Amazon Buying Whole Foods Will Cause More Ripples Than You Think

Yesterday, Amazon upset the grocery apple cart by purchasing Whole Foods.  In case you have been under a rock and missed this joke, I will post it for you.

Picture Jeff Bezos sitting around his house having coffee.

Bezos:  Alexa, Buy me something at Whole Foods

Alexa:  I just bought Whole Foods

Bezos:  Oh shit.

It’s easy to see some of the companies that are going to be threatened by this.  Here are the nation’s largest grocers.

Walmart is the largest seller of organic produce in the country.  Amazon and Walmart have been in some heated head to head competition for years.  Yesterday Walmart bought the Bonobos brand.  That’s nothing compared to Amazon going full bore into grocery.  Target, Costco, Meijer and the entrenched grocery gang are threatened for sure.

I don’t think your fruit stand guy is threatened.  I don’t think your boutique butcher is threatened.  Those are very small niche markets.

Strategically, this was a genius move on par with the baptism scene in The Godfather.

The other easy thing to think about is Amazon integrating grocery shopping with Alexa.  My first thought was my little cabin in northern MN.  I get Amazon Prime there.  What will I be able to order on Amazon Prime via Alexa that I might have gone to town for?

One remark I heard was a grocer saying that Amazon doesn’t know a thing about the grocery business.  My question would be how much do grocers know about digital businesses?  Amazon has powerful voice search and certainly understands mobile a lot better than traditional grocers.  With drone delivery, grocery gets bigger.

There is no doubt that grocery is a far different animal than other forms of retail.  However, if you think about Amazon being a private equity firm and Whole Foods the target the animal changes a bit.  Amazon will keep the knowledge it needs from Whole Foods and integrate Amazon’s distribution model. The grocery supply chain is filled with breakpoints and is also run by unions in a lot of cases.  That might change a lot.  Delivery of produce and goods along the entire supply chain will get a lot more efficient.

If I were a PE firm that bought a grocery chain, or a VC firm heavily invested in food distribution, I’d be worried.  Amazon can easily enter the prepared food home delivery space which was super crowded anyway.  If a firm segmented the market Amazon can enter that segment.  Plus, their back end costs can be allocated across several enterprises so the marginal cost to produce and acquire customers drops down.

Vivek Wadwha wrote a column about tech companies and he and I tweeted at each other about it the other day.  Vivek postulated that every industry will be disrupted by tech.  He also thinks it is going to be the big major tech companies like Amazon, Facebook, Google who will consolidate it.  For example, Apple and Google are working on self-driving cars.  Should GM, Ford and Chrysler be worried?

I agree with Vivek.  Every industry will be disrupted by tech.  It will happen in ways that we cannot imagine today.  The pace of change is pretty incredible.  But, if I look at United States business history as a guide, conglomerates almost never work out very well.  GE is an example of a conglomerate company and it’s always lagged the stock market on a return basis.  Some people might recall the 1980s when there was a wave of leveraged buyout activity and huge conglomerates were built.  It didn’t work out so well.  It’s easy to blame the leverage, but the lack of focus was a problem too.

One thing that Vivek asks a question about and points out is true.  Can tech companies use their core competencies across disparate industries and be successful?  I’d rejoin that question with a couple of others.  How do we define success?  Because they might be able to deploy tech across industries, but will it be beneficial to shareholders?

A trend that will emerge out of the Amazon move will be a ramp up among all industries to chase down cutting edge technology faster.  They will experiment with integration and if it works, spread it wide.  The “fail fast” mentality will have to be integrated into big flat footed corporations, or they risk getting run over.

If you are an executive in a business and you aren’t doing the right things with technology, start learning about it.  Get to a place like the University of Illinois Tech Park/Enterprise Works and start brainstorming.  Amazon just showed you that competition isn’t linear, it’s 3D.

 

Thanks for the link Glenn Reynolds.  Hope Helen’s mom is feeling okay.

