Amazon’s acquisition of Whole Foods certainly took the world by storm last week. Why would Amazon spend $13.7 billion on a struggling mid-size grocery chain with a reputation for high prices? Because Amazon is very good at disrupting industries and the grocery business is ripe for disruption, both on- and offline.
As we’ve said before, online grocery currently represents about 5% of all online sales; that is growing dramatically as Amazon clearly sees an opportunity in online grocery and intends to reap those rewards. More interesting, however, is Amazon’s desire for a physical footprint that can help them compete with Walmart, now the nation’s biggest seller of groceries, as well as innovative European companies such as Lidl and Aldi, delivery services (Peapod, Fresh Direct, Blue Apron), and chains like Kroger.
Whole Foods’ physical locations in affluent, urban areas, serve the same demographic as the Amazon Prime consumer—allowing Amazon Fresh to easily expand through neighborhood stores consumers already know and trust. Although, it’s unclear how Whole Foods’ partnership with Instacart will be affected, Amazon will certainly use infrastructure to strengthen its position in the delivery space. Imagine how convenient it would be to press an Amazon Dash button, tap your Amazon app, or ask Alexa to order the items for dinner and have them delivered or ready for curbside pickup. Ideally, in-store consumers wouldn’t even have to wait on long checkout lines, they could simply pay via Amazon Go. Plus, by linking Amazon Prime consumer data to their Whole Foods carts, Amazon has the potential to personalize the shopping experience and offer exclusive pricing for Prime members.
But what about Whole Foods’ reputation for high prices? Amazon’s ability to negotiate and undercut its competitors is legendary, so expect the same to happen in grocery. The resulting lower prices will be a win for consumers, but as most grocery stores already operate on razor-thin margins, it may be challenging for many smaller and regional chains to survive. We’re not alone in predicting that the Amazon-Whole Foods deal will shake up the industry, spurring mergers to broaden scale or other strategic acquisitions to create differentiation in the marketplace.
Adding to the appeal is Whole Foods’ thriving, well-priced private label business positioned in the hot natural and organic category. Adding these products to Amazon’s growing food assortment would both expand their private label offering and allow Amazon to offer better prices to consumers for their own private label goods.
To current food brands, including our own client partners, I say these are exciting times! There’s no question that brands must optimize their Amazon presence to remain competitive on the site, as well as staying close to your consumer, with a channel strategy that thoughtfully addresses the Amazon marketplace, where so much consumer search and product discovery takes place.
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Source: CNN Money, Amazon is buying Whole Foods for $13.7 billion, CNBC The Real Reason Amazon is Buying Whole Foods.
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