To casual observers, big-business acquisitions often just look like conquests—big fish eats smaller fish—and of course it’s easy to get distracted by the mountainous sums of money. But if you quiet the numbers and connect the details, you’ll see games of chess playing out through the headlines.
You’ll know the truly brilliant moves when you see them, even if it takes a bit. This coming Monday (June 15) is the third anniversary of Amazon’s purchase of Whole Foods, which might be one of the single most flabbergastingly smart moves in the history of retail. So today, we’ll outline the brilliance of the buy—and we’ll start with a reason the acquisition maybe seemed strange at first:
Grocers make razor-thin margins (but remember, that’s Amazon’s bloodthirsty sweet spot). As a rule of thumb, typical grocery stores profit about one penny for every dollar customers spend. That’s a 1% profit margin, which would be horrifying for most businesses, except that (A) grocers sell food, which everyone always needs, and (B) they take in a lot of revenue very steadily; you can literally hear a grocery’s cash flow if you listen for the bloops.
In simple terms, grocers make their own bread and butter by selling low-margin stuff to a lot of people all the time. Sound like anyone else we know?
Whole Foods is a bit different; for most of its life, it has operated comfortably in a narrower but wealthier market, where premium product can find buyers willing to pay premium price. That gives Whole Foods better margins, but in the ‘90s they also started expanding their product offerings toward the economical end of the spectrum with the 365 brand (which is now huge). All of this was perfect for Amazon, because…
Whole Foods’s wide appeal becomes universal appeal when you drop the prices. As we’ve discussed before, Bezos is ruthless about long-term growth—to the point that he’s willing to starve Amazon of profits until his competitors starve to death. How does he apply that pressure? Simple: shave costs as much as he can, drop prices as far as he must, and wait.
Whole Foods makes better margins than most grocers—but to Jeff Bezos, “better margins” really means “more opportunity to attract customers by eliminating said margin.” Sure enough, Whole Foods got cheaper in a hurry and a ton of new customers came to check (it) out.
Amazon bought when the timing was right. For the longest time, Whole Foods did well as a big fish in a small pond. Whole Foods effectively created its segment of the grocery market one city at a time; they didn’t have much competition at first because their expansion strategy was to purchase local fresh grocers and then play much the same role in their place (just bigger).
But therein lay the issue for Whole Foods: no competitive advantage once they had competition their own size. Other players could match Whole Foods’s product quality and pricing, and worse, Whole Foods’ infrastructure was bottlenecking any potential growth; they were unprepared to scale up to national distribution, and in some ways their business model actually resisted it (e.g. sourcing products regionally or even locally). By the mid-2010s, Walmart had become the nation’s largest seller of organic foods—which had to sting—and Whole Foods’s market share was actually starting to backslide.
Enter Amazon, which provides (A) some large-scale logistical know-how and (B) an immediate and terrifying competitive advantage. In fact, news of the acquisition was followed by a big drop in competing grocers’ stock prices (which is the investment equivalent of s****ing your pants).
Thanks, Whole Foods. Jeff will take it from here. Still, one question has evaded us thus far: why did Bezos buy a grocery store in the first place? Because…
Groceries are the ultimate gateway purchase. And they’re the ultimate gateway purchase because (A) literally everyone needs to eat and (B) groceries are a typical person’s most typical purchase.
Amazon’s super-low pricing on Fire tablets operates on the same principle: capture as many customers as you can, even at a loss, and then monetize those customers with cross-sells, upsells, subscription services, and so forth. Now that Whole Foods is owned by Amazon, its job is no longer to turn a profit; its job is to lure more customers (and more of their money) deep into the labyrinth of Amazonian shopping and services.
Meanwhile, Whole Foods is contributing something to the Amazon ecosystem whose value is hard to measure: consumer data. Amazon already has a pretty robust understanding of their customers—every search, every purchase, everything—but Whole Foods adds another dimension to it because it shows Amazon how people spend money both online and offline. (Remember, your Prime membership is basically also your Whole Foods saver’s card—and that’s how they link all your data together.) This will help them figure out how to sell more groceries—and also how to sell more of everything else.
Last but not least: Whole Foods gives Amazon a retail presence they’ve lacked (and extends their logistical reach a bit further). Amazon was already extremely present before Whole Foods, but not in the forward-facing ways that you’d typically see for retail. Like, nobody ever “drove to the local Amazon” to shop or pick up an order.
Whole Foods is starting to change that—not only by selling certain Amazon products directly (like the Echo), but also by providing new delivery options like the Amazon lockers at the front of most stores.
The union of Amazon and Whole Foods also creates some opportunities. It might, for example, provide the combination of forces needed to make fresh-food-delivery services work profitably where so many attempts (including Amazon Fresh) have failed before. Two compelling reasons to think it’ll work this time: the Whole Foods name, which sounds way tastier than “Amazon Food,” and Amazon’s ever-growing infrastructural capacity to deliver all of it.
Whole Foods will, of course, lose some of its soul in the process. As you’ve maybe seen in stores, it’s very clear that Whole Foods is Amazon territory now. That’s not surprising for any business under new management, but it will continue to shift as Amazon needs and there’s not necessarily an end to that.
This doesn’t have to mean product suffers—in our recent experience, staple foods like produce and fresh meat are as tasty as ever—and we certainly don’t mind paying less than before. But Whole Foods is no longer the same little oasis of the mind; it’s harder to relax when you know the sharks are circling.