 

 

 

  • rktsci

    Can tech companies use their core competencies across disparate industries and be successful?

    It didn’t work so well in the 70s. Think TRW and other conglomerates.

    • PapayaSF

      Yes, although that was the pre-digital age. Maybe that will make a difference? (Although I admit that may be as false as assumption as the 1950s-’60s “computers will make communism work” idea was.)

      • I 100% agree it was much more difficult. TRW is a good example. In foreign countries, conglomerates tend to work but they have regulatory power built into the govt (BASF, Mitsubishi are examples) We will see how it plays in the digital age. Will I buy insurance from Amazon? Insurance from Facebook? Using Alexa or VR?

    • On the other hand, look at Amazon. They sell nearly everything on earth, and with considerable success.

      I like going to physical stores, since I work at home and alone it’s good for me to be around people when I shop. So I would rather go to the Apple Store, Best Buy and Publix to shop for stuff than ordering it online. But I seem to be a vanishing breed, and maybe that’s good considering how bad traffic is in Miami. Eliminating a lot of shopping trips is surely good for the planet and for the sanity of the remaining drivers …

  • Bandit

    Whole Foods has a lot of problems – it’s hard for me to see them becoming a lot more popular in their current form and there’s already one in every college/boho/lilywhitesuburban town in the Northeast – but like what do I know?

    • Paul

      In system dynamics, there is an archetype called “Limits to Growth.” I think Whole Foods has grown as much as they can.

      I’m hoping Bezos purchased a Pig-in-a-Poke.

      • Amazon Prime/Whole Foods intersection. Guarantee they checked credit card data before they bid.

  • Ron

    When you buy a piece of meat, you want to look over the selection, not
    have some picker just grab the first piece in sight. That applies to
    produce and other items as well. Packaged products are a different
    story. That is one reason why I don’t get this Whole Foods acquisition.

    Each
    Whole Foods store will need a massive fleet of trucks to handle the
    volume, especially since drone use on a massive scale is a long way off from being approved. They will have to be refrigerated (costly) to make multiple
    stops for home delivery. That is added expense that WFM does not have
    presently. The long term goal of AMZN is to
    lower the prices, eliminate much of the competition, and then raise
    prices when that competition is gone. This game plan is already in
    effect with other products sold on-line, many of which are now more
    expensive than in-store purchases at Kohl’s and Walmart, for example.

    • Jeff Melcher

      “Each Whole Foods store will need a massive fleet of trucks to handle the volume …They will have to be refrigerated (costly) to make multiple stops for home delivery.”

      I think the Amazon last-mile-delivery model is (will be) more like Domino’s Pizza. They will hire a part-time, barely-trained low-skilled driver with his own vehicle and GPS. Amazon will give him at most three addresses with a very few cartons each, and those bundled in some sort of re-usable insulated carrier. The driver (in a Amazon vest, no other UPS or FEDEX style uniform or “fleet” vehicle) will arrive, hit the doorbell, turn over product, beg a tip, and move on. About three deliveries an hour. If the hiring model can’t get drivers willing to risk costs of buying gas Amazon may put tracking GPS devices on the private vehicle, measure mileage, and pay so much per mile — enough to cover gas but not reimburse the full operating costs of owning a vehicle.

      ANYHOW, Amazon Whole Grocery Delivery service will NOT be buying reefer trucks for last-mile services.

      • Ron

        That still requires quite a large fleet of dummy drivers to handle the volume. It still comes back to how many customers want some picker grabbing the first piece of meat or produce for your order like some assembly line worker. Or dairy products with close “use by” dates. People going to Whole Foods care about the quality of the products purchased. They will not be happy with a dumbed down cookie cutter approach.

        • Operations are the key. Agree on picking certain things. But, that might be changing with future generations. Plus if you get bad quality, you can use social media to shout.

