocery Market,” Bloomberg, March 20, 2017, https://www.bloomberg.com/news/features/2017-03-20/inside-amazon-s-battle-to-break-into-the-800-billion-grocery-market.

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