Why Everyone’s Talking About Whole Foods — Amazon Part 2
I thank God that the Whole Foods acquisition was announced just ten days after my summer internship in online grocery retail began. If this is not the most exciting time to be in online food retail, I don’t know when is.
Food retail is complicated: global to local supply chains, warehousing products with varying shelf times, developing private label goods, buying and merchandising, and store operations. Everything is fascinating and intricate, and Friday just made things exciting on a whole new level.
A lot of people way smarter and wiser than me have written volumes on the meaning of the merger. I will try my best not to repeat them and instead focus on angles which I think haven’t been covered enough.
I think Amazon bought Whole Foods for two main reasons. 1. Real Estate and 2. Produce buyers & merchants.
Real Estate
431 stores in primarily affluent prime retail area is nothing to scoff at. I’m sure people did an appraisal of how much these stores are worth. I have no idea how much that is. But getting the properties, well-functioning infrastructure, as well as a network of well dispersed stores nationwide at physical locations already well-known to nearby residents (with a lot of disposable income) overnight is probably the biggest value Amazon gets out of this deal, no matter what they do with the locations.
Talent
Amazon’s core competencies are not in food. While Amazon Fresh has been flirting with groceries since 2007, supplying and distributing produce has not been their strong suit.
Existing successful grocery retailers have iterated on supply chain for decades. They know how to source meat from various vendors and how to market vegetables. My employer, H-E-B, consistently receives one of the highest customer satisfaction scores in grocery retail (Really trying not to be biased. Go ask a Texan.) The two greatest secret sauce to their success is in store experience and buying & merchandising employees.
Included in the $13.7B was a price tag for buying Whole Foods’ buyers who know their produce inside and out (and the private label products they developed.)
It might just be my experience, but every buyer I have ever met can go on for hours about their products. They know what suppliers to source the best heirloom tomatoes, how to distribute the tomatoes nationwide quickly and cost-efficiently, and how to market it so people pay double the money to buy spotty, ugly tomatoes over perfect spherical tomatoes.
They develop their private label products — which does well because merchandisers agonized over how to make the perfect Organic Coconut Chips just like any CPG company would have. In a snap, Amazon acquired product experts with great passion and their brain child products.
What does this mean for ____?
Instacart
Single most mentioned company over the last weekend is probably Instacart. As someone who worked for a company with a unending stream of negative press, my heart goes out to them during this stressful time.
Most people agree that the third-party logistics company started by an ex-Amazon engineer lost a lot of their valuation on Friday. (BTW, I think there is no way Whole Foods was just 10% of their sales as Instacart claims. Whole Foods is the only big retailer whose prices are the same on the app as it is in the store. If its share was really 10%, it’s probably 10% of total units of sales, or 10% of their delivery revenues, not dollar sales.)
Because what does Instacart have? The shoppers aren’t an asset; that’s just the sharing economy. Uber at least has an excellent matching algorithm, traffic data, and foray into autonomous driving technology. But Instacart doesn’t have some proprietary technology or data that retailers don’t already have.
Their existence is built on disintermediation. It relies heavily on retailers helping them out. If the retailers don’t share their product catalogs and store layouts, Instacart has to go find out themselves. Then it would have no profitable way to sell to the consumers.
But there is still some opportunity ahead for Instacart. As grocery retailers around the nation get the wake up call that the ground they’re standing on is shifting drastically, they will be in dire need to get into online retail. For many who don’t have the capacity, Instacart is a quick and dirty solution to access online shoppers. In short, Amazon has a lot of enemies, and if an enemy of an enemy is one’s friend, then Instacart made a lot friends overnight.
CPG brands
A less mentioned, but important stakeholder in this deal is the CPG brands. Amazon wants to suck up all of suppliers’ margins (remember what Walmart used to do?) until there’s nothing left. Amazon hopes to source and retail goods on their own then. Amazon also controls all the product recommendation engine in the internet and can choose to wipe your brand authority in a heartbeat.
This produces a big challenge for CPG goods because traditional ways of marketing their products are irrelevant. They must comply with Amazon’s vampire ways. We’ll probably see CPG’s trying to go more directly to customers, perhaps through smaller, more approachable brands, subscription services, or choosing the lesser of two evils and using Amazon to host their e-commerce sites.
Retailers (Kroger, Walmart, HEB)
A separate disclaimer for this section. I started working for HEB ten days ago. It has been an amazing company to learn about. I see why people call it the best retailer in the nation. But I don’t know much more than you do yet. (When I do, I probably won’t share with you.) If you were looking for the inside scoop, sorry to let you down.
Every big retailer is doing the same things so far. They’re supplementing their brick and mortar with ordering online and picking up in the store. The Whole Foods deal impacts retailers but I don’t think it changes anything because Amazon’s ability to direct the lucrative profits from AWS to subsidize for retail and is the root of the problem that has been ailing retailers for years. The Whole Foods deal is just a symptom.
Competing with companies who need not worry about profitability is always going to be difficult. (One could say it’s like bringing a gun to a knife fight.) Acquiring Whole Foods was just one of the difficulties embodied. I just hope companies don’t lose sight of things and effectively enter a “price war,” throwing around free services without considering long term profitability.
But this is exactly the reason I chose HEB over other companies. I think private companies have a longer-term view and the freedom to react in ways they see fit without public scrutiny. Call me unconventional, but I think if anyone has a chance against Amazon it will be one like HEB.
Honorable Mentions
Like Instacart, Google Express might be getting a fair share of phone calls from retailers looking for partners. But Whole Foods deal impacts Google more than just in one of its side projects (no offense, Google Express.)
I must admit I realized this far too late. But Amazon’s product search is taking over the internet and Google is now number 2. This means Google is losing its ad revenue quickly and could become irrelevant in searches. Google’s primary revenue is ads and its lifeline is search. Unspecific to groceries, Amazon getting prominence in retail of a new vertical could be fatal for Google.
Alibaba
Alibaba is probably sipping PuEr tea and stroking its mustache watching this American chronicles, preparing its entry into online groceries and entry into the US market. Alibaba invested heavily in food delivery and in discount supermarkets across China, and is undoubtedly looking for ways to enter the online grocery delivery, the one un-disrupted patch of retail.
Blue Apron
Blue Apron might want to ask “what else can we do?” Retailers will try to make their in-store experience special and irreplaceable to stay relevant. They will ramp up their prepared meal sections and flirt with meal kits. Furthermore, they will be more efficient at it than Blue Apron is because they don’t have to serve so many geographies.
Fresh Direct
Fresh Direct is right to be a little nervous since their customer proposition is basically Whole Foods quality food with Amazon convenience. But time is on their side since it will take some more years for Amazon and Whole Foods to figure out operations, merge two opposite cultures. Plus, Fresh Direct has the NYC market pat down. But maybe Walmart would be interested in picking them up. Lately Walmart has been binging on millennial friendly niche companies with audiences they have low penetration in (jet.com, ModCloth, Bonobos, etc.)
I apologize my thoughts ended up a little all over the place. But it betrays how excited I am for what’s ahead!
I am just a curious woman who thinks better when her thoughts are written down. I write more for my benefit more than anyone else. All opinions expressed here represent my own personal thoughts and are not those of my employer, present or previous.
