Amazon/Whole Foods Deal: Not a Game Changer


At first glance,’s purchase of Whole Foods for $13.7 billion seems like a game-changer for the CPG industry. How could it not be? A massive, tech-savvy company with very deep pockets and grocery aspirations just bought a big name in grocery.

But consider: Stop & Shop is the same size as Whole Foods. Would the business world be freaking out if Amazon bought Stop & Shop? Exactly.

In reviewing this acquisition more closely, I see an admission from Amazon, and a few reasons why I believe this deal will have minimal impact on most grocery stores in the immediate future.

The Admission

By purchasing Whole Foods, Amazon has waved the white flag on succeeding with only an ecommerce grocery offering. The company has been testing brick-and-mortar book and grocery stores, but now it’s really making the plunge into physical stores.

Yes, an online-only Amazon has shown year over year grocery growth, but it still hasn’t been enough to make online grocery a major force. The TABS Analytics annual consumables study shows a loyalty rate of 15 percent to the format, while the brick and mortar norm is 75 percent. (Loyalty rate is defined as the percent of people that buy at an outlet once who buy there at least six times in a year.)

What’s interesting is that Amazon’s message here is likely getting lost to other grocery retailers. As major retailers from Kroger to Walmart and Meijer continue to throw money at online grocery, Amazon seems to have made a $13.7 billion bet in the direction of brick and mortar stores. Online grocery has a long way to go in the U.S. before it becomes fully adopted by consumers. It would be far better for retailers to test and learn with online rather than go full bore at the expense of their primary business.

Minimal Short-Term Impact

This deal likely won’t have that big of an impact on the major grocery retailers over the next couple of years. Amazon’s strengths don’t shore up Whole Foods’ weaknesses and vice versa. The same study that showed online grocery’s low loyalty also showed that only 23 percent of U.S. adults shop at either Whole Foods or Amazon six or more times per year. There is still a large group of people that these retailers are not reaching: households making less than $100,000 per year. Conversely, both Amazon and Whole Foods are close to saturation among the high-income households which represent just 26 percent of the U.S. population.

This acquisition does not do anything to close the gap among the vast majority of consumers whose incomes are flat, according to wage data from the Department of Labor, and are pulling back on purchasing consumer products, according to retail sales data from the Census Bureau. The only retailer that might see an immediate competitive threat is Target, who is already struggling in the grocery arena. Target shares a similar consumer profile to Whole Foods and Amazon, and has a larger presence in urban centers than other grocers do.

Another big issue for Whole Foods is that more than 65 percent of its sales are perishable foods. Non-perishable items fare poorly at Whole Foods, and it is not clear what Amazon would bring to the table that might close that gap. For context, a typical grocer does around 20 to 25 percent of its sales on the perimeter with perishables.

Possible Future Impact

In the next three to five years and beyond, this acquisition might cause problems for grocery retailers if Amazon uses its seemingly unlimited financial resources to expand stores aggressively. The only way for such an expansion plan to work is if Amazon could structure a mid-market banner to appeal to a larger part of the market than Whole Foods’ more upscale customer demographic. This would be damaging for many retailers, including Albertsons.

This would mean doing more than just introducing something like a Whole Foods 365, whose imprint on the company, and grocery at large, has been low relative to its hype as a low-cost Whole Foods that will appeal to more buyers. They will have to do better than just a few stores in selected areas.

However, Amazon’s technological prowess could lead to game-changing instore and supply chain innovations that would pose major competitive threats to the rest of the grocery landscape. Amazon now has a fresh laboratory to test its tech innovations and do so at scale. It is possible that in the next five to ten years, something big could come from Amazon’s laboratory, but that doesn’t help Amazon in the short term.

In the short term, Amazon’s acquisition of Whole Foods does not do anything obvious to improve the prospects for either company in grocery. The tech wizardry of Amazon, however, means that every competitor should be keeping a sharp eye out for them because something could hit that changes the business prospects for this combination overnight.

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