Amazon’s $14 billion acquisition of struggling grocery chain Whole Foods Market Inc, announced last Friday, will now see Amazon take on bricks-and-mortar grocery giants such Wal-Mart.
Amazon In The Grocery Market
Last month, Amazon expanded upon its existing Amazon Fresh grocery service, which already operates in 16 cities worldwide, with a trial of the ‘Amazon Fresh Pickup’ service from two ‘bricks-and-mortar’ locations in its home city of Seattle.
Amazon Fresh offers attended delivery (hand-to-hand drop-off) or doorstep delivery of groceries, and the new Amazon Fresh Pickup service invites customers to come and pick their shopping up themselves from Amazon’s stores, rather than having it delivered to their door.
Why Buy Whole Foods?
US store Whole Foods, which has notoriously high prices, and has been struggling in recent years is believed to have been purchased by Amazon:
- In order to fight back against traditional bricks-and-mortar retailer Wal-Mart who acquired retailer Jet.com for $3 billion last year in order to compete seriously with Amazon in the e-commerce world. Wal-Mart is also reported to have been going after Amazon’s higher-income customers with other online brand acquisitions including Moosejaw, Modcloth, and menswear e-tailer Bonobos. Wal-Mart is offering curbside pickup of online grocery purchases at 700 locations (with hundreds more planned), and is testing same-day fresh and frozen home delivery from 10 of its stores.
- To compete directly with (and to take customers from) Wal-Mart at the heart of its business i.e. groceries, which accounted for 56% of its $486 billion revenue last year. It has been reported that Amazon intends to do so by reducing the Whole Foods prices and changing its assortment of products to attract a larger customer base i.e. Wal-Mart customers. Like Wal-Mart, Amazon is also large and resourceful enough to wage a price war.
- To use the 460 Whole Foods stores which are within 10 miles of the main population centres in the US to test how Amazon can learn how to compete with Wal-Mart in the bricks-and-mortar grocery world.
- To compete with Instacart which works with a network of 160 grocery chains and retailers across the US, and to pull Instacart’s customers into Amazon Fresh.
Some of the concerns raised about the acquisition of Whole Foods Market Inc by Amazon (which have been denied by Amazon) are that it may cut jobs and / or use technology to automate jobs of cashiers.
Concerns have also been raised by some commentators about how the acquisition will affect Instacart with whom Whole Foods has a five-year contract. Whole Foods, however, only represents less than 10% of Instacart’s revenue, and Whole Foods has less than 1% equity in the company. Instacart is also confident that it has many more years experience in the grocery market than Amazon, and that it has spread its interests across a wide range of retailers, and that the move by Amazon may prompt other big grocery chains and retailers to seek Instacart as a partner
What Does This Mean For Your Business?
Amazon has grown and diversified at an incredible rate in recent years, and this move (in response to Wal-Mart’s moves) has meant that the traditional retail dividing lines between e-commerce and brick-and-mortar hasve now been blurred even more. This has led some leading retail commentators to say that dominance in this sector will now depend upon who is better at both e-commerce and brick-and-mortar retailing rather than just being best at one (as Morrisons discovered in the UK when its e-commerce lagged behind competitors).
The move by Amazon does look set to disrupt the U.S. grocery sector, and as we have seen with Amazon in the past, it frequently tests strategies in its home country before exporting them to others. This could mean that Amazon has the power and resources to set itself up as a serious competitor in many different sectors in the UK, just as it has recently done with its Amazon Business online trade-counter.
In the case of Amazon’s acquisition of Whole Foods Market Inc, some grocery retail commentators have, however, noted that it may not be as easy as Amazon thinks to start taking Wal-Mart’s customers because as things stand now, the two stores appeal to two very different types of customer. In the UK however, we have seen discounters (Lidl, Aldi) take customers from all of the other main supermarkets.