What Will Amazon Do With Whole Foods?

Share this:

It’s been nearly two months since Amazon announced its intent to acquire the Whole Foods chain for $13.4 billion — or $13.7 billion according to some sources. Whatever the figure, the acquisition, expected to close later this year upon regulatory approval, is by far the largest in Amazon’s history, and represents a watershed moment in the overall history of online retail. The world’s largest digital retailer has decided that its future strategy includes a nationwide chain of brick and mortar stores, the very thing we all assumed the Amazons of the world would someday replace.

For years, Amazon has been working to establish an infrastructure of warehouses and delivery systems that would bring purchased goods to the consumer as quickly as possible. That’s fine for post-purchase customer satisfaction, and Amazon can fairly say they’re already winning the fulfillment game. Sure, the addition of 460 stores across the U.S. could offer a huge boost to the retailer’s distribution, but it doesn’t make much sense to imagine that the acquisition is intended merely to turn high-end grocery stores into warehouses or pickup centers.

Others have suggested that Amazon may be interested in broad-based testing of new shopping concepts, like that of the register-free Amazon Go store in Seattle. Makes sense, although again, it’s hard to see why such a momentous acquisition was needed just for the sake of experimenting with in-store retail.

Greg Petro, writing in Forbes, believes the acquisition is really about data. The wealth of data Whole Foods must house about the grocery buying habits of affluent consumers can be crunched by Amazon’s master data analysts to derive the ultimate customized shopping experience in a sector Amazon knows a lot less about than it does books or electronics.

Perhaps the savviest analysis comes from those who point out that grocery shopping is the last major segment of retail that Amazon has not yet figured out how to dominate, and that it may be necessary to move heavily into grocery sales if the company wants to maintain its rate of growth. Representing 17 percent of the U.S. retail market, food sales are inherently difficult to manage in an online-only manner. If Amazon’s ultimate strategy, according to Jim Hertel of martech firm Inmar Inc., is to become “the first thing any consumer thinks of when they need to buy anything,” then mastering this corner of the retail market is essential. Says Hertel, “They can’t do what they want to do without grocery.”

Still, if Amazon wanted to make a big splash in grocery sales, it’s somewhat odd that they chose a retailer whose growth has flattened, whose brand is associated with exclusivity and high prices, and whose sales and spread of locations are modest compared to Walmart, Target, or Kroeger.

When I think of what the Whole Foods acquisition represents, I’m reminded of the lore surrounding the early history of Amazon, in particular the notion that Jeff Bezos initially chose to sell books because they fit the business model he was after, not out of any special fondness or expertise in books themselves. Books are standardized in many ways, making them easy to categorize and ship. They don’t expire on the shelf. Every copy of a book is the same as every other copy, so there’s no special reason to see it in person before you buy. There are too many books in print ever to sell more than a fraction in a single store, giving internet sales a distinct advantage. And so on.

So, if books in the abstract were the perfect product with which to build an online shopping empire, what can we say about groceries? In many ways, food is the polar opposite of books. It’s difficult to store and tricky to ship. Many consumers would be reluctant to buy fruit, vegetables, cuts of meat, and many other food items sight unseen. In the abstract, then, grocery stores may well represent the ultimate in local, offline retail – especially when you consider that grocery shopping is at least a weekly necessity for almost every U.S. consumer.

If that’s the case, the innovations Bezos and his team might introduce are probably not yet on our radar. Some of the concepts that have made Amazon so successful, such as Prime membership, may be translatable to offline retail, but many will not be. Instead, Whole Foods will represent a brand-new challenge to the company that has come to define online commerce. How can shopping in a physical store be disrupted and transformed by the same kind of thinking that created the world’s biggest virtual marketplace?

Damian Rollison is Director of Market Insights at SOCi.