Right after we published an article on Amazon and its grocery business, Amazon announced the acquisition of the American grocery chain Whole Foods for nearly 14 billion USD. The impact of this move on other U.S. grocery chains was devastating. Wal-Mart and Target finished the following day down 5%. Other pure grocery players like Kroger’s and Delhaize Ahold were down 8-9%, and discounter Costco was down 17%. The market seemed to sense that this is a game-changer, something that will disrupt the traditional grocery business, despite Whole Foods having less than 2% of the U.S. grocery business, with a focus on organic, sustainable offerings to high-income clients. It’s worthwhile to explore this reaction in light of what we reported earlier. In what ways could the acquisition of Whole Foods allow Amazon to make a leap in its efforts to revolutionize grocery?
The first possibility would be to leverage the existing Whole Foods grocery footprint as localized distribution centers. As mentioned earlier, the Amazon approach is to use customer fulfillment centers to prepare grocery orders. Most other competitors prepare orders from stores, be it their own (like Tesco) or from others (like Instacart or, in some markets, Peapod). Each approach has its advantages and drawbacks, and indeed some of the store-based players are building their own fulfillment centers to supplement their networks.
Whole foods has 456 stores, almost all in the U.S. Whole Foods is an upscale grocery chain, catering to a clientele that has more income, and is interested in organic, healthier food choices. Their stores tend to be in dense urban centers, right where this clientele works and lives. It’s easy to imagine Amazon using Whole Foods’ stores as localized preparation centers in the heart of these wealthier neighborhoods, offering one hour grocery delivery. As Tesco is demonstrating with their increased delivery fees, online grocery is a convenience choice, where the consumer trades the price of the delivery for the shopping time saved. Rapid delivery of Whole Foods products fits nicely into this positioning and would complement Amazon’s fulfilment centers which can focus more on urban perimeters.
Though the challenges of Amazon Go’s frictionless shopping were highlighted earlier, Amazon is certainly banking on having all the kinks worked out. Whole Foods’ store footprint would serve as the perfect network to rapidly deploy the technology when that day comes. With a high-income client base that values their time and has already shown the willingness to pay the higher price points of Whole Foods, there is a natural fit with the Amazon Go approach of quick, short shopping trips with minimal hassle. This story might even grow into one of the more immediate impacts of automation on employment as 7% of the American workforce is employed in retail sales. They will be watching the development of the Amazon Go experiment closely, as should all players in the retail supply chain.
This may all tie together and point to Amazon performing a segmentation of the product offering. The fresh products that require a cold chain could be picked from the Whole Foods locations, complemented by non-fresh grocery delivery from the customer fulfillment centers. This would enable Whole Foods locations to focus on fresh items with smaller baskets, matching the recent trends towards higher grocery shopping frequency. The Amazon Go technology would allow this higher shopping trip volume with lower per basket sales to move smoothly through the stores with no wait times at checkout.
There is likely a significant overlap between the Whole Foods customer base and Amazon Prime membership. Having privileged access to Whole Foods products will only serve as more enticement to enter the Prime program. Prime may even become the Whole Foods loyalty program. In the short term, this may on its own be enough enticement for the deal for Jeff Bezos. The deal has other immediate benefits for Amazon as well. They acquire the supplier relationships, volume pricing and geographic footprint of Whole Foods, an asset that would have taken time, considerable investment and risk to develop on their own.
It will be interesting to watch the results of this experiment unfold. Amazon’s powerful ability to use data may change the store layout, product offering, and integration with other Amazon applications like Alexa.
And while this acquisition won't pose any immediate threat to Swiss grocery retailers they will certainly carefully follow the future steps of Amazon in this domain.
Indeed, all retail supply chain eyes will be on this moving forward to see how it unfolds.
Ralf Seifert is Professor of Operations Management at IMD. He directs IMD’s new Digital Supply Chain Management program, which addresses both traditional supply chain strategy and implementation issues as well as digitalization trends and new technologies.