        • Diana Lee

          Ron, While I generally agree with you, (I regularly shop at Whole Foods & Trader Joe’s, in person), I can’t help but notice that every time I’m in one of the Whole Foods, the “Insta-Cart” staff are BUSY, BUSY, BUSY!! The Milenials are more than happy to hand off the task of grocery shopping & other mundane chores. I live in L.A. & we have MANY choices for food delivery from either restaurants or grocery stores. Outfits like Postmates will deliver your Lattes & Pastry to your morning breakfast meeting, your lunch, your dry cleaning & stand in line at the DMV for you. There’s NO SHORTAGE of people to work for Postmates, Uber, & GrubHub, etc., because the work is “on the contractor’s schedule”. So the techies order EVERYTHING delivered & those who (previously would’ve been trapped with a set-in-stone schedule at McDonald’s), get to CHOOSE their “shifts”. I use Uber ALL THE TIME, (when not using a train or bus) & my Uber drivers are a pleasant happy lot, because they “choose” when to work. The main loser in the Amazon/Whole Foods marriage, might be Insta-Cart, but the workers will likely just go to work for “the new boss”. I can’t speak for how many new customers Whole Foods OR Amazon might get, in the bargain, but if this can reduce the cost of organic food, we the customers will be the CLEAR WINNERS!!

          • Trent Telenko

            Dianna,

            Choosing your own hours to work is a huge thing for younger workers.

            They just hate hate hate punching a time clock.

          • CptNerd

            Some of us old Boomers don’t mind working our own hours, especially to supplement fixed incomes.

          • Pointsandfigures

            Many are in jobs that don’t have a time clock.

          • Ron

            Well then, it looks like Amazon and Whole Foods will keep the Millennials, but probably not make much headway in other demographics. The Millennials sure are a lazy lot since the smartphone.

        • gracepmc

          I know someone in Loveland Co whose mobility is increasingly restricted. She has begun to order groceries and other supplies on line from Walmart and they deliver. She is a great cook and very picky about meat, fish, chicken and produce — quality and dates.

          She couldn’t be happier with this process. The expiration dates are far out, the fresh produce etc has been quite good and so forth. Don’t know what will happen on AMZ scale but this Walmart operation works very well for her.

          I should note that she orders and delivery is two days out. That works for her since it is her weekly shopping for all goods. Don’t know if there is faster delivery.

          Whole Foods definitely pricier than Walmart. So maybe WF/AMZ will dominate urban environments.

          I find the conglomerate approach distasteful. Try to avoid it and support small if I can.

          • Pointsandfigures

            What’s amazing is to watch older people or people who have disabilities start interacting with the voice search and voice command on Alexa, Google Home.

      • Silverlock

        Well, we can think the last administration for lots of part time, barely-trained, low skill workers. Lots of deeply in (student) debt, bachelor’s of useless degree workers.

        • I don’t think we can blame the administration for deep student debt or useless degrees. It’s bigger than that.

  • Notorious P.I.G.

    Amazon knows grocery. I used to live in Seattle 7 years ago and we had Amazon fresh that would deliver to your house free of charge as long as you purchased $150. I could get anything from Ice Cream, Milk, OJ, fruits, lunch meat and all sorts of other sundry. You picked your delivery time which for me was first then in the morning. So all I had to do in the morning was open the front door and pull in all the containers. I would unload and stick the containers back outside and a few days later they would pick them backup. It saved the family having to go to the grocery store weekly.

    • Paul

      Yeah. But many people like grocery shopping. Take Wegmans for example, they made grocery shopping a destination activity.

      [hard to explain unless you’ve been to a Wegmans]

      • PapayaSF

        Lots of people like physical books, too. That didn’t stop ebooks.

        • In urban areas, it’s getting increasingly difficult to move around. That’s why Instacart was popular. In suburban areas, sometimes people are busy with jobs, kids and have trouble fitting a trip to the store in-besides, might be much more convenient to pick it online, have it delivered and spend more quality time with family. Time is money

      • Diana Lee

        I hear that’s also true of HEB, though I’ve never been to either.

