How Amazon’s $13.7 Billion Whole Foods Acquisition Will Alter The Grocery Space – And Each Other
The deal will quickly solve Amazon's grocery ambitions as well as Whole Foods' lagging tech -- while putting enormous pressure on local rivals and chains to keep pace.
After shaking up the retail space for the past two decades, Amazon’s $13.7 billion purchase of Whole Foods represents the e-commerce giant’s latest and biggest move to dominate the grocery space.
Over the year, Amazon has shifted significant resources designed to challenge major retailers like Walmart and Target on the grocery front.
This week, Amazon Dash, the three-year-old device for immediate delivery of consumer packaged goods, has revamped its Amazon Dash Wand barcode scanner with the voice-activated digital assistant Alexa built into the device, Techcrunch reported.
December saw the opening of the prototype brick-and-mortar grocery store, Amazon Go, in Seattle. The Amazon Go concept allows customers to avoid the checkout line by simply walking in and leaving — as long as they have an Amazon Prime account that tallies the purchases automatically.
“With physical store purchases still accounting for nearly 90 percent of all retail transactions even after a decade of e-commerce growth, Amazon realizes that continuing large-scale growth over the next 10 years as a company will require capturing a big slice of the physical store purchasing market — so as long as Amazon can make do with higher margins and less overhead than traditional retail stores,” Aisle411 CEO Nathan Pettyjohn wrote in GeoMarketing at the time of Amazon Go’s launch.
The purchase of Whole Foods, shows how Amazon plans to capture the the grocery space, leaving traditional markets scrambling more than ever to attempt to match its services and prices.
“The biggest challenge for Amazon now is that they offer so much choice,” says David Berkowitz, Chief Strategy Officer at marketing tech firm Sysomos. “For instance, there’s regular shipping, Prime, Prime Now, Prime Pantry, and Amazon Fresh. The same box of Famous Amos chocolate chip cookies costs $21 via regular shipping and $15.59 via Prime Pantry; these kinds of price differences are common. As Amazon grows more complex, it will need to find ways to become more streamlined, straightforward, and simple.”
In a conversation with GeoMarketing, Berkowitz related a discussion about Amazon with his parents last weekend. He tried explaining the differences among Prime Pantry, Fresh, and regular Prime. By the time he was done, “I had confused myself and essentially convinced them to stick with going to Costco.” (As a bonus, at Costco, you get the $1.50 massive hot dogs, he notes.)
“That there are now so many ways to order these products — website, mobile site/app, Amazon Smile (web/mobile), Dash, various Alexa-powered devices — adds to the convenience for customers — but only makes it more confusing,” Berkowitz says.
“Amazon will need to proactively address this,” he says. “Instead of making me compare how many packs of cookies are in each box and how many ounces are in each cookie, just show me that this same product is available a few different ways and has a few different costs.”
The Impact On Rival Grocers
Even as this deal has Whole Foods continuing to operate its 431 locations under its 37-year-old brand name, the combination of Amazon’s technology will be felt by consumers and rival grocers quickly. (As the Washington Post reports, investors in Walmart, Costco, Kroger, and Target felt the impact immediately, as shares in those companies fell as much as 13 percent with an hour of the acquisition’s news.)
But even smaller grocers, who have been buffeted by on-demand delivery from the likes of Fresh Direct and Instacart, will need to need to rapidly sharpen their own online/offline strategies.
“The Amazon deal demonstrates the need for grocery retailers to move faster in their digital efforts,” says Jeremy Neren, CEO of GrocerKey, a Madison, WI-based provider of e-commerce and tech services for local grocers and chains. “There was already pressure to do so, given the rise in consumer demand and pressure being put on by Amazon, that pressure only increases with Amazon now having a nationwide brick-and-mortar presence to add to it’s arsenal of digital tools to reach consumers and bring them into their overall ecosystem.”
Rival chains and independents should be thinking about finding partners that not only help them implement cutting edge technology, but also help them think about how to operate in a new environment such as e-commerce, Neren adds.
Furthermore, Amazon’s dominance of the voice-activated, Connected Intelligence space with the Echo’s Alexa. As these devices go mainstream, Alexa will certainly provide a direct line to grocery purchases to Whole Foods, placing even more pressure on rival grocers to also find a way ensure Alexa connects them to customers as well.
