Whole Foods: it’s fresh, it’s organic and it comes with a hefty charge. So where on earth does Amazon fit in? Procurious investigates…
Last week, to the public’s surprise and the retail world’s horror, Amazon announced that it was buying organic supermarket chain, Whole Foods. For the meagre (in Amazon terms) sum of U.S.$13.7bn the retailer will take ownership of the United States’ first certified organic grocer.
It’s a bold and unexpected move given that Amazon is well known for its cheap price points, which have traditionally undermined brick and mortar stores. Whole Foods, by contrast, is a reasonably exclusive and fairly expensive, organic retailer.
Jeff Bezos, Amazon founder and CEO said “Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy,” said Jeff Bezos, Amazon founder and CEO. Whole Foods Market has been satisfying, delighting and nourishing customers for nearly four decades – they’re doing an amazing job and we want that to continue.”
The annoncement has sparked much discussion and speculation ; What are Amazon’s intentions? How will other supermarkets be impacted? Will Amazon reinvent Whole Food’s supply chain?
John Mackey, Whole Foods Market co-founder and CEO believes “This partnership presents an opportunity to maximize value for Whole Foods Market’s shareholders, while at the same time extending our mission and bringing the highest quality, experience, convenience and innovation to our customers.”
What does this deal mean for other retailers?
Whole Foods is most prevalent in the U.S. with 431 supermarkets. Unsurpsingly, rival retailers were dealt a hefty blow following the announcement.. Walmart’s shares fell 4.7 per cent, Target’s fell 5.1 per cent Costco’s fell 7.2 per cent and Kroger’s by 9.2 per cent.
The impact was even felt in the UK, despite there being only nine stores as Tesco and Sainsbury’s by some 4-5% on Friday.
Raanan Cohenn, CEO of last-mile delivery software provider Bringg asserts that “Amazon has become a leading player in the grocery industry overnight. It’s crunch time for the industry.”
“In one word, it means pressure” he continues. “Profit margins are traditionally razor-thin for grocery chains and Amazon will have a greater ability to squeeze margins throughout the supply chain even further.
Latest news implies that Walmart could enter into a bidding war; it’s certainly true that the biggest competitors will do their utmost to make this deal as tricky as possible for Amazon. Given that Whole Foods stock is trading significanlty more per share than Amazon’s $42 offer, a counter bid is entirely conceivable.
The Supply Chain challenge for Amazon
“The challenge for online grocers is that freshness and variety are hard to combine — if they sell one type of tomato, their stock will turn over fast and be very fresh. If they offer 20 types, the choice is wider but the tomatoes will sit in warehouses longer. The supply chain for groceries is trickier and costlier than for non-perishables”says John Gapper, writing for the Financial Times.
It might be the cost-effective reigning champ of online efficiency but fresh, organic produce is a whole new ball game, and not one that Amazon has been good at winning in the past.
Jason Busch and Pierre Mitchell, Spend Matters, speculated that “Acquiring Whole Foods is perhaps proof that Amazon is willing to buy its way into managing adjacent supply chains in which it has struggled or not focused on yet. It also could provide a fascinating localized test-bed for Amazon Go bridging the consumer and B2B divide.”
If, bidding war allowing, the offer is accepted, Amazon is in a favourable postion to redfine the retail market. They’ll be able to sell fresh groceries online and give customers the option to collect their deliveries from Whole Foods stores, which would become instant fulfillment centres. Perhaps Amazon’s ultimate aim will be making same day delivery for groceries the norm.
And, as ZDNet pointed out, “Whole Foods’ roughly 30 million (typically affluent) customers are also likely to be Amazon Prime customers already, which further strengthens the connective tissue between the two brands.”
What do you think about Amazon’s purchase of Whole Foods? How will retail supply chains be affected? Let us know in the comments below.
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