        • Pettifogger

          We shop at HEB. I can’t say I regard it as a destination, but shopping there is pleasant enough, and it’s easy to see that they work to adapt. Whether they’ll successfully adapt to compete with Amazon, I have no idea.

      • JLM

        .
        Grocery shopping at a WF IS a social experience. Hell, hey have five restaurants in the joint.

        JLM
        http://www.themusingsofthebigredcar.com

  • Terenc Blakely

    I can see buying canned/packaged stuff online but fresh stuff like meat and produce?

    • ajwpip

      I’m hoping Amazon will let you Skype with the butcher counter et al. Pick your cut online. Why not?

      • Pointsandfigures

        Why not exactly? That’s something I never thought of.

    • Happening a lot in urban areas now.

    • Pettifogger

      I agree, especially as to things such as bananas and avocados as to which ripeness is crucial.

  • Paul

    Bezos/Amazon needs a beat down, for purposes of competition. Maybe this Whole Foods mistake is just what the Dr ordered.

    I hate Whole Foods. It is inglorious outside hipster land, as it should be. Give me Trader Joes, ALDI (same company BTW), Costco/Kirkland and Wegmans any day of the week. The rest are just treading water on their way to Ch. 13.

    • Time will tell. Hate doesn’t factor into iron business laws or iron laws of economics.

    • Diana Lee

      That likely depends on where you live. EVERY Whole Foods here in L.A. is ALWAYS PACKED, as are the 2 back home in Kansas City. And NO, it’s NOT “just hipsters”.

    • Pettifogger

      Whole Foods a/k/a Whole Paycheck is designed to cure the problem of having more money than is good for you. I avoid it almost entirely.

      • Pointsandfigures

        Joke: Amazon bought Whole Foods for 17.3B. Then had to stop at Kroger on the way home to pick up a few things Whole Foods didn’t stock

  • patrick k

    It can’t be ruled out that Amazon bought Whole Foods for their stores and locations to simply act as distribution centers for Amazon Fresh while keeping the stores open to simply pay the rent. As to delivery, Uber already does it. No worries there. Down the road, drones and driverless cars will do the leg work. What Bezos needed were distribution centers. He has them now all in the neighborhoods that would likey use Amazon Fresh. My guess, the only thing he is worried about is someone making a higher bid.

    • You Can’t Say That?

      Use Uber drivers to deliver.

    • Trent Telenko

      Patrick K,

      This —

      >>It can’t be ruled out that Amazon bought Whole Foods for their stores and locations to simply act as distribution centers for Amazon Fresh while keeping the stores open to simply pay the rent.

      Feels right.

      I’m thinking along the lines that Whole Foods stores might make interesting heliports for Amazon’s future multi-copter delivery-drone fleet.

      Uber delivery at first, then Drones.

      Draw a 5-mile circle around those 460 odd stores and think in terms of 60 minutes or less grocery delivery times.

      One more thought — future Amazon cargo drones would not be limited to just delivering Amazon’s goods.

      Amazon sells 3rd party vendor items all the time in competition with on-line places like e-Bay.

      There is no reason that these future Whole Food’s ‘Drone-Ports’ can’t deliver other people’s stuff in an hour or less.

      Amazon could actually drop by a local pizza place (insert name here) with the right transponder and GPS coordinates to deliver anywhere with a smart phone “knock at the door” to tell you the pizza is outside in a box waiting.

  • JLM

    .
    Groceries are a 1% margin business. Amazon preys on margins. There is not enough margin to wet their beak.

    Bezos will work this for a long time and five years from today, it will not look anything like it does today.

    Walmart and Sams Club together are so much bigger than Whole Foods as to be laughable.

    Amazon will insert disciplines, supply chain, and delivery, but they will still be tiny when compared to Walmart.

    WF will do fine in hipster locations. Walmart will own the rest of the world.

    JLM
    http://www.themusingsofthebigredcar.com

    • Trent Telenko

      >>Groceries are a 1% margin business.

      People are willing to pay more for convenience.

