Amazon is set to acquire Whole Foods for a whopping $13.7B. Here are my two cents on how this news will effect the grocery industry.
A Volume Play
First, this type of acquisition should come as no surprise for folks in the grocery and retail space. Grocery is a tough business because it means selling low-margin, low-price products. But what it lacks in margin, it makes up for in volume. By driving people into a store, retailers can upsell higher margin products to those shoppers. (This is why you see companies like CVS selling bread and milk.)
This margin and volume game is exactly what Amazon has been setting up for. Last fall they were testing Amazon Go, their grocery store of the future, where shoppers could go into the store, pick up products and just walk out--payment was handled not at a register, but through an app connected directly to the shopper's Amazon account.
With no lines or registers, people could get in and out of the store faster: higher volume. Now pair this with their intentions of making Whole Foods products more affordable. According to Bloomberg, Amazon will tackle the "Whole Paycheck" reputation by "chang[ing] inventory to lower prices and make Whole Foods competitive with Wal-Mart Stores Inc. and other big-box retailers." Appealing price points also mean higher volume.
Now, pair these two high volume plays with the ability to upsell any product (headed into Whole Foods for your groceries? Why not pick up other home goods while you're there?) in the world and you are talking much bigger cart sizes.
Brick and Mortar
This acquisition marks a big investment in brick and mortar and online grocery, both very important future strategies for Amazon. Amazon’s previous undertakings in the grocery space, which, if we're speaking about brick and mortar, has consisted of the single Amazon Go Seattle store, spurred retailers and manufacturers to dip their toe into online grocery strategies. Seeing Amazon make a move toward physical stores, a company like Walmart or Kroger would be naive to not then consider their ecommerce strategy. But this acquisition news is going to push the industry into high gear.
I would imagine Walmart and Kroger are really kicking themselves for not moving more quickly in the online grocery space. Yes, investments were made into Walmart Grocery, Jet Fresh and Click and Collect (for Kroger), but the grocery behemoths should have acted faster before Amazon got into the space in such dramatic fashion. The good news is, there is still time.
Walmart and Kroger still have leverage on the brick and mortar side with 4,672 Walmart stores and 2,792 Kroger stores compared to Whole Foods’ 431. Utilizing those physical stores as pickup locations or as a distribution centers gives the companies a head start in being able to deliver perishable products at scale.
The future of Instacart is also a big question. My initial thought was that Instacart would be in trouble because Whole Foods drives revenue for the company and has an equity investment. But it’s going to be quite the opposite. Smaller national retailers and regional retailers are going to scramble to find an ecommerce solution and will turn to Instacart as a quick way to get in the game. Their recent round of financing should give them a distinct advantage over Shipt, the other company that also provides ecommerce capabilities for Whole Foods.
The Amazon acquisition also has an effect on manufacturers, who have traditionally relied on retailers for data about shoppers and, more importantly, to sell their products. The paradigm will shift, with brick and mortar retailers instead relying more heavily on category leaders to make suggestions and lead innovation initiatives as business practices change and retailers scramble to figure out an ecommerce strategy. Some brands already boast robust ecommerce teams, who have been navigating digital developments for years... and now will face significantly more pressure.
What This Means For Us
As for Chicory, this is exciting news for us. An investment in grocery is just one step along Amazon’s path to conquering the world. But, as we’ve seen time and again, Amazon leaves a big footprint. This acquisition means that online grocery is certain to get a push. We are already seeing internal chatter within the online grocery community about how this effects corporate-level strategies and we want to continue creating solutions that can help to shape the future of this space.
There are still key questions remaining around how Amazon plans to integrate Whole Foods into their existing business and how much investment they plan on making into expanding grocery ecommerce versus brick and mortar retail. Grocery is said to be the final frontier of ecommerce and we’re excited to see how this big, old industry changes in the coming years.