On Friday Amazon announced that it will be buying Whole Foods for a jaw dropping £10.7bn ($13.7), the biggest and most affluent merge it has ever done proving that the online giant is going to settle for nothing less than world domination (Amazon’s biggest deal to date was with retailer Zappos for £1bn). Upon announcement Amazon’s share prices rose, adding £9bn ($11bn) to its market cap. Therefore, it’s already made up most of the cost of the purchase in one day’s stock trading in USA. Furthermore, the ‘market caps’ of competitor chains in the USA (Target, Kroger, CostCo, Walmart, Dollar General, SuperValu and Sprouts) fell by a combined £17bn ($21bn) on Friday.
Suffice to say, profit (alone) is definitely not Amazon’s end goal in this acquisition.
For brand owners, retailers and the world at large, this opens up the next big question; now what? Where is retail heading? And why Whole Foods? It’s an organic specialist which had a measly 1.21% share in the grocery sector in comparison to Walmart’s 14.45%.
To the outside it may seem that Amazon is buying a retailer however, this merge has little to do with Amazon buying a company, the reality is that it is buying a customer - the first and best customer that will instantly bring its grocery vision and efforts to scale. Whole Foods’ target market are affluent, their shoppers are willing to spend. It’s experimental, their offering is diverse and it’s urban, they’re situated in prime locations. And as Amazon is famously known for its ‘test and learn’ approach, it is likely that Whole Foods will be the perfect platform for the retailer to continue experimenting and strengthening its consumer insights to create new retail models.
Right now, all of the logistics that Whole Foods outlets are focused on are for the purpose of stocking physical shelves, the entire operation is integrated into a supply chain. Over the next few years it’s likely that Amazon will transform the Whole Foods supply chain into a service architecture based on core categories such as: meat, fruit, vegetables, baked goods, non-perishables.
If we understand Amazon’s company’s goals, we can understand what their strategies and tactics might be. Amazon’s objective is to be the leading online retailer of information-based products and services. Their vision is to be the most customer centric company; to build a place where people can come to find and discover, anything they might want to buy online. Buying an instant premium customer base to offer an entire pantry too, now makes sense.
So how does this tactic fit into their strategy?
- Amazon only has about 1% grocery market share in the USA. This acquisition will provide immediate market share growth
- Amazon has actually made dozens of acquisitions in its short life (over 70) so rest assured it knows what it’s doing and has a plan
- Selling groceries (even fresh ones) is not new to Amazon, it has already tried and tested its approach with Amazon Fresh
- Whole Foods work largely in categories where there are not necessarily household name suppliers – therefore Amazon can work with whoever wants to supply Amazon (and deliver on the price/quality matrix)
- Amazon are already looking at supply/vertical integration. They now own their own fleet of aircraft to become couriers to their own products rather than working with third parties giving them greater control over their customer’s journey from start to end
What does all this mean for the brand owner? One of the most intriguing things about this merge is that Amazon is slowly becoming more Omnichannel and less pure play; like all the current major grocery retailers, it has started to develop both online and brick and mortar channels indicating that the current retail model isn’t going to become redundant anytime soon. However, what this merge does do is make it imperative for brands and retailers alike to examine their own digital presence and rethink their eCommerce strategy.
Analyst Brendan Witcher who specialises in eCommerce from Forrester Research Inc. reinforced that this means brands “no longer have the luxury of waiting to see if online grocery will become a trend...While online grocery is a small percentage of total grocery today, Amazon will certainly have an impact in the future on consumers’ willingness to try and adopt this method of grocery shopping.”
It has never been more pressing to Upskill teams and build the right capabilities so you know how to keep winning in eCommerce. After having worked with global and niche brands alike, the ones who are still considering whether to make eCommerce a priority, are already losing against their competition. And unless brands make immediate headway to understand their online sales channel better, Amazon's entry into grocery is just going to speed up that decline. Here the team at E Fundamentals have developed a Price Elasticity Model for Amazon which is giving brands the edge and knowledge to not only upskill their teams, but set credible sales strategies based on facts.
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Marcus Vallance, COO
Marcus founded SalesOut Ltd in 2003, a wholesale data management service for FMCG which was later bought by IRI Worldwide Inc. Previously he worked as a food technologist at John Lewis and several senior roles in Safeway and Coca-Cola Enterprises. He has helped over 500 international FMCG clients grow their business across several marketplaces including CCE, Unilever, P&G, Mars, GSK and Nestlé.