Amazon Acquires Whole Foods to Change the Way We Live
Amazon made major headlines last month after the announcement of their blockbuster acquisition of organic food supermarket chain Whole Foods Markets. The deal, which has Amazon acquiring the supermarket chain at $42 per share, is significant because it allows Amazon to leverage its already massive, low-margin business model to provide even more convenience for its customers. For most, Amazon’s move signals a better in-store shopping experience at Whole Foods and improvements to its growing grocery delivery business. While that’s true, I believe Amazon is making a much larger play: the entire grocer market. The following provides background to this influential acquisition and details how Amazon may one day be the only company satisfying your household needs.
On the surface, the deal was a no-brainer. Whole Foods needed an exit strategy and they needed it fast. The company posted declining revenue for five years straight and last year it laid off over 1,500 employees. The rationale for Amazon was a little more strategic. As a budding grocer, it favored Whole Food’s large organic food supply. As a retail distributor, Whole Foods amassed enviable real estate holdings serving as future distribution points and warehouse storage. The synergies compelled Amazon to swoop in and beat out the other four to five Whole Food suitors.
Furthermore, the $42 per share acquisition beat industry valuation estimates of $35-$40. This 27% sales premium left little room for Whole Foods to walk. Pending regulatory approval, the deal will close at a whopping $14 billion. With bloated overhead, declining revenue, and a reputation for high costs, the purchase seems overvalued, especially as Amazon heads debunked the shrinking of Whole Food’s massive 90,000 labor force. Why then would Amazon pay more than what Whole Foods is worth? What other possibilities can derive from Amazon’s landmark move?
Food Delivery Service: AmazonFresh
One major reason Amazon coveted Whole Foods was for its expansive organic food selection. Amazon wants to expand its fledgling business line item, AmazonFresh, by offering a larger catalogue of organic grocery goods. Health-conscious millennials love shopping organic. They also represent a growing market. According to the Organic Trade Association, organic food sales increased 6% to $47 billion in 2016. Amazon wants to take advantage of this growing consumer preference. Natural retailers owned roughly 37% of that market share, with mass-market retailers accounting for 53.3%. As America’s favorite disrupter, let’s expect Amazon to slash its prices to enter and eventually upend the market using its super efficient distribution model.
The possibilities don’t end there. In a time when shoppers want to improve their diet but without the hassle of grocery shopping, AmazonFresh will diminish their wait time while offering the wider selection of a large grocery chain. Amazon can also leverage its Prime subscription service. Grocer customers who become Prime users can enjoy great savings for purchases on the platform and receive next-day or two-hour shipping on their groceries all from the comfort of their couch. Your next romantic dinner date just got loads easier. Niche delivery brands HelloFresh and Blue Apron should beware. Amazon has the ability to disrupt their business model the same way it’s done for grocery market leaders. The food giants have already taken a hit in their stock after the acquisition announcement.
Remember the organic grocery savings you can collect through the Amazon Prime service? Well, if you shop through the service long enough, it could learn your shopping habits. The platform has the ability to remember your most popular purchases and send them automatically at your convenience. This feature would revolutionize the shopping experience, allowing for Amazon to strike better deals with manufacturers and lower costs in the process.
Amazon is no stranger to this approach. To maintain low costs, it operates with little-to-no profit, opting to push for greater market share instead. And it works. Amazon has been able to grow revenue and build its product offering while competitors push for greater profits.The business strategy allowed Amazon to gain considerable market share in every industry it's breached since 1994. CEO Jeff Bezos has made it his mission to streamline business functionality for greater value. This strategy reduces potential loss and improves viability.
Amazon’s Ethical Concerns
With lower costs and greater convenience, consumers have very little downside. However, what could Amazon’s presence mean for the grocery ecosystem? Well, the company has had a history of questionable business tactics in the past. For example, Brooklyn-based boutique publishing house, Melville House, battled Amazon in 2004 to limit its reach. Melville CEO, Dennis Johnson, reported to Publishers Weekly about his unsavory dealings with Amazon. He likened his negotiation meeting with Amazon to “dinner with the Godfather.” The battle turned sour when Amazon took away the publisher’s commerce functionality. At a time when Amazon sales accounted for a sizable portion of Melville House’s total sales, the move certainly hurt.
In addition to strong arm negotiating tactics, predatory co-op fees could cripple its business partners. Razor thin margins and increased sales growth allow Amazon to impose even higher co-op fees. These tactics could be applied to the grocery industry once the deal between Amazon and Whole Foods finalizes. Amazon could leverage the massive assets of the organic foods supplier to gain an increased market share. This newfound position will make it the new gatekeeper within the industry, allowing it to limit competition, fix prices, and circumvent the natural laws of supply and demand.
Amazon consumers could receive a convenience windfall if the Whole Foods acquisition goes through. Household chores such as grocery shopping and cooking could be eliminated or drastically reduced. However, the deal could upend the landscape for grocers, food delivery services, and meal-kit companies. For one-click shopping, is that the price we’re willing to pay?