Last week Amazon completed its purchase with Whole Foods. Why is this such a big deal?
This deal is going to shake up the grocery industry. Until now, Amazon has been a minor player in grocery, with just 1 percent of market share. Whole Foods has just under 2 percent. But this deal shows Amazon is serious about challenging the current status quo, and wants a bigger piece of the $800 billion dollar a year market. To do this, Amazon must challenge Wal-Mart, the largest brick and mortar retailer in the country, and the leader in grocery with about 20 percent of the market. This battle will have far-reaching consequences for the industry, and for consumers.
Why does this deal make sense for Amazon?
The genius of this move is the integration of the superior tech and convenience of Amazon with the superior quality of Whole Foods. This deal combines over 460 prime store locations in the wealthiest zip codes in the country with the power of a 65 million strong Amazon Prime membership base.
Amazon wants to provide everything to everyone, and now they have a more localized distribution network closer to their customers, and added incentive for Prime members, who will get discounts at Whole Foods and be able to get their groceries with the same account they use to get books or streaming video. This is a key foundation of Amazon’s expansion into grocery: to address the logistical and loyalty challenges they face in grocery.
Additionally, in Whole Foods, amazon acquires a well-known private label. Amazon has private labels, but few people know them by name. But Whole Foods’ 365 brand has 3000 products and a loyal following. There is huge growth potential here for Amazon. Finally, this tie-up is also likely to improve Whole Food’s efforts to increase average cart sales as Amazon emphasizes cross selling. Right now, you may go to Whole Foods and just buy an avocado. From here on out, you are likely to see increased emphasis placed on getting you to also buy the rest of the ingredients for guacamole, and lower prices than before.
You mentioned prices. Amazon announced last week that they will begin lowering prices on some items starting today. Why are they doing this?
Amazon knows that Whole Foods has a perception problem. Often called Whole Paycheck, consumers often think of the chain as an overly expensive option. By reducing prices, Amazon is addressing this issue. Price point is an area where these two companies have diverged until now.
Whole Foods company pioneered organic foods in this country, but in recent years, it has been undercut by traditional grocers as they have started offering similar products at lower prices. Amazon, by contrast, has always followed a lowest-price strategy to grow, and has often grown through a strategy of loss leadership. But at this point, profits are not the issue. Market share in the grocery segment is, and this is a very smart move by Amazon.
Are shoppers likely to benefit from this?
There is no question that customers are set to be the winners here, at least in the short-term. The increased competition will drive down prices, offer greater convenience and allow consumers to further customize their grocery experience. We are only at the beginning of the huge transformations in grocery ahead for consumers, and one of the main benefits will be lower prices. That said, if Amazon crushes other competitors, they could be freed to raise prices eventually.
If consumers are the winners, who are the losers? Who will this move affect the most?
Wal-Mart is the current grocery behemoth and Amazon’s main competitor, and they are not sitting on their hands. In terms of proximity and access, Wal-Mart has scale on its side. It has been testing several delivery options – notably partnering with Uber – to take advantage of its geographic proximity. Retailers often talk about the last mile when referencing the challenges of delivery – maintaining a cold chain for perishable items and other time-sensitive products. Wal-Mart has a location advantage here, and that can translate to a cost advantage as well.
But beyond Amazon and Wal-Mart, the road ahead looks rough. If you are not Amazon or Wal-Mart, you are going to get squeezed. Take Kroger: it is the second largest grocer in the U.S. by market share with around 9 percent of sales. The way they do business has not changed in decades, but they are now being hit from multiple directions: price, convenience, and scale.
Mellody Hobson is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
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