      Fresh cooked and delivered pizza is more than double what you pay for a pizza from a store. Yet we have Dominos and Pappa John’s pizza.

      Bezos model is to take a hit up front to establish that new social behavior centered on convenience.

      An observation from another blog —

      “I was talking to a co-worker a few days ago, and we began talking about Amazon and Mr. Bezos.

      The co-worker said that, years ago, he had purchased a Kindle Reader for his wife. It was just before they were going on a vacation. At the time he purchased it, he realized that it was being sold for less than it cost to build it. He said “Bezos is a moron. You can’t make money by selling below your own cost.” Then he got back from vacation, and his credit card bill came in.

      His wife had spent most of the vacation just resting on the beach, enjoying the quiet. And reading her brand-new Kindle Reader. Which had the ability, while there on the beach, to download any book that was available on Amazon. So, she would finish a book, and then download another one. And another one. And another one. For two weeks.

      After looking at the bill for all the books she had downloaded, my coworker said “Bezos is a genius.

      Sell something at a slight loss, because it will make it SO easy for people to spend more than what you gave up initially.””

      • JLM

        .
        Just to spark a bit of polite debate, I would note that people are willing to pay for convenience, but they are not willing to pay more for milk or cucumbers. Those are staples.

        Your anecdote is the classic “give away the tomatoes for free” and charge them for the lettuce pricing strategy. I feel compelled to note there is a huge margin in digital entertainment while there is none in groceries.

        How does one fashion such a thing in the grocery business?

        JLM
        http://www.themusingsofthebigredcar.com

        • Trent Telenko

          JLM,

          Have you ever grocery shopped with three children under six years of age?

          Or picked up produce from a local farm/organic co-op with a mini-van full of kids?

          There have been a dozen times where my wife would have used a quick grocery delivery App — had one been available — for that one or two items for a pastry recipe for the kids cup cakes or cookies for class the next day in lieu of making a late evening dash to the grocery store and the price of our sleep..

          A singe mom with multiple kids needing to arrange child care to shop or a soccer mom not having to make another trip in urban traffic rates as major quality of life improvement that people will pay more for than the traditional 1% grocery retail experience.

          A retail experience where you are increasingly using self-check out under a part-time “straw boss” for the scanning machines that are on the ragged edge of reliable function.

          The nastier the retail experience, the more likely people are to use a Amazon Prime-like delivery service in lieu of going to Walmart.

          • None

            So, what you are saying is that shopping will be a much more pleasant experience since the screaming kids will be left at home? I might just cancel Prime and head to the store instead now.

          • JLM

            .
            No disagreement.

            The issue may be the wealth of the consumer and if having three kids allows one the luxury of buying out some of the hassle.

            Wealthy people don’t actually go to the store. They send their cooks and maids. Even before the advent of any kind of shopping app, wealthy moms made lists for their maids.

            I live in ATX and there are a couple of dozen services, including Instacart serving WF, which can harness your needs and deliver. I advised one of them when they were a raw startup.

            The market for delivery services is segmented. Not everyone is going to be interested. It will be an education process and as the cost is lowered ($3.99/$35 order + tip) they will become more in demand.

            Sams has the straw boss self-checkout humming right now. It easier and more convenient than the alternative.

            JLM
            http://www.themusingsofthebigredcar.com

    • Totally possible. Market segmentation is always a key to success.

  • Sardondi

    Meh, Amazon Prime is beginning to underwhelm me. I’ve been a member at least 10 years, and in that time the price has gone up, and the delivery service has gone down. Amazon misses its promised delivery date by one day, two or even more in at least 30% of my Prime purchases. And I mean deliveries which Amazon says will be here Tuesday, but don’t arrive until some time afterward. I don’t include the increasingly common “non-Prime” Prime items, or the “half-Prime” goods, which although marked Prime, are accompanied by a note saying delivery won’t be made within two days. Huh? Then why tell me it’s a “Prime” article when it’s not? It’s just a free-shipping article then. That stuff smacks of the kind of sharp-dealing I associate with other merchants.

