Amazon broke the Internet when it announced that it will be buying the upscale Whole Foods supermarket chain for almost $14 billion. The initial result was a torrent of jokes which theorized that the purchase was the result of Amazon’s Alexa misunderstanding CEO Jeff Bezos’ command to buy some groceries at Whole Foods, and tongue-in-cheek laments about how every trip to Whole Foods seems to end up costing a lot more than you planned. Beyond the humor, though, what does this purchase mean for the future of online and offline shopping?
Amazon has shown an interest in grocery shopping for some time. Back in 2007, it launched Amazon Fresh, selling fresh food via its distribution centers. More recently, in December 2016, Amazon launched a beta version of Amazon Go, a frictionless supermarket with no cashiers—just take what you want, and sensors will make sure you are charged the right amount. Now, Amazon’s purchase of Whole Foods and its 431 brick and mortar locations takes this interest to a whole new level.
It’s easy to understand Amazon’s interest in the grocery shopping segment as the next area for growth after having conquered online retail for durable goods. The total available market is just too large to ignore: Americans spend about 10 percent of their income on groceries, to the tune of over $600 billion dollars a year. But, grocery shopping has unique challenges that make it different than other kinds of retail:
- The margins are razor-thin, at around 2 percent, due to stiff competition.
- Many grocery goods have a short shelf life, so inventory cannot be stockpiled, and spoilage is a major threat to profitability.
- Consumers will not wait until the next day for delivery – they typically need at least some of the products they’ve requested within the hour.
Let’s assume that Amazon’s goal is to become the dominant player in all aspects of retail: online and offline, durable goods and groceries. It thus makes sense for Amazon to buy a grocery chain. But, Amazon could have bought any grocery chain, like Kroger’s or Safeway for example. Why Whole Foods?
For one thing, Whole Foods shoppers have the same demographic as Amazon Prime shoppers: urban, upper middle class. This provides opportunities for synergies such as:
- Cross-selling, e.g., offer in-store discounts to Amazon Prime members.
- Leveraging Whole Foods’ brick-and-mortar locations as delivery centers to reach Amazon’s most dedicated urban Amazon Prime customers. This narrows a competitive gap with Walmart, which complements online retail with in-store pick-up.
- Collecting data about buying habits of Whole Foods customers that can be used to better target Amazon Prime customers with personalized offers.
Another key attribute of Whole Foods is its ability to provide a high-touch shopping experience. Over the past few decades, we have seen the decline of the general purpose one-size-fits-all, mid-sized supermarket, in favor of a bifurcated model. On the one hand, there are mega-stores which provide terrific prices in a sterile warehouse atmosphere. On the other hand, there are high-touch experiential stores, such as Whole Foods and Trader Joe’s, where shoppers go not so much to buy specific items as to enjoy the sensation of shopping, to smell and touch the produce, to talk food with other foodies, and to discover products and food categories they had no idea existed.
Amazon needs no help in conquering the warehouse-style grocery segment. With their expertise in logistics and automation, Amazon can create a more efficient food warehouse that will ultimately eliminate the consumer’s need to visit the store at all.
Where Amazon needs help is in the high-touch experiential shopping segment, because this is far from Amazon’s online shopping DNA. While shopping online with Amazon may be efficient, it is not a shopping experience most people would describe as pleasant, engaging or interesting. To put it another way: You are far more likely to discover a product you didn’t initially intend to buy in a Whole Foods store than on Amazon’s web site. Whole Foods provides Amazon with an entry into high-touch experiential shopping. It also provides a laboratory where Amazon can collect data about this kind of shopping, and perhaps gain insights into how to make online shopping more exploratory and engaging.
If you are a competitor in the supermarket segment, Amazon’s purchase of Whole Foods serves as a wake-up call. Like it or not, you are now part of digital transformation, competing against a nimble company that uses software to drive operational efficiencies and derive marketing insights. You’ll have to up your game by becoming a data-driven company, or risk being left behind. If you don’t have those technical capabilities, get help from a partner that has experience mentoring companies through digital transformation.
Ness Digital Engineering is a custom software development firm with expertise in experience engineering, product and platform development and data analytics.