Why Amazon purchased Whole Foods, what it means for consumers, and how Amazon can boldly lead us to a new food future.
Lately I’ve read dozens of articles on Amazon’s purchase of Whole Foods Markets. Nearly all of them land the basic strategy, that is, an expansion into an adjacent market. Most don’t go much further. The Atlantic touches on two phases of what I believe is Jeff Bezos’ vision better than most but they, like most, don’t quite capture the grand strategy I see coming quickly over the horizon.
Let’s look at the four phases I believe make up Amazon’s master plan to absolutely dominate the combined retail and supermarket industries and truly become, “The Everything Store“.
Phase 1
Adding Whole Foods Markets to the Amazon portfolio provides Amazon with a strategic stronghold in terms of entering an adjacent market. Clearly the acquisition brings with it Whole Foods’ large physical footprint. These are obvious reasons behind the purchase that we can all agree on. It’s easy to imagine that soon you will fill your cart from home, work, or your mobile device and simply show up at Whole Foods to retrieve your items. They might even be brought out to your car by a nice little robot. What’s far more significant, however, is to imagine all the data Amazon tracks today, now applied to the refrigerator and the pantry. Imagine local stores optimizing around what you and your neighbors actually purchase. Imagine that more of what you actually purchase is available, in the right stock levels, at the right time, for the right price.
That is the real vision for Phase 1: Amazon leveraging Whole Foods stores to optimize for local and regional demand. As a bonus they get to use these hundreds of stores, and their hundreds of surrounding communities, to introduce new products, get live feedback on local purchasing habits, and adjust accordingly. Like everything Amazon does, these changes will likely happen in real time, with the result being that we continue to buy more of our goods from Amazon while they continually improve upon the ability to provide exactly what we’re looking for.
Phase 2
Coming off of Phase 1, Phase 2 seems readily apparent: Amazon realizes massive cost reductions as they optimize their ground and air shipping lanes around everything learned from Phase 1. This is further altered by another major shift in a later phase, but before you jump down the page let’s explore this for a moment. Amazon may get to further evolve their ground game, both freight and midsize transport, beyond their current hub-and-spoke model into a much more complex but also more cost-effective multi-node model where they leverage some percentage of each Whole Foods store as a local small-scale distribution center.
As a practical example tying their existing business into the new grocery business, if everyone in your town is hot on the latest Stephen King novel, but the three surrounding towns aren’t, Amazon can now leverage your local Whole Foods store both as a better distribution point and for in-store shelf space to do direct sales. Combining the existing business with the new is a given, thus why I haven’t broken that out into it’s own phase, but the details of that combination are merely an outcome of the primary goal of cost reductions through distributions optimization.
Phase 3
Stop & Shop’s “Peapod” service, along with several food-delivery startups, have all experienced mixed levels of success in grocery delivery. Amazon, with their Prime Pantry service, was the only company noted in that article as having grown their share of wallet in that market. Purchasing Whole Foods is thus a natural progression beyond Amazon Pantry, which is mostly for non-perishables, out into fresh produce, meats, cheeses, and so on. So here we are in Phase 3: Amazon leverages Whole Foods to rapidly expand Amazon Prime Pantry into the grocery delivery market. This move takes Amazon’s existing supply chain expertise, strengthens it with the localization experiences learned in Phase 1, and solidifies it through the enormous cost-reductions and distributions optimization from Phase 2.
Given all of this, I have to believe the approval on this $14 Billion purchase sailed through Amazon’s board. A purchase that is low risk, low friction and high return? This is the trifecta of a perfect strategic expansion opportunity.
Phase 4
Amazon constantly works to minimize costs and maximize customer loyalty. I covered one approach to minimizing costs back in Phase 2. Amazon’s customer loyalty is largely a factor of constantly streamlining the shipping experience, as evidenced by free two-day shipping being the big driver behind the wildly-successful Amazon Prime program. What does the purchase of Whole Foods have to do with increasing customer loyalty if the best way to do that is by reducing shipping time and improving delivery accuracy, and didn’t I already cover that in Phase 2?
Enter Amazon Prime Air, Amazon’s drone-based delivery system. Currently in testing.
You need to be reasonably close to your customers to support drone delivery today due to the speeds, ranges, and battery recharge times of modern drones. Buying up Whole Foods gets them this proximity. We have recently seen Amazon push hard into solar, and so the addition of 20 million square feet of rooftop space to support solar panels and takeoff & landing platforms could realistically drive Amazon’s local transportation costs from spoke-to-customer down to zero. Millions of square feet of parking lot space means room for local GPS, radio, and other signals towers that provide a leap forward in location-tracking precision: Amazon needs to deliver right to your front door, not a spot 50 feet away! All of that parking lot space also means room for fleets of self-driving vehicles, but that may be part of another strategy altogether (and an article for another time, see “Amazon v Tesla in the battle for the self-driving future”; not yet written!)
Thus we arrive at Phase 4: Amazon provides a food and goods delivery service that is automated, sustainable, and always available. The foods, and potentially all other goods you want as I discussed Amazon optimizing their non-foods distribution back in Phase 2, delivered to your door or any other location of your choosing, at the exact time of your choosing, all tracked and giving you updates in real time, and all at nearly zero shipping & energy costs to Amazon. Combined with the Amazon mobile app, and your phone’s GPS, this could one day mean doing your shopping online during your lunch break and having everything show up at your feet exactly as you arrive home after work.
This massive leap forward in the grocery and retail industries could further spell the collapse of many of Amazon’s competitors, leaving Amazon to buy up the challengers with the best store locations at price points they can basically demand. This could lead to even greater shopping and delivery experiences and ultimately cement Amazon’s position as “The Everything Store”.
Why is all of this so valuable both to consumers and to Amazon? The simple answer is time. At least one survey, done in 2014, found that Americans are willing to pay over $2700 for an extra hour of time in the day. On average we spend 43 minutes per week (PDF) in the grocery store. Amazon is doubling-down on this. We’ll pay the same or even a little more so long as we also get some free time out of the deal. By adding food products to their portfolio, by continuing to streamline our exchange of money for time, Amazon has positioned themselves perfectly as the food and retail supergiant of the future.
Some closing thoughts…
What do you get when you combine some of the unique demographic demands of Whole Foods shoppers, such as the growing demand for local and sustainable food products, with the strategy outlined here?
In my view, you get Amazon dominating the growing farm-to-table industry in North America inside of 10 years. It starts with vans and trucks but soon we will see fleets of drones, on ground and in the air, gathering fresh foods straight from local farmers for delivery to your local store or, perhaps more conveniently, straight to your door. Prices are managed dynamically by Amazon based on local supply levels. Farmers know what’s in demand and can react accordingly, or try introducing unique products at premium prices. You just choose what you want to buy, from which local farm, and there it is on your doorstep at a time of your choosing.
A final burning question on the new food future
What happens when Amazon then takes the next logical step and begins buying up all the local and regional farms, perhaps even extending their reach into the factory farming industry itself?
Sean M Masters 