Why Would Amazon Buy Whole Foods?

By James O Malley on at

What do you do if you have a spare $13.7bn? Umm, if you’re Amazon the answer is apparently buy a supermarket. As the retail giant has today announced it is splashing out and buying the American chain Whole Foods.

So now the question is… umm, why? Here’s our guide to what Amazon might be thinking.

First things first… what is Whole Foods Market?

If you’re British, you might not have come across the chain before as while there arei that rich people never have to mix with the likes of you when buying a pint of milk. Think M&S or Waitrose - and then add another couple of layers of pretension.

If you want some Asparagus Water, Whole Foods is the place for you.

Source

Why would Amazon want to own a supermarket?

Amazon has already been on the attack against supermarkets. Since 2007, it has been slowly expanding Amazon Fresh, an online grocery delivery service, and it launched in London last year.

And the reason it is interested in taking on the supermarkets is pretty clear: Amazon already sells literally everything else, and groceries is its only weakness against the likes of Walmart and Tesco.

The acquisition could also give Amazon (even) more power when negotiating with suppliers of goods and foodstuffs. As we’ve seen with the publishing industry, Amazon’s dominance enables it to make more favourable deals with publishers, who need their books for sale on Amazon. It’s easy to imagine leveraging this even more enormous heft across an enormous range of industries.

But it isn’t just loaves of bread and ready meals that Amazon wants to sell you. As the Wall Street Journal’s Dennis Berman notes, “Amazon did not just buy Whole Foods grocery stores. It bought 431 upper-income, prime-location distribution nodes for everything it does.

Whole Foods has just become an accessible front-end for Amazon’s entire product range.

How could owning a supermarket make Amazon’s existing business better?

One of the biggest problems for delivery companies is the “last mile” problem. Getting goods delivered from one warehouse to another by using a lorry is relatively straightforward. Getting those same goods delivered to every individual at their home is more so - and is expensive too. That’s why companies like Amazon are busy building robots and drones to try to bring down these costs and make it a more efficient process.

And owning a supermarket could help with this: Suddenly Amazon has a big, visible warehouse where you can either go to pick up your stuff, or a place that can be used as essentially a sub-depot for maintaining and servicing “last mile” delivery robots and drones. Sure, this might sound futuristic, but this sort of technology is already being tested no London’s streets by the likes of Starship Technologies, which has built its own delivery robots.

How could Amazon technology make supermarkets better?

It’s also intriguing to think about how Amazon could use its technology to change the way we buy groceries.

In fact, we’ve already seen Amazon’s intentions for the future in the form of Amazon Go. As it revealed in a video last December, it wants to build shops where you never need to use a checkout again. All you need to do is scan your phone on the way in, pick whatever you want off the shelves and leave - and Amazon will work out how much to bill you based on what in-store cameras can see you carrying.

Amazon hasn’t quite perfected the technology yet: The store’s public launch was delayed because of technical problems (it didn’t actually work), but still, we can see what the company is aiming to do in the not-too-distant future.

And obviously, now that it will soon own Whole Foods, it is very easy to see where it could apply the technology, making it less annoying for customers, and cheaper for Amazon to operate stores (fewer pesky humans to pay).

There are also dozens of much easier to implement quick wins you can imagine Amazon doing, such as adding groceries to your shopping list using an Amazon Echo in your kitchen (or maybe with a tap of the Dash button). Then when you’re driving home from work, you can stop at Whole Foods and pick up your shopping, which has already been bagged and paid for.

Then there’s another old trick traditional supermarkets could use, which Amazon could take to the next level: loyalty cards. Cards like the Tesco Clubcard and the Sainsbury’s Nectar card were first introduced in the '90s with a dual purpose: Earning customer loyalty, by offering discounts to repeat customers who collect points, and also giving the supermarkets a rich seam of data to mine to better understand customer’s shopping habits.

Obviously, Amazon already has its own Clubcard, in the form of each of us having an account on the service. And some of us have even gone further and signed up to Amazon Prime. This means Amazon already knows so much about us - and adding our grocery habits will only enrich this data. It is surely inevitable that Amazon Prime will also receive some new, grocery-related perks too.

What does it mean for the company’s future strategy?

How this plays into Amazon’s broader strategy is super interesting - because Amazon is unusual. Though it is one of the biggest companies the world, it doesn’t actually make much profit, because Jeff Bezos’ goal to instead plough cash back into the company to grow it even further. Better to grow the company than to line the pockets of investors, the thinking goes.

Groceries is Amazon’s last unchartered frontier - and today appears to be Jeff Bezos sending tanks across the border, en route to the likes of Walmart.

What’s going to be particularly interesting is to see what Jeff Bezos does to Whole Foods to make it better reflect his way of doing business. As a posh supermarket, Whole Foods doesn’t compete on price - it charges higher prices than competitors, like Waitrose. Amazon, on the other hand, is a company entirely driven by finding value and cutting costs.

In fact, here’s quote in which Bezos explains his business strategy and why he is constantly trying to lower prices:

“I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”

(This quote is via Business Insider which is, of course, counts Jeff Bezos as one of it’s investors.)

So why go for Whole Foods? In addition to all of the potential technological transformation described above, As Benedict Evans notes, perhaps the benefit is it also enables Amazon to do perhaps the one thing a virtual supermarket can do better than an online store: discovery.

In other words, our online world is so customised to us, it is often hard to find new things. If you order your shopping online, you probably buy the same things every week. In a physical supermarket, you can wander around and discover new products too. Perhaps Amazon has just found a new outlet to help you discover the contents of its entire online store?

Is it good or bad for us?

And finally: What does the acquisition mean for us consumers?

On the plus side, it could making the shopping experience better: Who wouldn’t like to see new technologies eliminate the annoying parts or the weekly shop?

On the down side there’s Amazon less-than-stellar treatment of its staff - something that has been highlighted repeatedly on both sides of the Atlantic. An even more powerful Amazon is going to be even less susceptible to protests and campaigns to get workers better treatment. And politicians will be even more frightened of taking such a behemoth on.

And this leads into the final issue: Competition. Though Amazon is relatively new to grocery retail… is it really a good thing that such a massive company can take over another massive industry? At what point should competition authorities step in and try to rein Amazon in, for the good of the market?

As Christopher Mims notes, once the acquisition goes through, “It is now possible to live your entire life while only buying products from Jeff Bezos”.

Is this the future we want?

Featured image: Steve Jurvetson/Flickr (Modified)


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