In the middle of June 2017, online retailing giant Amazon announced a deal to purchase Whole Foods for $13.7 billion.
This move came as a bit of a surprise. Earlier in the year Amazon whet the appetites of technologists across the globe when they released a promotional video for their own physical grocery stores – featuring shoppers browsing the shelves for sandwiches and other treats before walking out of the store, confident in the knowledge that Amazon’s sensors and systems were capturing their purchases and billing them automatically.
Source: The Business Journals
That video, which now has more than 9 million views on YouTube, was exciting – representing a whole new world of possibilities when it comes to a frictionless grocery shopping experience.
So why did they buy Whole Foods?
Whole Foods Decline
Whole Foods was suffering. In October 2013 their share price peaked at $65 a share. By March of 2017, the share price languished at around $30 a piece. A company with sales of organic foodstuffs of $43 billion in 2015 started to see customers abandon ship as other grocers started offering organic offerings at cheaper prices. Whole Foods even launched a new chain of stores, branded under the 365 name, to compete with the low-cost organic grocers.
Put simply, Whole Foods faced a sales slump the likes it had never seen in a decade – with six straight quarters of declining same-store sales ( the standard by which the industry is judged).
Amazon is the king of e-commerce. According to an analysis by Slice Intelligence, 43% of all online US retail sales went through Amazon in 2016. They aren’t stagnating either. In 2015 Amazon had 33% of all US online purchases.
However while Amazon continues to dominate online retail we have to remember that e-commerce represents just 12% of all retail purchases. Given that total e-commerce sales were around $400 billion in 2016, that means there’s a roughly$3.4 trillion dollar pie that Amazon has yet its grubby mitts on.
If you ask us, that sounds like ample motivation to establish a physical presence!
Match made in heaven
So you take an e-commerce giant who wants to get into the physical shopping arena and you get this $13.7 billion deal. By buying Whole Foods, Amazon gets access. $13.7 billion gets them more than 430 stores in the US, Canada and UK and locations in all but 8 US states. Buying Whole Foods instantly turns Amazon into a top 10 grocery chain.
That’s a big deal, and that’s even before taking into account what Amazon is really good at: data.
Whole Foods’s network of stores is an interconnected web of customer data that Amazon can collect, store and analyze as they simultaneously optimize and perfect their grocery offerings. Amazon can leverage their expertise with data in order to trim all the fat from Whole Foods as a grocery service.
The acquisition also is a revenue generator. Yes, Whole Foods is struggling as of late but they still made half a billion dollars in profit in 2016. Their margins are higher than Amazon’s (5% vs 3%) and the customer base is largely made up of the affluent upper-class.
Who knows, Amazon might even implement parts of their frictionless grocery service into select Whole Foods locations as a type of pilot program. It would be a quick way to test the offering, and the vast amounts of data that testing in say, 10% of their stores would generate would only serve to fine-tune and refine their machine learning algorithms further.
Amazon has long reigned online – now it’s time to conquer the physical world.