Why did Amazon acquire Whole Foods?

By: | Issue #652 | at 07:30 AM | Channel(s): Logistics  

“All of the above”

Amazon’s acquisition of Whole Foods may have generated screaming headlines and stock market convolutions, but it really shouldn’t have come as a huge surprise. Amazon has been trying to gain a foothold in the grocery business for years.

The pairing of an e-commerce giant and a grocery store may seem odd at first, but close observers of Amazon know CEO Jeff Bezos has been trying to gain market share in this retail subsector for years, not only in the United States, but internationally. But the Whole Foods acquisition gives Amazon with much more than a source of groceries. It provides the e-commerce giant with a logistics network, including 15 food-grade distribution centers as well as hundreds of retail outlets through which Amazon can execute an omnichannel retail strategy, today every retailer’s dream. Amazon currently operates less than 100 distribution centers in the U.S.

Amazon has sought entry to US grocery retailing for a decade, but in those years has garnered a market share of less then one percent. Elsewhere, Amazon has started up grocery initiatives in several international markets, including the United Kingdom, Spain, Italy, France, Germany, and Japan. In Milan, Italy, Amazon delivers 30 kinds of fruits and vegetables that traditionally would have been bought at local open-air markets.

In India, Amazon is in preliminary acquisition talks with BigBasket, the country’s largest online grocery, and the word is that the Indian government will soon grant Amazon the right to begin delivering groceries. In Paris, where Amazon introduced Prime Now to deliver fresh and frozen groceries, government officials and local supermarkets have pushed back. Last June, the city’s mayor questioned Amazon’s impact on local businesses and a local chain went on air with an add stating “You don’t need an app to go shopping.”

Amazon’s entry to the grocery marketplace has been stymied by a lack of cold chain distribution facilities, notes Philip Evers, an associate professor of logistics, business, and public policy at the University of Maryland’s Robert H. Smith School of Business. The Whole Foods deal comes along with 11 distribution centers, plus three seafood-specific facilities and one coffee-distribution warehouse.

“Amazon could always compete on the dry goods side, because distributing dry goods is not terribly different from distributing books,” said Evers. “But refrigerated and frozen, that’s something that requires significantly different handling.”

The network of over 400 retail outlets means quicker and fresher delivery for Amazon’s existing grocery delivery service, AmazonFresh, which is offered to the company’s Prime members for a monthly fee of $14.99. That service is now available in only 20 U.S. cities, but the addition of the Whole Foods stores to the logistics equation puts Amazon a lot closer to more potential customers.

The stores are, in effect, hundreds of refrigerated warehouses within 10 miles of 80 percent of the U.S. population, according to Michael Pachter, an analyst for Wedbush Securities. “More importantly,” he added, “it puts refrigerated distribution within 10 miles of probably 95 percent of Prime members.”

Whole Foods operations can benefit as well, from a logistics standpoint, as it has struggled to manage its supply chain and has been reluctant to adopt technology. Amazon, by contrast, has made managing a rapidly-growing logistics system one of its core competencies, with the lease of air cargo and trucking fleets and acquiring licenses to operate as a non-vessel operating common carrier (NVOCC).

In fact, it was Whole Foods’ supply chain and distribution challenges—challenges that Amazon is already meeting—that are part of what put the supermarket chain in a position to be acquired in the first place. Jana Partners, an activist investment firm, has been agitating for Whole Foods to change and was calling for an overhaul of the grocer’s supply chain and distribution strategy for months.

Whole Foods stores now also provide Amazon with an omnichannel presence with its network of 436 brick-and-mortar stores, capable of fulfilling online orders and serving as pick-up spots for any product sold on Amazon. Important to the omnichannel strategy—the latest in retail, in which companies integrate different methods of shopping such as online, physical stores, and over the phone—is the demographic overlap between Amazon Prime and Whole Foods. Research from NPD Group shows 20 percent of Amazon consumers bought at least one item from Whole Foods in the last year. With access to Whole Foods data, Amazon can analyze customer offline behavior in addition to online trends.

“Whole Foods currently records around eight million weekly customer visits and has 30 million customers,” notes a report from JP Morgan, “which we believe overlaps significantly with Amazon’s projected 60 million domestic households. With Whole Foods, Amazon now has 464 stores in markets that we believe have significant overlap with Prime customers as the broader grocery market transitions online at what we believe is likely to be at an accelerating pace.”

There is also a place where concerns over customer demographics and supply-chain management intersect. Amazon CEO Jeff Bezos told Forbes in a recent interview that “there’s a subset of customers…that when you’re talking about things that go in or on your body, or in or on your children’s bodies, they really care about that supply chain.” To that end, Amazon offers a premium product line called Elements that comes with a code that customers use to track ingredients, including its place of and date of origin. The acquisition of Whole Foods—the chain that made organic food mainstream—seems like a good philosophical fit.

So why, then, did Amazon acquire Whole Foods? The best answer is probably, All of the above. Amazon seeks to expand its grocery business by adding bricks-and-mortar supermarkets and by expanding its core e-commerce efforts in this category in a synergistic way. The deal provides an opportunity for both Whole Foods and Amazon to reimagine their supply chains, from procurement to fulfillment and to break new ground developing omnichannel retailing strategies for an upscale demographic.

It will be interesting to follow the progress of the two companies’ integration. The story will likely provide a useful case study on how companies can transform supply chains and adapt to emerging market trends.

Peter Buxbaum's avatar

American Journal of Transportation

More on Peter Buxbaum
Peter Buxbaum has been writing about international trade and transportation, as well as security, defense, technology, and foreign policy, for over 20 years. Besides contributing to the AJOT, Buxbaum's work has appeared in such leading publications as [em]Fortune, Forbes, Chief Executive, Computerworld, and Jane's Defence Weekly[/em]. He was educated at Columbia University.