    • gracepmc

      Packaging has also suffered. And my inbox is overwhelmed with AMZ Prime offers — music, video , books, tablets. Alexa, Henry and so on.

      • Sardondi

        You’re absolutely right. I overlooked how often fragile foodstuffs in particular such as cookies or biscotti arrive as chunks and dust.

        • Pointsandfigures

          Interesting. I use Amazon Prime in a remote area of Northern MN. They delivered kayaks to me, locksets, and other stuff

  • Silverlock

    Amazon has tried to build a stand alone immediate food delivery service. Primarily, it worked out of the Pacific Northwest. Now they have a nationwide system to convert.

  • Proud Skeptic

    Bezos’ rockets still look like penises.

    • Pointsandfigures

      What rocket doesn’t?

  • James_IIa

    Wal-Mart has Internet distribution. It could learn to compete w. Amazon.

  • RWB person

    Hopefully, this won’t force my local grocery store to become more competitive, lower prices and improve quality and service, cause I don’t want that.

  • Jonathan

    “Get to a place like the University of Illinois Tech Park/Enterprise Works and start brainstorming.”

    That was the weirdest native ad I’ve seen since someone dropped an energy bar mention into a Mark Wahlberg interview. Hope they paid you well, it detracted from an otherwise fine article.

    • Pointsandfigures

      I am a University of Illinois Alum. So, yes, it was sort of an ad. I hope you come back and interact with this blog. Occasionally, I will tout companies I am invested in. Occasionally, I will post causes I am concerned with (NationalWW2Museum.org is one) or some issues that I am concerned with (like my friend’s son who has cancer, or a local Chicago entrepreneur who’s baby has suddenly gone blind).

      But, the truth is the University of Illinois College of Engineering is one of the best, if not the best, engineering college in the United States. The internet was basically invented there. I have been there several times over the past two years, and you cannot imagine the stuff they are building in labs there. It would blow your mind.

      Appreciate your sentiments. Thank you.

      • Jonathan

        I think those details would be very useful to those of us unaware of the existence of the University of Illinois and its College of Engineering, and the nature of its relevance to the topic you’re addressing.

        • I am a VC, former independent trader and blogger, not an unbiased journalist. But, I am transparent about my biases. Check out Illinois online. Great school in a fiscally challenged state.

          • Jonathan

            I don’t consider you biased. To your own point, Illinois is the most deeply corrupt, fiscally incompetent state in the union and will remain so if and when Puerto Rico attains statehood. Against that backdrop, a more extended introduction of the University of Illinois and its noteworthy achievements will tend to usefully inform the casual reader. Thanks for your suggestion, I will definitely check out the school.

  • dave72

    Whole Foods prices are for saps. Does that make Bezos a sap? We’ll see.

    • Pointsandfigures

      You can get a pretty good price on grass fed, grass finished beef there compared to a lot of places

  • ubik

    Time will tell. Wish I had a crystal ball.

    • Pointsandfigures

      Me too. When you invent it, please let me in on the results! : ) (This is sarcasm, wish I had tomorrow’s copy of the Wall Street Journal too!)

  • CurlyDave

    I think Whole Foods and Amazon work together differently than most are predicting.

    Walmart is testing order it online, pick it up at the store. Who foods gives Amazon 460 upscale locations with parking space, reefers, etc.

    A lot of people don’t order from Amazon because stuff left on their doorstep disappears.

    Order online pick it up at Whole Foods, and get a few groceries while you are there…

  • Tom

    I think Bezos is propping up another liberal cult fetish – like buying the WAPO. Both are money losers, but he can afford it because he made so much money from core Amazon. Whether Amazon can afford it, along with discounting Prime to welfare recipients, remains to be seen. That is for the little investor to worry about – not Bezos. He already has his assets covered.

    • Pointsandfigures

      You don’t spend 17B to prop up a liberal cult fetish.