Like all deals between well-known brands, Amazon's acquisition of Whole Foods drew lots of headlines. But in this case, the immediate speculation about what will follow was often thin gruel and Amazon head honcho Jeff Bezos has chosen not to elucidate.
In a thoughtful analysis on his Stratechery blog, technology strategist Ben Thompson begins with the differences between selling books, Amazon's original starting point, and food, where it tested the waters with AmazonFresh and now is deep diving with Whole Foods:
- There are far more books than can ever fit in a physical store, so an e-commerce site can fare well through vast selection. On the other hand, there is a more limited number of grocery items, with a typical store having between 30,000 and 50,000 stock-keeping units.
- When you order a book, you know exactly what you are getting. A book from Amazon is the same as a book from your local bookstore you can hold in your hands. That’s not always so with groceries. Yes, a brand-label mustard may be the same in all stores but a tomato in one store is not the same as a tomato in another store. Groceries can vary in quality, “not just store-to-store but, particularly in the case of perishable goods, item-to-item,” he notes.
- Books can be stored in a centralized warehouse indefinitely, which has been part of Amazon’s success. But perishable groceries can only be stored for a limited amount of time. They degrade in quality during transit.
Those differences lie at the core of Amazon's coming challenge. It has moved into new product line after product line but generally there was a similarity to books. Grocery is very different. And so far, Mr. Thompson notes, Amazon has not been successful: "AmazonFresh launched a decade ago, and unlike other Amazon experiments, has continued to receive funding along with other rumoured initiatives like convenience store and grocery pick-ups. Amazon simply hasn't been able to figure out the right tactics."
He notes, however, that Amazon's success in recent years relates to a not commonly acknowledged factor: It often creates offerings for which it is its own best customer. Amazon Web Services, which has high fixed costs and depends on scale – lots of companies using its capacity – counts Amazon as a key customer. Amazon's fulfilment centres also need scale and count on Amazon using it.
With that in mind, he believes that Amazon has just bought a customer: "To the outside it may seem that Amazon is buying a retailer. The truth, though, is that Amazon is buying a customer – the first-and-best customer that will instantly bring its grocery efforts to scale."
Specifically, he expects that Amazon over the next few years will create a massive supply chain in meat, fruit, vegetables, baked goods and non-perishables that can be justified because it has a guaranteed customer in Whole Foods beyond the consumers that Amazon's online mastery can attract. "In the long run, physical grocery stores will be only one of the Amazon Grocery Services' customers: obviously a home delivery service will be another, and it will be far more efficient than a company like Instacart trying to layer on top of Whole Foods' current integrated model. I suspect Amazon's ambitions stretch further, though: Amazon Grocery Services will be well-placed to start supplying restaurants too, gaining Amazon access to another big cut of economic activity," he writes.
Whole Foods founder and CEO John Mackey two years ago predicted that groceries would be Amazon's Waterloo. Now, Mr. Thompson says, Mr. Mackey can call Napoleon boss. He argues Mr. Mackey misunderstood Amazon's goals, strategies and tactics but the bigger error was in misunderstanding Amazon itself. "Unlike Whole Foods, Amazon has no desire to be a grocer, and contrary to conventional wisdom the company is not even a retailer. At its core Amazon is a services provider enabled – and protected – by scale. Indeed, to the extent Waterloo is a valid analogy, Amazon is much more akin to the British Empire, and there is now one less obstacle to sitting astride all aspects of the economy," he says.
Gary Hawkins, CEO of the Los Angeles-based Center for Advancing Retail & Technology, told Progressive Grocer that Amazon can bring to brick-and-mortar operations its expertise in marketing relevancy and personalization integrated with sophisticated pricing algorithms. This will change the game as the operation won't be dependent on traditional big consumer packaged-goods companies and their marketing budgets. As well, with online shopping moving quickly from typing on a keyboard to conversational commerce, Amazon has a significant advantage over traditional grocers. "Think about how Alexa can be used even more extensively to shop at Whole Foods and inquire about what's fresh that day, where products are sourced from, etc. Amazon will leverage voice to expand the Whole Foods shopping experience. I can start my shopping list as I have coffee at home in the morning, add some things to it I think of while I'm driving to work, and then ask Alexa to have my order ready to pick up at the Whole Foods I drive by on my way home later that day. What traditional retailer is even close to this capability?" he said.
- Derek Thompson, a senior editor at The Atlantic, says “at the simplest level, the deal represents a straightforward confluence of interests. Amazon needs food and urban real estate, and Whole Foods needs help. The e-commerce giant has been expanding into groceries and physical locations, including bookstores, ironically working itself back into the brick-and-mortar business that it’s also disrupting. Whole Foods, meanwhile, offers the biggest name in yuppie groceries and a fleet of urban locations, which can double as Amazon warehouses.” On a deeper level, he feels Amazon is taking advantage of the most important value in American retail today, which is consumer convenience (or more vividly, “human sloth”). Grocery stores and restaurants are seeing fewer shoppers and diners passing through their shops, as Americans are ordering more of their produce and meals online.
- Wharton Marketing Professor Barbara Kahn says Amazon could entice its Prime subscription members into shopping at Whole Foods since many upscale consumers belong to the service. The appeal will be convenience, compared with Wal-Mart’s pitch on low prices. The Atlantic’s Mr. Thompson goes further on Prime, seeing it as akin to today’s cable bundle – a “life bundle” for affluent people. More than half of American households with income over $100,000 are already Prime subscribers, spending more than $1,000 annually. Now add to that Whole Foods customers spending $500 a month at that grocer.
- Harvard Business School Professor Len Schlesinger wonders how Mr. Bezos will handle the upcoming culture clash between the two entities. Amazon has an “obsessively customer centric culture,” he notes, while Whole Foods has adopted the concept of “Conscious Capitalism,” with a more balanced set of commitments to customers, employees, communities and investors. But Raj Sisodia, who co-wrote the book Conscious Capitalism with Mr. Mackey, told Fast Company that this could be a way out for Whole Foods, taking some of the short-term pressures from Wall Street off the flagging company. As well, Amazon may be a more understanding owner than if Whole Foods had been bought by another supermarket eager to cut margins.
- Have you ever taken a detour to avoid a traffic jam? Consultant Alan Weiss says the same tactic helps in business.
- It has long been believed that entrepreneurs open to new experiences generate better ideas. Recent research suggests that’s only true when they work alongside extroverted peers. When working with non-extroverted peers, the ideas tend to be average.
- It’s summer so take your work outdoors – your smartphone works anywhere, and all you need is a picnic table and a large hat, consultant Ann Gomez says. Embrace walking meetings, take a lunch break and challenge yourself to leave the office earlier in the good weather.
- If your website has consumer reviews – but only positive ones – it probably is backfiring. Good reviews can build trust, notes marketing consultant Roger Dooley, but a study showed 95 per cent of consumers suspect censorship or fake reviews when there are no bad ones.
- Lesson for startups from the Uber mess, courtesy of Bryant University Professor Michael Roberto: You can’t ignore human-resources rules, policies and procedures – you need guidelines for employee conduct.