Insight: five conclusions following the Amazon – Whole Foods deal

It was as clear as day that Amazon would one day acquire a supermarket chain, but nevertheless, the news hit everyone like a bombshell. What are the consequences of Whole Foods‘s acquisition for food retailers worldwide? 

Perfect match

If Amazon wants to become the ‘The Everything Store’, then this acquisition is a masterstroke. It is a perfect match: Amazon needed stores and Whole Foods needed money. The financial markets reacted violently and the headlines talked about revolution and disruption. Are they exaggerating? What are the possible consequences for traditional food retailers? Here are five possible angles.

1. Pure play is not the future of retail

Jeff Bezos seems to realize well that consumers no longer distinguish between offline and online channels. You cannot succeed with a “pure play” online model. You need physical stores in this market, particularly in the food market.

Amazon did already have a few physical stores (a number of book stores and a pilot convenience store), but things are getting serious. Whole Foods may be a niche player, it still generates a 15.7 billion euro turnover with 431 stores in the US, thirteen in Canada and nine in the United Kingdom. All of a sudden, Amazon has hundreds of perfectly located pick-up points thanks to Whole Foods. This may partially solve its costly “last mile”, even beyond its food sales.

2. Amazon buys food expertise 

Amazon drastically altered shopping behaviour in almost every possible product category imaginable – except for food… until now. Yes, Amazon Pantry is a price breaker and Amazon Fresh is a decent proposition, but its market shares are very limited. This acquisition propels Amazon into the largest retail market for sure. It also needed to enter that gigantic market, especially if it seeks global domination, because food gets you everywhere. Will online food sales actually pick up? Despite its limited market share, online has far more growth potential than offline.

Whole Foods also expands Amazon’s food product range, which its demanding customers will appreciate. In that sense, the acquisition is very similar to its previous purchases, like diapers.com and soap.com (household and care products). This turns Amazon into an actual fresh food expert, which is important because fresh food is often a barrier for online customers. Whole Foods stores can also start selling Amazon products, which does not have to be limited to food items, because Amazon spent a lot of money to develop its own brands across a wide variety of categories.

3. A lab for technological innovation

Amazon is used to spend a lot of money on research and innovation, something traditional supermarket chains are unable to do with their razor-thin margins. The tech company generates an enormous cashflow and does not need to pay its shareholders large dividends as the share will continue to grow anyway. It has an overabundance in funds.

Whole Foods can become a lab, a playground to trial new technologies, like cash register-free stores, artificial intelligence, … which is a frightening prospect for the competition. Investors feel the same way, because every other traditional retailer’s share plummeted, including those from Walmart and Ahold Delhaize, even though the latter has a decent online player in Peapod. 

Innovation penetrates most industries from the outside, like Google and Tesla’s impact in the automotive industry. It is not easy to compete with a tech company that has enormous financial resources to create actual disruptive innovation. Supermarket chains face high fixed costs in their offline divisions (real estate, supplies, staff, …) and their small margins leave very little room for innovative technology investments. However, they will need to be quick and develop new business models.

4. A data goldmine

Whole Foods’ audience fits Amazon Fresh’ audience: busy, cosmopolitan quality-seekers with cash to burn. The eighty million Prime subscribers also share certain traits with the Whole Foods audience. The organic store chain is considered to be a high-quality brand, albeit somewhat expensive, while Amazon is a price fighter. Just image if Whole Foods can become a price fighter thanks to Amazon’s scale…

Amazon also gets to see how Whole Foods’s many customers behave offline, which is a gold mine, because Amazon knows very well how to deal with data. It has the expertise to align the chain’s product range to its customers much better….

5. Not an entirely American story

It is all too tempting to see this acquisition as another step in the war between Amazon and Walmart: the world’s largest retailer buys one eCommerce company after another to catch up to Amazon online. However, the revelation that Walmart had bought fashion retailer Bonobos barely even made headlines…

The American food market is also in turmoil because of price fighter Lidl’s arrival, which has already resulted in a feisty response from competitors, sparking a price war. At first glance, the consequences will play out in the United States. The Instacart delivery service, which has an important collaboration with Whole Foods, may wonder what its future will hold. However, the impact of this deal reaches far beyond these two companies as the stock exchange indicates.

Maybe this acquisition is just the first step and maybe Amazon has other physical supermarket chains on its wish list, maybe even outside of the United States? This is a global company we are talking about. Should Ahold Delhaize start to worry? There may not be a huge overlap between its own store network and that of Whole Foods, but every supermarket chain faces extinction with Bezos’ omnichannel approach. Even in Europe? Well, Whole Foods already has several stores in the United Kingdom and Amazon Fresh is active in several neighbouring countries too. Most of all, Amazon has shown its ambition to perturb the supermarket’s feeble business model. In short, there are plenty of reasons to become nervous.