Amazon And Whole Foods: Applying Scale To Ethics And Quality In Retail

Within an hour of Amazon’s $13.7bn bid for Whole foods stocks for Kroger, Costco, and Dollar General all fell more than six percent. Meanwhile, Amazon’s stock gained $14bn in market cap. In a world where acquisitions often wipe short term value off companies, Amazon’s value increased by more than the cost of the deal. So it’s fair to say that the market likes the deal and has faith in Bezos and Amazon to finally make their move into groceries stick. 

And there is plenty to like from an immediate point of view...

1. Amazon get a foothold in groceries

It finally gives them an established, premium foothold in food, with Amazon Fresh likely to be rolled into a combined offering with Whole Foods. After Amazon has been experimenting with groceries for a decade with limited success to date.

2. Valuable real estate 

Whole Foods also offers 431 locations in prime, urban locations. Which can act both as local distribution hubs and a way to scale it’s current experiments around the future of bricks & mortar retail.

3. Immediate opportunities for cross selling

In the Whole Foods customer base, there is a wealth of younger, affluent consumers to pull into the Amazon Prime ecosystem. Whilst in Amazon prime customers, there is a group of people likely to be interested in a high end food offering with a great delivery experience.

4. An established grocer with minimal delivery capabilities

Finally, although Whole foods has a partnership with shutl, Amazon would immediately upgrade this capability to threaten firms like Fresh Direct in the States or Tesco in the UK.

These benefits are all strong, and obviously enough to convince the market of immediate benefit. But Amazon has succeeded to this point by always looking for investments that will set them up for success in the long term. So what angle is not being considered enough here?

It’s not about price, it’s about value and membership

Amazon is famous for its relentless focus on the customer. And for much of its history that has been about getting products to people as cheaply and as quickly as possible. However, recently, there have been a number of moves that suggest Amazon will continue to focus on convenience, but are shifting away from low prices as it’s killer benefit, towards a broader idea of value. 

Firstly Amazon appears to be moving away from using ‘list’ price. A tactic that leans on customers perception that they’re getting a bargain. As an isolated decision it could just be seen as a response to the ongoing lawsuits in the US around the legitimacy of these ‘list’ prices. However, we have also seen Amazon pack the Prime subscription with more and more value. No longer just an offer of free delivery, members have access to streaming video, streaming music and the ability to borrow Kindle books. On top of all of this, they have also patented a technology that would allow them to block shoppers from comparison shopping in a physical location. The irony of which shouldn’t be lost on anyone. This could be driven by observing that Amazon Prime customers are less price sensitive.

Which brings us back to Whole Foods. Because Amazon didn’t just buy a set of buildings, a customer base and a 1.21% share of the US grocery market. They bought one of the most successful companies to explicitly put sustainability and environmental impact at the heart of its operating model. 

So what if we looked at this deal differently.

Building an emotionally powerful supply chain

Rather than look at what the Amazon Fresh proposition can do with the assets of Whole Foods, focus on what would happen if you started with the philosophy and values of Whole Foods and layered on Amazon’s energy, CapEx and logistics capabilities. Whole Foods’ competitive advantage is based on its ability to source and stock responsibly made and often locally sourced foods. Buying at Whole Foods isn’t just a decision driven by food quality, but a declaration of what you value. It’s a model that’s harder to scale, but that’s the point. Solving the complexity of getting locally sourced products to each individual online shopper based on their location; or finding new ways to make your food supply chain even more accountable and transparent are hard tasks; Shaving some of the cost from these premium food stuffs. Crack these and they would create an incredibly powerful competitive moat.

Consumers are increasingly demanding of company’s ethics, but are rarely willing to pay more for those ethics. This may seem unreasonable, but solving unreasonable demands is how markets are disrupted. In this case, Amazon could offer affluent customers the ability to save the planet, with delicious local cheeses, all from the comfort of their sofa. Another reason for people to subscribe to Amazon’s increasingly broad life bundle.

Using their powers for good

Amazon have always succeeded by thinking differently. And despite Amazon’s moral track record to date being patchy, Bezos is increasingly aware that his company’s scale has thrust it and himself into the spotlight when it comes to companies’ role wider society.

By using it’s power to scale Whole Foods’ core values, Amazon could not only create a major headache for its rivals. But they could set a new bar for the level of transparency and impact a retailer creates on its surrounding environment.

As a customer, this is what I hope for. If I was in the food retail business this is what would terrify me most of all. Because it would be the hardest, least expected move to try and match or counter.