On paper, Amazon just bought a struggling overpriced grocery chain for more than $13 billion. But the online retail giant sees much more in Whole Foods than a simple supermarket.
Jeff Bezos’ sprawling retail empire will no doubt squeeze every last cent out of Whole Foods’ various assets in ways that only a company as large as Amazon can.
To Amazon, Whole Foods is essentially a knockout punch to the comparatively tiny startups battling it out in the grocery delivery wars. It’s also a quick way to amass hundreds of distrubution centers, a fleet of premium food brands, and an army of retail employees.
So, without further adieu, here are the various opportunities Amazon investors might see in the wake of this monumental acquisition.
Way more pick-up locations for Prime subscribers
Until now, the only pickup option for AmazonFresh customers were the company’s two drive-thru spots in Seattle. It also has an experimental high-tech supermarket called Amazon Go in the same location and plans to expand the concept to other major cities across the country.
The acquisition of Whole Foods just expedited those plans. It gives Amazon a whopping 431 more pickup locations situated in the often high-density or affluent enclaves of Whole Foods shoppers.
A whole new set of in-house brands
Amazon has quietly built a booming business of in-house brands that produce things like batteries, baby wipes, and other household commodities. Now it’s trying to replicate that success in the grocery business.
It appears that Amazon wants to make these product lines better than your average store generic product. You can think of it like a Trader Joe’s store, but built for the internet.
The problem, Kantar retail analyst Megan Werle said in an interview last week, is that shoppers don’t necessarily know whether to trust Amazon with their food. “They could easily fail here,” she said. “They still need to establish that credibility with shoppers.”
The Whole Foods acquisition solves that problem. The store comes with its own collection of established high-quality food brands, including 365 Everyday Value, Engine 2 Granola, and snacks sold under the Whole Foods name. That should pair well with the roasted seaweed and cocoa truffle spread of Amazon’s own fledgling food labels.
An army of employees to better compete with Walmart
Amazon’s greatest retail nemesis, Walmart, has been bragging forever about how its vast infrastructure of brick-and-mortar stores and employees will give it a leg up on Amazon’s still-fledgling network of stores.
“We will compete with technology, but win with people,” Walmart CEO Doug McMillon said at a corporate shareholders meeting in Arkansas earlier this month.
So much for that. Whole Foods’ hundreds of retail locations obviously don’t come close to Walmart’s 5,000 in the United States alone. But it’s a significant leap forward.
Amazon’s new Whole Foods workforce can help it with last-mile delivery, the final leg of a package’s journey from a warehouse to someone’s doorstep that costs companies the most because it’s done one house at a time. Stores could effectively double as shipping centers, and since Whole Foods stores tend to be located in areas with lots of likely Whole Foods customers, that could make the process cheaper.
Walmart’s been getting around this problem by experimenting with initiatives like having store employees drop off packages on their way home from work or load orders into Ubers. Amazon could conceivably do the same.
Walmart’s also put a lot of stake in battling Amazon in the grocery business, where its huge network of superstores gives it up a leg up. That advantage eroded a bit this week.
Investors seem to agree. Walmart’s purchase of menswear upstart Bonobos the same day wasn’t enough to remove that threat.
A bomb drop in the grocery wars
Minutes after Amazon announced the Whole Foods deal, Instacart’s name also popped into Twitter’s trending topics as a brief moment of schadenfreude took hold. The startup offers same-day delivery via free-lance workers and partnerships with major chains, and it’s become one of the biggest startups to face Amazon in the space.
Even the deep pockets of Instacart’s investors won’t necessarily protect it from the power that the deal gives Amazon.
A source close to the company says it’s only one year into its five-year partnership contract with Whole Foods. That document is supposed to stand regardless of changes of control, but anything can happen. That said, revenue from Whole Foods makes up less than 10 percent of Instacarts overall revenue, the source claims.
Instacart’s only hope seems to be that traditional supermarkets might line up to embrace it further as they recognize Amazon’s much bigger threat. That’s far from a sure bet, though.
Already today, Instacart has received attention from new stores worried about the deal, the source claims. The company thinks it will have more luck rallying stores around the Amazon factor going forward.
It’s easy to see why grocery stores might be worried based on their plummeting stocks across the board.
Though I guess it could prompt non-whole foods supermarkets to work even more closely with instacart
Farhad Manjoo (@fmanjoo) June 16, 2017
Amazon helped Whole Foods escape the “greedy bastard” activist investors chasing it for a quick sale, in the words of its CEO John Mackey.
Mackey gets to keep his job plus an estimated $8 million payday and turn the company he founded over to much better hands.
But it’s a pretty ironic outcome considering the Whole Foods boss predicted two years ago that groceries would be “Amazon’s waterloo.”
This story was updated with more information about Instacart’s reaction to the deal.