Amazon’s acquisition of Whole Foods Market set to disrupt retail industry
In June 2017, Amazon bid for Whole Foods Market acquisition at $13.7 billion. Although this bid by Amazon is seeing some competition, is under scrutiny and is pending review, it sheds light on the next target for Amazon’s business empire.
A brief look into Amazon’s history
Amazon started with the online book store in 1995. That was the time when internet boom had already begun and every mom and dad had got their own domain name for bragging rights. From an online book store, it expanded its products catalog to almost anything and everything within a span of 5 years. Jeff Bezos seemed to know that future of the business was e-commerce and did everything to be ahead of the curve at all times. Part of the reason of Amazon’s success has been aggressively following belief and direction set by the Bezos. Through the rise of Amazon and other e-tailers, many industries have seen disruptive changes and countless businesses have gone in delinquency.
Case in point the book retailing industry. In 1996, just 1 year from the inception of Amazon, Jeff Bezos met with owners of Barnes and Noble for dinner and was told that Barnes and Noble was planning to launch a website of its own for online book retailing which will crush Amazon. Understanding this direction of Barnes and Noble, Jeff Bezos made Amazon a diversified e-retailer and at the same time made the pricing of the books even more aggressive to nudge ahead of the competition from the likes of Barnes and Noble. Today, in 2017 even though Barnes and Noble continues to exist, its financial performance speaks for the state of its business:
Barnes and Noble is just one of the last major book retailer which has weathered the aggressive rise of online book retailing and emergence of e-books as the preferred medium for many. Others such as Borders could not survive this industry transition and are not in business any more. Another industry which went through the same transition is audio / video records industry, and the comparison of the downfall of the businesses in this line with the book retailers is almost identical (along with timeline). Then there are consumer electronics brick & mortar stores which are struggling to survive today to provide hefty discounts to match with Amazon, thanks to Amazon’s low cost and highly efficient operating model.
Why grocery retailers have been immune to Amazon’s expanse so far?
So far groceries businessess have enjoyed a strong consumer preference for in-store purchases for the reasons of quality and immediate need in most cases. Amazon started with grocery product line Amazon Fresh in 2007 in Seattle. Since then it has gradually expanded its services in most major cities in US and some international locations. The demand of the online grocery segment is yet to pick-up due to many reasons :
– Consumer preferences – Most consumers prefer to visit stores and see for themselves the quality of the fresh produce. When consumers require to go to neighborhood stores for fresh produce, they tend to purchase other grocery items (toiletries, kitchen essentials, napkins etc). Due to this reason, it becomes difficult for an online business to be a one-stop-shop for grocery segment
– Pricing competitiveness – Amazon Fresh requires consumers to subscribe Amazon Prime @ $99 per year, and add on Amazon Fresh services for additional per month cost of $14.99 (at this time). Beyond this recurring cost, the pricing of the grocery items is also not competitive on Amazon in comparison to Walmart, Costco or Kroger
– Severe competition from brick & mortal stores – Sensing the threat of online retailers, most brick and mortar retailers have become more aggressive on pricing by leveraging their hold of the local supply in most regions. Beyond pricing, many big chains have also embraced technology innovations to provide seamless and faster experience for consumers. One such example is Walmart Store Pickup service. Through this service, consumers can order the required items from convenience of their mobile devices and pickup at their liberty, sometimes in as little time as 1 hour. To be ahead of the competition, Walmart has started this service for free and even offering consumers discounts of $10 on first delivery.
Is Whole Foods Market Amazon’s super weapon in the grocery segment?
For Amazon to be able to be successful in this segment, the key is to be A) one-stop-shop for all consumer needs so that the consumers become accustomed to ordering groceries online, B) offer high quality products in order to gain consumer acceptance of new mode of grocery purchase at a premium cost, C) enabling quick gratification to consumers through same day delivery models at no or least cost to customers, and lastly D) effectively market the service to consumers advocating total cost of grocery purchase (including personal logistics & time) and not just apples to apples comparison.
This is where their new direction in this line of business gains importance – purchase of Whole Foods Market.
Through having local presence by owning a premium grocery chain like Whole Foods Market, Amazon is addressing all of above agenda items, while also ensuring the hold on supply of premium products form local markets. Whole Foods Market’s logistical presence across the major cities in US and high loyalty premium customer base is perfectly aligned with Amazon’s strategy of commanding premium consumer segment. Once Amazon integrates Whole Foods Market into its own supply chain infrastructure and starts utilizing its stores as distribution centers, Amazon would be become a retail juggernaut, the situation which other retailers are preparing for.
Amazon being primarily a technology behemoth is expected to bring many technological advances to retail industry. Some of those are cashier-less shopping, integration of its personal virtual assistance Alexa with retail (already underway), “showrooming” blocking, real-time product pricing algorithms, to name a few. Armed with such an arsenal of competencies and significantly retail aligned patents at its disposal, other grocery giants in the industry would see Amazon as a threat to their existence. On announcement of the Amazon’s offer to buy Whole Foods Market, SuperValu’s stock dived 14%, Kroger’s stock dived 9% and Walmart and Costco stocks reversed their recent uptrend sharply.
Does this signal the new era of retail transformation, similar to what we witnessed for books, audio and video businesses? Feel free to share your opinions in comments!