Roundtable: Amazon's Future with Whole Foods
Aaron Steinfeld, Carolyn Hamm, Henrietta Dehn, Kathleen Bentley
Welcome to the latest in the Prosek Roundtable series, where we discuss the possibilities of timely topics.
In a world where brick-and-mortar stores are gradually going the route of the dinosaur, Amazon.com is trying in earnest to become the one-stop-shop for everything from high fashion to electronics. Oh, and books. Don't forget books. Not too long ago, it was announced that the company would purchase Whole Foods super markets, in a move that is both strange and fascinating. Was this to further the reach of it's relatively new Amazon Fresh brand? Or, was it to further enhance the company's distribution capabilities? Perhaps there are additional, strategic goals the general public is yet to be made aware of?
Meet the Participants:
There are few things in life more calming than a trip to the grocery store. After a particularly grueling day at work, I can’t help but find comfort in endless options of kale, shelves of grass-fed organic dairy and gluten-free crackers to choose from. Some people do yoga, but I go to Whole Foods.
Until grocery delivery programs disrupted the market some odd years ago, a trip to the local grocery store was more than an indulgence, it was a necessity. Running low on bananas? Better stop for some on your way home or enjoy a delicious bite of air for breakfast.
For the millennial generation, which is marked by its need for instant gratification, grocery shopping (like apparently everything else) appears to get in the way of a busy schedule and prevents folks from doing something more valuable with their time. This is exactly why Amazon Prime’s business model is so successful. After all, what other terms could you justify paying $100 a year for the instant delivery of something you could just as easily pick up around the corner?
Following last week’s announcement that Amazon would buy Whole Foods for a whopping $13.7 billion, millennials everywhere rejoiced knowing that someday soon, they could have their gluten-free, dairy-free, grass-fed, organic cake and eat it too—all from the comfort of their couch.
But what about people like me, who find peace in the aisles? Or for those who prefer to give their avocados a squeeze first to check for ripeness before throwing in the cart? Will a physical trip to the grocery store become obsolete? I can’t say for sure. What I do know, is that no matter how online retailers disrupt the system, a trip to the grocery store is more than throwing food in a digital basket. It’s an opportunity to brainstorm your next culinary masterpiece, learn more about healthy eating and support local farmers. You’re not just buying kale, you’re buying the experience.
Amazon’s Friday afternoon supermarket sweep on Whole Foods marks the latest stage in its drive to take over and dominate the consumer marketplace. In a clear demonstration that Amazon will do whatever it needs to gain market share, it has made a blatant move beyond the online world (of which it is already master) into the realm of physical retail. Because Amazon doesn't just want to gain share of one market—it wants the whole thing.
The positive share price reactions of Amazon and Whole Foods—and the negative ones of food retailers on both sides of the pond—gives an indication of quite how large an opportunity Amazon sees. There is also the fear that this whopping deal has struck a negative blow into the food retail industry—already on the back foot competing with discount retailers like Aldi or Lidl and the growth of "convenience shopping".
Amazon’s forays into the grocery sector to date have been well-documented, but not wholly successful. What’s most interesting about this deal is the value that the online monolith sees in having a brick-and-mortar presence to market its products and reach consumers. It also raises the question of whether marketing and selling food to consumers will always need some form of physical presence to succeed.
We’ve been told that Whole Foods will be run as a separate business and remain as a differentiated brand. For those of us in the business of marketing, it re-shines a light on the impact of branding and whether independent brands will survive Amazon’s relentless growth and pursuit of market share across sectors. In the future, using Alexa to do grocery shopping could well be a brand's final arbiter, and it won't be a surprise if we see shelves in Whole Foods stacked with Amazon Basic brands.
This acquisition brings serious scalability to Amazon’s grocery ambitions and makes us wonder what the "experimentation laboratory" (which is what GlobalData Retail called this move) will lead to, not least with the strong crossover in demographic between Whole Foods shoppers and Amazon Prime customers. Could combining Amazon’s online might, sophisticated sales and distribution tactics with the Whole Foods physical presence and customer base, alongside the development of its own convenience store models and kiosks herald a new shopping model altogether?
In April this year, Scott Galloway said that the "reckoning of retail" was already here. The acquisition—and the potential price and choice disruption Amazon-Whole Foods is likely to bring—proves it is.
Amazon’s $13.7 billion purchase offer for Whole Foods, the largest acquisition in the company’s history, thrust the online behemoth into the brick-and-mortar retail sector that it has spent years disrupting. Its new network of over 460 stores will serve as a catalyst for its distribution system, justifying supply centers in more remote areas and boosting the company’s struggling role in the grocery business. In 2016, Amazon’s grocery options, including Prime Pantry and Amazon Fresh, only accounted for an estimated 1.1% of the grocery industry’s market share, compared to Whole Foods’ 1.7% share. With the surge in consumer desire for affordable natural and organic groceries, Whole Foods struggled to maintain its elitist approach to providing these products, with same-store sales falling 2.5% in the recent year, and found itself facing pressure from activist Jana Partners.
But, in the overarching view of the transaction, who wins and who loses? Whole Foods is overwhelmingly receiving the saving grace that it needed to stay competitive within the grocery market. The marriage of these two entities will create the fifth-largest U.S. grocery retailer by market share, and will bring together a company which has struggled to compete in affordability with a leader in low-price retail. As the availability of natural and organic products has increased across big-box retailers, the pairing will help Whole Foods attract more mainstream consumers who are increasingly demanding these products at an affordable price. The transaction would also stand to benefit Jana Partners, who advocated for a potential sale as a way to reinvigorate the company’s performance in the market.
Another company expected to be seen as a big winner is Seattle-based Impinj, Inc. who serves as a manufacturer of radio-frequency identification devices and software, most widely used in both the retail and healthcare industries to track inventory and plan deliveries. While there are no official ties, it has been rumored that Amazon’s Go cashier-less concept stores would utilize Impinj’s RFID technology to track inventory and movement of products. Following the announcement by Amazon, Impinj’s stock was up 17% per share on Friday afternoon with many speculating about the endless potential for the implementation of this technology.
And the losers? Rival grocery store stocks plummeted on Friday, with industry giant Kroger falling as much as 9% as investors scrambled to digest where an Amazon-backed grocery chain would land in the market. In addition to the Whole Foods matter, the grocery industry also faces the threat of incoming German grocery chain Lidl who began opening U.S. locations as of June 15th, and plans to open 100 by the end of summer 2018. The chain, which plays in the small-store, limited assortment arena will compete with the low-price giants (think Walmart) and is opening a handful of its locations within five miles of a Kroger or Walmart. The continued disruption across the grocery industry is creating a tumultuous environment for long-standing retailers who are frantically working to keep up with the pace of change.
Additionally, grocery delivery service Instacart may be an unintended casualty of the acquisition as Whole Foods currently accounts for around 10% of the company’s business and was an early partner. With Amazon already boasting its own internal grocery delivery service, there is a large chunk of Instacart’s business that is in question, and it is not unlikely that Amazon will nullify the need for Instacart’s service. However, Instacart still holds a majority of its business with additional grocery partners, and has a unique opportunity to emerge as the top delivery rival to Amazon/Whole Foods.
There are many loose ends that need to be tied up before the acquisition is completed, and some suspect that there may be a competing bid in the works from grocery giant Kroger. All in all, the proposal excited many investors who are eying the endless opportunities for enhanced convenience, affordability and technological growth in this market. But, the unknown challenges that Amazon may face in expanding into this arena are yet to be seen - how they adapt to merging two different visions of workplace culture, pricing models and business strategy will define the long-term success of this endeavor.
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