A new platform for Whole Foods? How deal could upend grocery

Now you can buy anything from dvds to exercise equipment to clothing to yes, even food.

By buying Whole Foods, Amazon is attempting to become “the Everything Store”, said Jonathan Taplin, clinical professor and emeritus director of the Annenberg Innovation Lab at the USC Annenberg School for Communication and Journalism.

Amazon’s market capitalization grew by more than $11 billion on the day the Whole Foods deal was announced. In short, for every space of retail Amazon does business with, it’ll have one competitor that’s primarily in the physical space. That report, which was first covered by The Seattle Times, found that “Members of both Costco and Prime have not and generally do not intend to spend more with one retailer/e-tailer at the expense of the other”, according to the report, which noted brand loyalty being a boon to both.

“Publix can sit back and watch other competitors get bigger by buying subpar grocers and going further into debt by doing it”, he said. “The Whole Foods purchase is a $14 billion bet on the future of food that comes in boxes”, argues Derek Thompson, a senior editor at The Atlantic.

One thing, though, should be made clear: Amazon is positioning itself to be the most powerful retailer in the world, and it can not achieve this goal without food. With its purchase of Whole Foods and the hundreds of grocery stores it operates, Amazon has an opportunity to expand the products it can deliver under Prime Now. Amazon may then suggest turning left to grab some Austrian yogurt, because “it goes great with granola!” Whole Foods stores will provide Amazon with enough data to identify meaningful patterns.

Walmart is the only company with the financial might to play ball with Amazon.

For starters, it puts Walmart in a defensive position rather than offensive: It already owns a colossal network of brick and mortar grocery stores; what it really needs to improve is its online platform.

Where I used to go through the door and think, “I’ve gotta have some of this”, now I feel like I do when it’s time to go to Sears: “Are you still here?” That means that a lot of folks on Wall Street are betting that the bidding isn’t over. German low-priced rivals such as Aldi and Lidl have started to challenge established incumbents in metro Atlanta such as Publix, Kroger, Walmart and Target.

Many experts believe Amazon would use its vast distribution system to help streamline Whole Foods’ operations. Case in point: the top four publicly held grocers – Walmart, Kroger, Costco and Target – have a 77% cost-of-goods sold (COGS) as a percentage of sales, while their average inventory outstanding is 41 days, according to Goor. The drop in grocer share prices the day the deal was announced – No. 1 USA grocer Kroger fell more than 9 percent – demonstrates the threat investors feel Amazon poses to traditional grocery chains.

So the best way to think of this deal is to look at Whole Foods as a kind of guinea pig for Amazon – a pricey, organically sourced one, perhaps, but a guinea pig all the same.

He said Amazon is “looking to control the end-to-end customer experience”. Retail spending is now mixed between the physical and the digital, but that spending is still on the rise. Investors can buy pricy shares of Amazon, but the big money has likely been made on the retail consolidation trade over the past 20 years. Kroger has almost 2,800 stores that operate under a variety of names.

Instead, Bezos and his team will most likely spend years meticulously analysing and tinkering with how Whole Foods works.

Customers still like to pick out their own meats and produce, and that isn’t likely to change all that much, at least not yet.

Amazon’s Prime Now service promises to deliver certain products, ranging from paper towels to electronics, in an hour or less by sourcing them from 70 local fulfillment centers.

Wiesel, the analyst, said Amazon has been trying to crack the grocery code for years with only varied success. “We’ve known that the fight over e-commerce between Wal-Mart and Amazon was set to pressure pricing further”. Following its explosive growth Amazon came to the conclusion that others might pay to use its vast server infrastructure, and thus was born a range of cloud computing services from Amazon Web Services (AWS) to Elastic Cloud Compute (EC²) and the Amazon Simple Storage Service (S3).

Grocery stores are low-margin affairs to begin with.