Amazon and Whole Foods: A Contrarian Opinion

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Amazon and Whole Foods: A Contrarian Opinion

By David Diamond - 06/27/2017

Obviously, the big news in the world of retail, especially food retail, is’s pending acquisition of Whole Foods. Many commentators are suggesting that this news means online grocery retail has come of age, that supermarkets are doomed, and that a large percentage of grocery retail is poised to move online.

I would suggest that just the opposite is true. Amazon has been trying to figure out the grocery category for many years now, and while they are making some headway in specific products and categories, the kind of success that Amazon has created in many other categories – from books to music and electronics – has eluded them (and everyone else) in groceries. So rather than discuss how the acquisition of Whole Foods completes a successful effort for Amazon, I would strongly suggest that the acquisition is simply another attempt to solve a problem which, to date, has remained a huge challenge for Amazon.

At the end of the day, online grocery ordering and delivery remains an idea that has not yet happened. There are some successes – particularly Fresh Direct in New York City – but those successes have more to do with the unusual dynamics of a compact area with many upscale consumers, groceries which are already very expensive compared to U.S. averages, and the relative absence of car culture in New York, than any inherent, expandable approach within the Fresh Direct model. And outside Fresh Direct, I can’t find any place in the U.S. where Internet-ordered groceries are more than 2 percent of the market.

The only reason anyone cares, at this point, is that the grocery market is so very big. Amazon wants to be the biggest retailer in the world, and not just by a nose – they want to be three, four or five times as large as No. 2. And they cannot get there without groceries because groceries are such a huge sector. The point of this discussion is to point out that the proper way to view Amazon’s approach to grocery is not that it is building on any success, but that success in grocery is a requirement for Amazon’s long-term success, and that this success has been very elusive.

Why Behind the Buy

So why buy Whole Foods? First and foremost, why not buy the best? And while Whole Foods is far from the biggest grocery retailer, it is the most profitable on a margin basis; it is certainly among the most innovative, and it serves the most upscale clientele. And by the way, the fact that the stock price has recently been battered because of eroding business growth makes the purchase far more affordable. And with only a few hundred stores, Whole Foods is basically a manageable size, not thousands of stores operating under dozens of banners like Kroger or Albertsons. The only other logical grocers for them to buy would be Publix or Wegmans, which share all of these attributes, but both of those chains are only in limited geography, while Whole Foods is national, and both Publix and Wegmans are owned by families who are not interested in selling, making the discussion a moot point.

But why buy a grocer at all? Why not just innovate from scratch? Well, that question has three answers. First, it seems clear that actual brick-and-mortar stores are going to be needed. For a variety of reasons, mostly having to do with convenience and need, groceries need to be handy. Even two-hour delivery just doesn’t cut it when I need one more ingredient to complete the dish. Second, the time it would take to build a national chain of grocery stores from scratch is well beyond Amazon’s patience level, and as we all know, location is critical for grocers, and prime real estate does not just appear on command.

Third, and perhaps most important, there does seem to be an emerging consensus on how Internet-driven grocery retailing can work. The emerging popularity of the so-called “click-and-collect” model, where consumers order staples and other items from an existing grocery list, and then go to the store to both collect their groceries and supplement the digital selections with whatever catches their fancy in-store, seems to be a compelling approach for grocers and consumers alike. Click-and-collect really does do a good job of melding the advantages of Internet ordering (making the trip faster and easier) with the advantages of shopping in the store (picking out my own pork chops). And at the end of the day, Amazon, in buying Whole Foods, has hundreds of “click and collect” locales ready to go with just some minor retrofitting and staffing changes.

I do not mean to suggest that this is the only reason Amazon is buying Whole Foods – you can also think of the roofs of Whole Foods Stores as drone launch pads waiting to happen – but I think it provides Amazon with the next viable approach to test as it moves inexorably into the world of groceries. None of us, including Amazon, know if this will work well or, for that matter, what it will really be, but if Amazon is to achieve its oft-stated goals, this is the most logical next step they can make to understanding the role of the Internet in grocery retailing. Consider this the most reasonable hypothesis, and the acquisition of Whole Foods as a $13 billion test of that hypothesis.