Amazon.com has redefined all aspects of the retail market. The e-commerce giant’s online presence has forced many brick-and-mortar stores to close locations and move their own operations online to compete. So why would the tech-savvy giant choose to purchase Whole Food Markets Inc., an upscale grocer with 460 retail store locations?
There are a few answers, and “data” is predominant among them. Although Amazon has a firm and enviable grip on how consumers shop online, it struggles to predict consumer behavior in physical store locations. Thus far, its tentative efforts to enter the grocery market, such as its delayed grab-and-go concept store in Seattle and struggling Amazon Pantry service, have remained rare missteps for the company. The purchase of Whole Foods—with its own successful track record of creating and fostering customer loyalty—could provide the answer.
In particular, the consumer data that Amazon will obtain from Whole Foods offer the promise of enhancing, developing, and supporting its newly extended brand. First, Whole Foods will provide Amazon with information about how shoppers behave in physical stores. Everything from impulse purchases to traffic flow patterns will provide valuable insights to Amazon as it seeks to enhance sales at its own brick-and-mortar bookstores and planned grab-and-go convenience stores. As a bonus, 60 percent of Whole Foods shoppers also currently subscribe to Amazon’s Prime service, so Amazon already knows that Whole Foods customers represent a viable target segment, displaying the needs and behaviors that shoppers who are in its target market embody.
Second, Whole Foods has successfully built a wide-ranging private-label brand. This experience and expertise will help Amazon better understand how to grow its own private-label brand successfully. It currently produces mostly staples, such as batteries, baby wipes, and computer paper, but there clearly is room for Amazon to leverage its new retail data to expand these offerings.
Third, the new physical store platform will allow Amazon to test a variety of new ideas to see what works and what does not. For example, acquiring Whole Foods means that Amazon gains a space and means to experiment with new forms of payment, such as expanding the use of its Amazon Pay service. The results of these experiments should enable Amazon to devise new ways to encourage greater adoption of this service or any subsequently developed easy pay service—a development that would lead to an even greater stockpile of data.
Ultimately though, the $13.4 billion dollar purchase of Whole Foods by Amazon still represents a risk. The high-end grocery store has faced increased competition from other grocers, especially as larger chain stores seek to lure shoppers with similar lines of organic products offered at lower prices. Whole Foods’ 460 stores also have faced a long stretch of same-store sales declines. With prices that average 20–30 percent higher than other grocers’, Whole Foods continues to seek ways to deal with not just declining sales but also a labeling scandal uncovered by the New York Department of Consumer Affairs and growing opposition from both its board and its shareholders about the CEO’s plan to remain independent.
Still, the acquisition of Whole Foods and its retail locations suggests that Amazon is dedicated to the idea of competing more aggressively in the retail grocery space and overcome its early struggles to cross into that market. Purchasing Whole Foods allows Amazon to piggyback on a successful brand and concept. Fresh leadership and greater purchasing power seemingly might help alleviate many of the woes that Whole Foods has struggled to overcome as an independent retailer.
By adding grocery to its already extensive array of retail offerings, now more than ever Amazon seems poised to compete with Walmart for ultimate dominance in the retail space. Both entities have expanded their operations, by acquiring other, smaller, successful brands, then raising the profile of each niche company to help it reach new audiences. For example, Walmart typically has been associated with lower- and middle-income customers in rural areas, but it recently acquired two high-end fashion companies, ModCloth and Bonobos, that are known for their fashion-forward images and significant online retail presence. Through such acquisitions, Walmart clearly is seeking to expand its product offerings and appeal to a new type of affluent consumers. They also allow Walmart to expand its online presence and fashionable image, such that it might compete more directly with Amazon for the same shoppers.
Simultaneously, Amazon’s acquisition of Whole Foods seeks to broaden the retailer’s appeal and customer base in the grocery market, a sector traditionally dominated by Walmart. As each nips at the heels of the other, the consolidation of retail power behind two mega-brands continues to lead toward what might be an interesting showdown in the retail sector. Which entity will come out on top?
Discussion Question:
- Why did Amazon buy Whole Foods?
- Was it a good idea from the perspectives of the buyer and seller?
- How do these acquisitions fit into the current omnichannel retail environment?
- Who will come out on top, in your opinion: Walmart or Amazon? Why?
Source: Laura Stevens and Heather Haddon, “Big Prize in Amazon-Whole Foods Deal: Data,” The Wall Street Journal, June 20, 2017; Neil Irwin, “The Amazon-Walmart Showdown that Explains the Modern Economy,” The New York Times, June 16, 2017; Annie Gasparro and Heather Haddon, “Grocery Pioneer Whole Foods to Join Mass-Market Crowd,” The Wall Street Journal, June 16, 2017; Farhad Manjoo, “In Whole Foods, Bezos Gets a Sustainably Sourced Guinea Pig,” The New York Times, June 17, 2017