On Friday Amazon announced it will be buying Whole Foods Market for $13.7bn in cash. The transaction still needs to be approved, of course, and it is supposed to close in the second half of 2017. There is a lot of opportunity in this deal for Amazon and the time was right for Whole Foods to sell.
Whole Foods’ struggle
Back in April the Wall Street Journal highlighted that Whole Foods’ CEO was being pressured to adopt more traditional groceries practices such as loyalty cards and coupons to try and put the brakes on growing competition from grocers that offered organic food at more competitive prices. Whole Foods used to own the organic produce market, but now it is Costco that sells the most. Aside from lower prices on organic produce, competitors such as Sprouts ( an Amazon partner) and Trader Joes on top of adding their own brand to products such as organic pasta, olive oil, organic frozen vegetables also started to offer products that used to be exclusive to Whole Foods.
Brick and mortar competition was not the only worry for Whole Foods. Online shopping through traditional brands and new environmentally friendly brands have also started to chip into Whole Foods dominance. A friend introduced me recently to Imperfect Produce a home delivery subscription of surplus or “ugly” produce. Serving Los Angeles and the Bay Area, Imperfect Produce offers lower costs and the chance to do something to lower food waste which resonates with high-end customers who care about local farms and the environment, especially millennials, a big focus of Whole Foods.
Boosting AmazonFresh and Prime Now
A report on Amazon’s grocery performance released in April showed that sales hit $10 million dollars. After produce and refrigerated dairy, the top-selling categories at AmazonFresh in the first quarter of 2017, in order, were bakery, other refrigerated items, frozen novelties, floral and garden, frozen meals, frozen breakfast foods, frozen vegetables and fruits and frozen desserts. Despite this good growth, AmazonFresh was starting to get competition from Instacart, a startup that has been rolling out its grocery delivery service at incredible speed compared to Amazon. Instacart serves around 40 metropolitan areas nationwide compared to 17 served by AmazonFresh. The speed of service and lower pricing are the drivers behind Instacart that offers a delivery window of as little as an hour compared to the eight-hour window of AmazonFresh. AmazonFresh is a 14.99 monthly subscription while Instacart Express is available from $99 a year depending on location.
Getting access to 462 brick and mortar stores will help AmazonFresh to become more completive on delivery time in key locations. You just need to take a look at the where these stores are located to see that Amazon will get access to very affluent customers 62% of whom, according to Morgan Stanley, are already Prime members. An opportunity for Amazon to grow Fresh within that base as well as expand the base itself reaching that 38% of Whole Foods customers who might be interested in getting groceries delivered but are not currently Prime Members. This is especially true if the Whole Foods branded products stay that way with maybe the addition of “by Amazon.”
Aside from groceries, Whole Foods has a solid offering of Health and Beauty products as well as organic clothing which could have a broad appeal to Amazon’s Prime Members.
The stores could also open up the new opportunity for Amazon for a ready meal delivery service like DoorDash or a cook your own meal delivery service like Blue Apron. Whole Foods has a good selection of ready meals in store today as well as the opportunity to come up with recipe-based hampers for people who enjoy cooking but not having to worry about coming up with the idea of a meal.
Shelf-space for Amazon’s Brands
Brick and mortar presence is, of course, not only about distribution but also about in-store shopping. With Amazon opening up AmazonBooks and Amazon Go stores it is clear that the e-commerce giant also values brick and mortar space. The added Whole Foods locations will offer Amazon the opportunity to showcase more of its own products. And when I say products I do not only mean tech products.
Back in 2014, Amazon launched Amazon Elements which was focused on baby wipes. Despite being only available to Prime Members, the wipes were able to reach a 16% market share making Amazon Elements the third baby wipe brand after Huggies and Pampers.
Since then Amazon has also launched many other brands many of which would fit quite nicely on a Whole Food store shelf. Mama Bear, organic baby food, and Happy Belly nuts, coffee and oil are good examples of such brands.
Amazon has also launched its own clothing brands some of which share Whole Foods’ natural fabric focus.
A Possible Showcase for Amazon’s Devices and Technology
The big question when Amazon unveiled its first Amazon Go in Seattle was how feasible it would be to expand that experience without a brick and mortar presence. While I doubt we will see the full experience of walking in, grab your item and walk out without going through a register, replicated in the Whole Foods stores, there is plenty of opportunities for Amazon to showcase its technology.
One option I thought about is to use the new Dash Wand to help us shop. You could either bring your own if you have one or get one at the store. Either way, it will be associated with your Amazon Prime account so all you will need to do would be scan your items as you put them in your cart and walk out. Waitrose in the UK, a supermarket with a very similar clientele to Whole Foods, had self-checkout scanners already seven years ago.
Another option would be for Alexa to help me navigate my shopping list as well as the store reminding me of which aisle a product I am looking for is. Alexa could also be at self-checkout stations if the Wand idea is not an option!
Possibly the most obvious opportunity is, however, to make my shopping experience much more personal and tailored to my needs thanks to the data that will be available to Amazon of what my overall shopping preferences are. A significant opportunity for AWS to continue to grow behind the scene.
The Risk of Company Culture Differences
Some analysts are already pointing out that Whole Foods and Amazon are just too different to actually make this acquisition successful. The former focused on a more targeted customer pool of higher spending consumers who value quality. The latter focused on excellent customer service, acceptable quality, and the best price.
While I agree with the assessment, it does not mean that the two are mutually exclusive. Customer care is core to both brands, so that is a great starting point. I see the stores and the Whole Food brand offering Amazon an opportunity to drive a more quality experience for its Prime customers. At the same time, I am hoping that prices will come down, so customers will love everything about the shopping experience including the price!
A big thank you for your blog.Really looking forward to read more. Want more.
This post post made me think. I will write something about this on my blog. Have a nice day!!