Amazon recently announced that it has bought Whole Foods, and the takeover is causing some unrest among third-party sellers. Whole Foods is known as an upscale grocery chain with a very different business model from Amazon’s. So what does the takeover mean for the rest of us?
Rumours of the Amazon Whole Foods takeover have been spreading for over a week, and other bidders will probably jump in and challenge the online retail giant. But Amazon’s offer of $13.7 billion is likely to be the winning bid, and pending regulatory approval, the takeover is bound to be completed in the second half of the year.
Supermarket shares across the world have been hit by the news, plunging over the weekend. Many instantly began hypothesizing about the winners and losers of the deal, as Tech Crunch and Forbes reveal. Some even speculated that Amazon would turn Whole Foods into cashier-free stores the likes of its Amazon Go prototype.
Yet, a spokeswoman for Amazon, Drew Herdener, said the company doesn’t plan to cut jobs or implement Amazon Go technology in Whole Foods stores, as Reuters reports. In fact, Amazon seems to have promised not to interfere with the Whole Foods image in any way, at least for the foreseeable future, despite the media hype.
To people reading the headlines, this seems hard to believe. Surely Jeff Bezos will try to shake the upmarket image of ‘Whole Paycheck’, as Whole Foods came to be known over the years. It stands to reason they’ll be looking for ways to cut costs, now they’ve turned thriftiness into an artform, doesn’t it?
Media reports are conflicting. Considering that the Whole Foods chairwoman, Gabrielle Sulzberger, is married to the NY Times publisher, their reports of the Amazon Whole Foods takeover may seem biased, but also more realistic. The fact that Bezos owns the Washington Post is also slightly uncomfortable, but it gives us a few clues from the other side of the negotiating table.
But let’s ignore the kerfuffle and look at what we do know:
- Whole Foods is a natural and organic food retailing pioneer founded in Austin, Texas in 1978. It’s always tried to promote healthy food and to make the farm-to-table idea more accessible for regular consumers. In terms of margins, it’s far more profitable than other large chains like Costco and Wal-Mart, according to eMarketer, but also far smaller, with only 461 stores around the world.
- Amazon was founded in 1994 in Seattle. It’s always been more about putting the customer first and stripping down prices, even if it means trading profit for volume. Whatever profit it makes, it reinvests it in technology and assets, so margins are low. It’s more interested in doing things differently than in cashing in.
Why buy Whole Foods, then, if money isn’t an issue? In our opinion, it all has to do with reach, access, volume, growth and technology– a.k.a. economies of scale. Here’s what we think is likely to happen over the next few years:
1. Online Food Shopping Will Flourish
Since the AmazonFresh grocery delivery service was launched in Seattle, Amazon was only able to deliver a few goods to some customers in small areas. Then it rolled its AmazonFresh Pickup service in March. It enables you to shop for groceries online and collect within as little as 15 minutes, however small the order or the number of orders.
Even so, the variety of products is low and people weren’t quick to sign up. It looks like most people still like to shop in person and see and feel their meat and produce for themselves before buying. So AmazonFresh doesn’t even begin to address the nation’s urban ‘food desert’ problem at the moment.
But thanks to Whole Foods, that could all change. People know and trust the brand and the produce. So Amazon could be banking on the idea that regular Whole Foods customers would be willing to turn to online grocery shopping.
2. Amazon Orders Will Shoot Up
When people go shopping, they’re more likely to go looking for food and drinks than they are for any other goods. If Amazon could entice people to do their grocery shopping online, then that would bring far more orders to its website. Even if the margins were low, as they usually are for food retailers, the sheer volume would be worth it.
Also, there is potential for shopping carts to grow far bigger. Amazon buyers would be introduced to Whole Foods products and vice-versa. Customers would potentially log in to do their shopping, and end up compiling their grocery orders (AmazonFresh and Amazon Pantry) with their subscription orders and other regular orders, literally buying everything they need online, and perhaps even having everything delivered by drone.
The number of sellers signing up could increase dramatically as the number of fulfillment, collection or return centers increases. A wider distribution network, with picking, dispatching, click-and-collect points means sellers’ delivery and return costs could also decrease. If Amazon finds ways to make the most of every inch of extra floor space at Whole Foods warehouses, shops and lands, which it probably will, then it may never need to change Whole Foods’ business model or image.
3. Even Lower Operation Costs
Acquiring Whole Foods’ network of 461 stores means a fivefold increase in global presence for Amazon. The benefits would be obvious. It would be closer to customers across the world, shortening delivery times, processing returns far easier, reducing stock-out costs and possibly even making FBA products instantly available online. It all depends on how it’s going to use Whole Foods facilities and assets.
It could be able to expand AmazonFresh and AmazonFresh Pickup services nationally and then globally, delivering more groceries by van or opening more drive-up and pick-up Fresh stores. It could be able to shift more products with Prime Now delivery if it bundled orders together with grocery shopping lists.
It could test more Amazon Go stores, to see how easily people from different countries and cities adapt to not paying at a cashier desk. It could even test more of its drone technology across borders. It would have more international customer data and it would be able to fine-tune its business decisions. It would also have a larger customer base for its software services. The possibilities are endless. But one thing is certain: nobody would ever be able to match its prices.
So, you’d be forgiven for thinking your days on Amazon are numbered if you read the headlines, but there’s no reason to panic. If anything, this is a great opportunity for Amazon sellers to take a step back and find ways to grow and profit from the Amazon Whole Foods takeover.
Melanie takes an active interest in all things Amazon. She keeps an eye on the latest developments and keeps Amazon sellers up to speed.