Online retail giant Amazon.com Inc. announced Friday that it was purchasing upscale grocer Whole Foods Inc. for $13.7 billion in a story that had business reporters covering the ramifications all weekend.
Jeffrey Dorfman of Forbes wrote about how the deal may change how consumers purchase groceries:
Amazon has the deep pockets to survive in the online grocery business for a while and patient enough stockholders that it has no real pressure to turn a profit in that segment anytime soon. Amazon also knows as much about delivery as anybody else and already has the infrastructure so that its cost of delivery is assumedly lower than any competitor could achieve. Because it can spread its fixed costs over all its other businesses, it just isn’t possible for anybody else to beat Amazon on the ordering and delivery costs if it chooses to use its Whole Foods purchase as leverage to make a really big move in online groceries.
The touch problem is harder, but again Amazon has a lot of experience in this area. They may not have a solution, but assumedly they know a lot about what it takes for customers to buy products they couldn’t touch first and which sort of products are most amenable to e-commerce.
Most intriguing is the prospect that Amazon does not use the purchase of Whole Foods simply as a knowledge source to grow its online grocery business, but instead gets more innovative. Others have already suggested that Amazon could use Whole Food stores as pick up points for online purchases completely unrelated to groceries. That is possible, although grocery stores don’t have loads of unused space lying around ready to hold stacks of boxes until somebody comes to pick them up. More likely, and promising, is that Amazon might use Whole Foods to blend online and in-store food retailing.
Nandita Bose and Jeffrey Dastin of Reuters reported about how Amazon is focused on competing against Wal-Mart:
When Wal-Mart Stores Inc bought online retailer Jet.com for $3 billion last year, it marked a crucial moment – the world’s largest brick-and-mortar retailer, after years of ceding e-commerce leadership to arch rival Amazon, intended to compete.
On Friday, Amazon.com Inc countered. With its $14 billion purchase of grocery chain Whole Foods Market Inc, the largest e-commerce company announced its intention to take on Wal-Mart in the brick-and-mortar world.
The two deals make it clear that the lines that divided traditional retail from e-commerce are disappearing and sector dominance will no longer be bound by e-commerce or brick-and-mortar, but by who is better at both.
Amazon’s purchase of Whole Foods also brings disruption to the $700 billion U.S. grocery sector, a traditional area of retailing that stands on the precipice of a ferocious price war. German discounters Aldi and Lidl are battling Wal-Mart, which controls 22 percent of the U.S. grocery market, with each vowing to undercut whatever price the others offer.
The stakes are highest for Wal-Mart. Amazon’s move aims at the heart of the Bentonville, Arkansas-based retail giant’s business – groceries, which account for 56 percent of Wal-Mart’s $486 billion in revenue for the year ending Jan. 31. With the deal, Whole Foods’ more than 460 stores become a test bed with which Amazon can learn how to compete with Wal-Mart’s 4,700 stores with a large grocery offering that are also within 10 miles (16 km) of 90 percent of the U.S. population.
David Z. Morris of Fortune wrote about how the deal will lead to lower prices and more automation:
How will Amazon reduce Whole Foods’ legendary “Whole Paycheck” reputation? Its plans could also include inventory changes that would eliminate the most expensive items from shelves and introduce more private-label goods.
Whole Foods’ reputation has become a major pain point for the grocer, which has steadily lost sales to lower-priced competition—including Amazon. In February, after six straight quarters of falling sales, Whole Foods closed nine stores. It has already been lowering prices and experimenting with a lower-priced store format with fewer employees, 365 by Whole Foods.
True or not, the rumor of job cuts and automation points to a potential sticking point in the pending acquisition. Whole Foods has been recognized as one of Fortune’s 100 Best Companies to Work For every year since the list was created in 1998. It’s described by employees as a workplace offering fair pay and a welcoming environment.
Amazon, on the other hand, has been described as having an intense workplace culture marked by infighting and high turnover among staffers. Work conditions in its warehouse-like fulfillment centers have been described as demanding and even dangerous. Those divergent approaches to labor could well clash when the acquisition closes.