“It requires an entirely different operational approach than they are accustomed to operating in to serve their customers in-store,” Neren says. “It’s also important to consider that strengthening your digital presence does not simply mean e-commerce, it means providing more touch points to reach consumers — e-commerce is a component of that, but you must also consider how to augment the in-store experience via digital touch points such as value added native mobile apps.”
Can Amazon Bring Efficiency – And Lower Prices – To Whole Foods?
Whole Foods Market first opened in 1980 in Austin. That was two years after its founders started a vegetarian grocery called SaferWay (a play on the general supermarket chain Safeway).
It wasn’t until the 1990s, when the idea of buying organic food caught on outside of bohemian enclaves and the company capitalized on the embrace upscale consumers were making towards buying products that were at least perceived as being eco-friendly and natural.
But after a spate of aggressive store openings and acquisitions, Whole Foods began to be a victim of two separate perceptions: one, that it was too high-priced for lower-income and mainstream grocery shoppers, and two, that it was failing to keep up technologically with its core upscale consumers’ desire for more on-demand and omnichannel shopping choices.
To address some of those issues, in 2015 the introduction of “365 By Whole Foods Market” represented an attempt to attract millennials with a combination of lower prices and app-based, in-store shopping services and loyalty discounts. But with only four outlets at this point, Whole Foods has clearly had trouble scaling that idea.
Bryan Eisenberg, co-founder of B2C marketing consultancy BuyerLegends and co-author of Be Like Amazon: Even A Lemonade Stand Can Do It, expects the acquisition to solve Amazon’s and Whole Foods’ respective problems in the current grocery space.
“Amazon has been trying to scale its grocery business for years; it’s where so much of our retail spend is,”Eisenberg said. “Part of the problem for Amazon in that space is that to sell groceries, obviously, you need a local footprint.
“The challenge is that Whole Foods has struggled the last few years,” he added. They’re not a technology company. They’re not good at efficiency. But from a brand perspective, they’re still strong, though people do feel they’re overpriced. Amazon will be able to give those stores the technology boost that they desperately need, Eisenberg said. We have 365 By Whole Foods store near us in Austin. But they haven’t pushed that concept far enough.”
The Endless Amazon Loop
The release of the Dash Wand with Alexa, along with announcement that the Prime members who add funds from a bank account to an online gift card will get 2 percent cash back on any Amazon purchase in the form of rewards/points, which can then be used to purchase of more products sold through Amazon.
That ability to entice shoppers to stay within the Amazon shopping system, which includes streaming video and music, is based on the bottom line idea of efficiency, immediate sales fulfillment, and lower prices than any other shop.
“The merger of the two brands will be great in consumers’ mindsets,” Eisenberg said. “Whole Foods does command some brand loyalty – though many people gripe about it being Whole Paycheck – by bringing Amazon to that, the prices have gotten more competitive, but they haven’t been able to shake the idea that they’re an over-priced supermarket. Amazon was able to keep that great ‘people culture’ at Zappos. I think they’ll do the same with Whole Foods, improving the perception of both the culture and the price points.”
From books to electronics to CPG to groceries, the Amazon brand has always been to allow a user to log-in to its site and apps and get personalized recommendations based on previous purchases. Suggestions are based on what the user searches, and what similarly profiled consumers bought when searching for those products.
“The number one thing you’ll see implemented ASAP: checking out at the register with Amazon Pay,” Eisenberg says. “That’s important because the problem with Whole Foods is that they don’t know if someone walking in is the most valuable customer or the least valuable customer. That’s the same problem Walmart’s had.
“Now, they’ll let people log into their Amazon accounts and they’ll be enabling the ‘endless shelf’ pretty quickly,” Eisenberg says. “Being able to check out and get the data on their customers will have an enormous impact on both companies.”
To realize the potential advantages of owning Whole Foods, Amazon needs to make buying groceries as easy as buying books,” says Berkowitz.
“I get that there are options with Hardcover, Paperback, Kindle, and Audible, so Amazon shows me pricing options, and delivery options too,” Berkowitz says. “Digital options arrive immediately, while physical options have their own delivery times and costs. Amazon now has to do for Famous Amos cookies what it does for John Grisham novels.”