Amazon Buys Whole Foods

https://www.forbes.com/sites/ciocentral/2017/06/23/amazon-buys-whole-foods-now-what-the-story-behind-the-story/#7e3030dee898

In a move that surprised many last week, Amazon announced its intention to purchase Whole Foods for $13.7B in cash.  Amazon had been dabbling with traditional brick-and-mortar activities for a few years already – from owning a few physical stores to running experiments like “Amazon Fresh” and “Amazon Go” (more on this later).

When the news broke last week, critics saw it as a sign that the company had finally caved and made a large investment into physical stores in order to grow. What many didn’t see, however, is that this acquisition is, in fact, in complete alignment with Amazon’s view of the world of retail.

According to a recent survey of chief data executives, 47% of them believe that their firms are at risk of major disruption in the next decade.  That disruption will most likely come from Data.  And Amazon is using Data to reverse-engineer retail in a way that might change it forever.

The firm’s move marks the beginning of the end of retail as we’ve known it. Or maybe the beginning of the retail industry, as it should be.  How does this relate to the disruptions coming to your industry?

Data: No longer a four-letter word

Retail is a ruthless business. It has incredible uncertainty and risk built-in. Groceries can go bad in unpredictable ways.  The sale of accessories can be affected by unexpected fashion trends and unforeseen weather patterns.

To succeed, retailers have to compete on many fronts: they have to invest in the right location.  They need to carry the right inventory at the right time.  They have to operate with exceptional excellence and provide supreme convenience to extract razor-thin margins.

Historically, this industry took a while to adopt technology and Data to disrupt itself.  It wasn’t until the 1970’s, when point-of-sale systems were introduced to replace the very limited electronic cash registers, that retailers could start tracking transactions, and tie them to orders and buyers in order to start managing inventory with more certainty.

In contrast, Amazon has approached the problem of retail in a more scientific way since day 1.  In the Amazon world, every transaction is recorded, every buyer is known, every inventory movement is known, and perhaps more importantly, every possible next order can be suggested based on what visitors buy and browse.  This playbook, based on the belief that all data must be collected, analyzed and used, is drastically different from retail’s traditional way of thinking.

Amazon’s move is a pretty clever one if you think about the luxury it will give the online company to reinvent and reengineer the process of buying, moving and selling goods: Whole Foods has higher margins than Amazon’s retail business (5% vs. 3%), and with 460 locations and a history of highly localized habits, Amazon will benefit from a trove of Data that it can mine to write the future.

http://fortune.com/2017/06/22/amazon-buying-whole-foods-disruption/

For years, Amazon has been the specter looming over retail, as once-dominant department stores and specialty chains fell on harder and harder times. But up until now, the e-commerce titan has managed to irrevocably alter the industry without making much of a dent in retail’s biggest moneymaker of all—the $800 billion grocery business.

That changed on June 16 when Amazon announced its intention to acquire Whole Foods, the upscale supermarket chain that played a pivotal role in taking organic and natural foods mainstream. Whole Foods itself may have been under duress, pressured by an activist investor and softening sales, but the healthy-food movement and the meticulously curated store experience that it pioneered is alive and well. “Amazon is placing its bet on the future of the food industry,” says Errol Schweizer, a former Whole Foods executive who is now an industry adviser, “and they see Whole Foods as the leadership.”

Most Amazon watchers are focused on the some 450 stores the e-commerce behemoth scoops up in the deal. These brick-and-mortar locations instantly give it a national ­physical presence, as well as a network of mini distribution centers for fresh produce—by far the most challenging part of the grocery delivery business because of spoilage and the fragility of fruits and vegetables. (Upon news of the bid, grocery stocks took a nosedive accordingly.)

But Amazon isn’t just trying to change how we buy groceries. Remember the company’s original disruption: bookselling. Jeff Bezos not only shifted how and where books were sold; he also changed how they were made, by forcing publishers, authors, and everybody else along the book supply chain to cut their costs. The same thing could very well happen in food, and the outcome for food manufacturers could be as dire it was for book publishers. “I would be terrified if I were a consumer packaged-goods company right now,” says Benzi Ronen, CEO and founder of food hub management software startup Farmigo. Indeed, packaged-goods producers’ businesses are already under stress, with manufactured-food volumes at large companies declining 4% this year, as consumers seek out less-processed fare. And on the long-shot chance that Walmart (WMT, -0.33%), playing defense, swoops in with a bigger bid, the same pressures will still be in play.

Chart shows change in stock price for food companies in the 24 hours following Amazon's bid on Whole FoodsChart shows change in stock price for food companies in the 24 hours following Amazon’s bid on Whole Foods 

The overlooked asset Amazon gets in the deal is Whole Foods’ 365 house brand—one of the most coveted in the organic and natural space, private label and otherwise. This is not your mother’s generic box of cornflakes, with its bad design and perceived quality issues. A Piper Jaffray survey last spring found that 365 is customers’ favorite organic-food brand, ahead of premium names like Kellogg’s-owned Kashi and General Mills’ Annie’s. The 365 brand is virtually unavailable online, but that will change if Amazon is smart about it. “The opportunity to use the 365 brand as a mainstay of their online offering is really profound,” says Bernstein analyst Alexia Howard. “It puts a huge amount of pressure on branded food sales.”

Amazon has tried to develop its own private label in food for years. In 2016 it rolled out its Happy Belly coffee, Mama Bear baby food, and Wickedly Prime snacks. These brands are available only to Amazon Prime members, who pay $99 a year for free two-day shipping, among a litany of other benefits. In a sign of how powerful its private label can be, analytics company 1010data found that for a 12-month period ending last year, 94% of all batteries sold online went through Amazon sites, and Amazon’s own brand made up about a third of all online battery sales. Its Amazon Elements baby wipes, introduced in 2014, have managed to capture 16% of online market share, despite being available only to Prime members.

Amazon and Whole Foods might seem like they are on opposite ends of the retail spectrum—a relatively small, high-end grocer vs. the massive e-commerce Everything Store—but they overlap in the power of their brands. That’s a rarity for a purveyor of food. Under the old model of food retailing, “the brand you trusted was the manufacturer,” Ronen says. “Today you go onto Amazon and filter everything by what’s Prime.” Similarly, Whole Foods acts as a curator for shoppers by banning ingredients like saccharin and bleached flour from the products it sells. Together, the two trusted brands should create an even more powerful one. That could fundamentally alter the way grocery aisles look—and even make the aisles themselves obsolete.

 

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