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Amazon’s Purchase Of Whole Foods Is Risky, But Has Huge Potential

The purchase confused many, but could be groundbreaking for both companies

19Jun

On Friday June 16 Amazon announced that it was buying the organic grocery store chain Whole Foods for $13 billion. To many this seems like a strange move, after all, Amazon is the absolute definition of a long tail company, whilst Whole Foods has generally been seen as relatively specialist, stocking only organic and sustainable foods and products. Whole Foods is also almost entirely based within physical stores, whilst Amazon’s huge annual sales come almost exclusively from online, although it has opened a handful of temporary physical shops. This move, therefore, seems like a strange one to many, but it could have a dramatic impact on grocery shopping and organic supply chains in the future.

One of the ways this will have an impact is that it holds a significant threat to the current grocery incumbents such as Walmart. At present Whole Foods is seen as a relatively small-time competitor to Walmart, operating around 90% fewer shops than the grocery giant, with 431 stores to Walmart’s 4,177. This number also doesn’t represent the dispersal of the stores, with vast swathes of the US currently having no access to a Whole Foods, with states such as Utah, Montana, North Dakota and South Dakota having no stores at all, whilst California alone has 84.

It is a prime time for the products offered by Whole Foods, with sales of organic foods and non-foods rising from around $17 billion in 2006 to $43 billion in 2015. With this rise in ‘quality over price’ shopping decisions combined with the increase in online grocery shopping, ‘big box’ retailers such as Walmart are having their profits hit, and the US’s largest retailer’s dropped by 18% in Q4 2016. This move by Amazon is aimed right in the middle of the Venn diagram with its global reach combined with the organic and quality credentials of Whole Foods.

With Amazon’s attempt to move into more physical retail stores too, this Whole Foods acquisition gives them 431 stores in prime locations across the US. It will allow them to experiment further with new technologies, like Amazon Go, which allows people to buy groceries by simply taking them out of the store, avoiding queues and saving time. Rather than needing to create entirely new shops and trying to build a brand around them, they can simply retrofit these kinds of technologies to existing shops that already have annual revenues of $3.5 billion.

However, one of the major elements that could see this become such a success is that it creates not only a positive market for Amazon, but also improves the potential for Whole Foods given the huge uptick in the numbers of potential customers for the chain. Where before they would have been able to target only those within a 20 mile radius of one of their stores, they now have potential customers throughout the US. This is likely to see them grow at a much faster rate than they would be able to through their traditional physical store model as it almost instantly opens them up to 320 million potential customers through Amazon’s delivery network. As the customer base increases, Whole Foods will see increasing economies of scale, meaning that the often high price of organic foods will drop, making them more appealing to a larger number of consumers.

This then has a knock-on effect down the ladder as Whole Food suppliers then need to increase the amount of product sent to the company, which is likely to see a significant increase in the numbers of organic farmers and organically farmed agricultural land. If the deal can reach the kind of heights that it has the potential to, it may even see some of the larger less sustainable farming companies changing their practices to allow them to supply Whole Foods. One of the biggest threats to the environment at present is the way that we get our food, so with a shift to genuinely organic and responsibly sourced farming techniques on a large scale, there could be a significant positive impact on the environment.

Whether this move will be a success remains to be seen, but it is clearly something that investors appreciate, with Amazon stock jumping 3% at the opening bell on Friday following the news and Whole Foods rocketing up 27%, which is a strong sign that the markets approve. It is likely to also mean that with the additional resources at their disposal, that Whole Foods is going to destroy other organic retailers. David J Livingston, owner of DJL Research a grocery industry research company, put it simply ‘I think competitors like Sprouts, The Fresh Market, Fresh Thyme, Earth Fare and Natural Grocers are totally screwed’.

With the growing market for organic produce Whole Foods are now very much in the driving seat, having previously had their leading position in the market chipped away by companies like Sprouts Farmers Market, Earth Fare, and Fresh Thyme. It puts what has been traditionally seen as a bit of a hipster, elite retail experience into the grasp of a huge audience, and despite the challenges that this will pose to others in the organic produce market segment, is only likely to be a good thing for the industry in the long run. 

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