Amazon Purchases Whole Foods and Terrifies the World…But Why?

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Amazon has the ability to win any race it enters. Whole Foods, however, is the wrong horse.

Last week I wrote about Amazon's pending purchase of Whole Foods. I think it could be a bit disruptive but when you read some of the media stories, you would have thought that Amazon had just exploded a nuclear device. Here are a few of the headlines:

"The real reason Amazon buying Whole Foods terrifies the competition"

"Amazon's Real Target Isn't Whole Foods. It's Everything You Buy"

"Walmart Gears Up Anti-Amazon Stance in Wake of Whole Foods Deal"

"Wall Street bails on Target after Amazon's deal for Whole Foods"

It all seems to be a bit overblown to me. Amazon is not purchasing a major, mainstream supermarket like Kroger (2778 stores), Albertson's (2400) or Ahold (2265). Nor are they purchasing a warehouse club like Costco or BJ's. And, thank God, they are not buying Walmart. 

No, they are buying Whole Foods and its 431 stores. Unlike most other supermarkets, Whole Foods bills itself as an organic grocer that carries only foods that are free of artificial anything. Its customer base is comparatively affluent and located in large metropolitan areas.

Whole Foods is wounded. It has experienced six consecutive quarters in which it has seen a decline in same store sales. Its competitors have gotten into the organic grocery business and have siphoned off customers with lower prices.

It has also shot itself in the foot on several occasions. To name just three: It has mislabeled weights on products resulting in overcharges reported to be as high as $15; the CEO called Obamacare a form of fascism, angering its primarily liberal customer base and it's yogurt brand contained five times the amount of sugar claimed on the ingredients label.

So, bottom line, Amazon is buying a relatively small supermarket chain with cultural problems, increased competition and a declining customer base. Amazon has no experience in the bricks and mortar supermarket business and they are going to be in engaged in what looks like a turn-around.

So, I think Amazon is going to be preoccupied with fixing Whole Foods before they get around to changing the supermarket business. Amazon has the ability to win any race it enters. Whole Foods, however, is the wrong horse.

One thought

  1. That’s a very optimistic way to look at it. There’s a lot of speculation going around on Amazon’s strategy here. Some say it’s about killing a competitor in Instacart for whom Whole Foods is their biggest partner. Others say it’s a distribution play – I find that unlikely and espoused mostly by people who don’t understand distribution. What’s clear is that grocery has been an elusive category for Amazon. It’s the key to unlocking local delivery in a major way. And if they can, it stabs directly in the heart of mass market retailers who have all turned to grocery to drive store traffic.
    Whole Foods is a trusted brand for quality if not expensive food. I’d more readily buy Whole Foods meat or produce sight unseen than from Amazon. And if they can get enough people doing that, it disrupts a major pillar of brick-and-mortar retail. And remember, they don’t have to take the whole enchilada to cause cascading effects across the entire ecosystem. Walmart’s net profit was only 4.5% last year and same store sales grew 1.4% so even small percentages matter.
    I’ve known Amazon long enough to know that there’s massive ambition but not always execution. At the same time, never ever underestimate them – and that’s what retail has been doing for 20 yrs – thinking small, ignoring ecommerce, and hoping tomorrow never comes. Whether it’s because of Whole Foods or not, anyone in the consumer products business should be freaking out because we are living on the literal tipping point right now – and if grocery goes, all the dominoes come down.
    We have to understand that our industry is dependent on something like 10,000 doors that are big boxes of inventory that sit there not selling most of the time. The entire business is built on huge initial order quantities which inevitably leads to things that don’t sell and have to be marked down. No matter how good you are at managing the supply chain, you still suck at it becuase it’s a flawed, inefficient system. Any one who works with Amazon knows that they will be a very low quantity but put that on a virtual shelf for the whole country to see, and if it sells, they reorder. Now there’s a good side to this too because reducing markdowns and volitility is good for everyone. But can the toy business as it exists today even afford to cut a tool on Amazon-sized initial buys?
    And then let’s talk about marketing. Toy Cos are still way too reliant on TV advertising, where perversely CPMs keep going up even as actual viewership craters. Digital marketing is an entirely different beast that requires a way deeper knowledge of data, CRM, social networks, and performance marketing. Most Toy Cos just don’t have these skills or even know they need them.
    I hate to be so bleak but I left the toy biz 7 yrs ago because I saw this change coming, and frankly it’s taken longer than I thought. The next 5 yrs and even decade are going to bring rapid, cascading, seismic changes to anyone that does business at retail and only those that see it coming and build a bigger boat will survive.

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