Two Surprising Lessons from Amazon’s Purchase of Whole Foods

There has been much debate on why Amazon purchased Whole Foods.  On the surface, it appears that the online behemoth is trying to complement its online operations with retail space.  Some argue, however, that if Amazon is going for distribution or physical footprint then a retailer such as Kroger or Costco would have been a better buy. U.S. food sales are about $800 billion a year with Wal-Mart ($200 billion), Kroger ($130b), Albertson’s ($60b) and Costco ($50b) being the biggest players. So why the interest in Whole Foods’ $20 billion enterprise?

Customer

I believe that Ben Thompson at Stratechery has cracked the proverbial nut.  He argues that Amazon isn’t buying a retailer, but a customer — the first-and-best customer that will instantly bring its grocery efforts to scale.  Amazon’s explosive growth has come by making infrastructure modular and leveraging the power of scale so that the company is able to make itself its first and best customer.

 

He expects the company to transform the Whole Foods supply chain into a service architecture based on perishables: meat, fruit, vegetables, baked goods, etc. and in the long run logistics services will be a platform to service grocery stores, restaurants and home delivery.

Why has Amazon so intent on breaking into the food industry?  As Moody’s Investor Service notes “Online sales still account for only about 10% of overall U.S. retail sales, with a much lower percentage in the grocery segment, leaving the big brick-and-mortar retailers, led by Walmart, still really formidable competitors in the industry.” Developing such a service would open up yet another industry to Amazon.

 

There are two lessons to be learned here.

  1. Amazon has developed an almost-ideal business model that is symbiotic with the customer. What is good for Amazon is good for the customer.  Increased scale increases capability and reduces costs for both the company and customers. I’m surprised their mantra isn’t “Help me to help you!”
  2. The power of perception. The perception is that as soon as Amazon enters a product category, it immediately wins – this is especially reflective in retailers’ stock prices after the Whole Foods deal was announced.  This is another enormous competitive advantage.

 

However, Moody’s argues that this perception is flawed. While Amazon is clearly disruptive, it does not dominate every category in which it operates. In consumer electronics, for example, Amazon has about a third of the share of Best Buy.

 

With these competitive advantages, no wonder they can take risks such as building drone towers.  It’ll be interesting to see how Amazon’s goal of “Our vision is to be earth’s most customer centric company; to build a place where people can come to find and discover anything they might want to buy online” continues to play out.

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