Game Over, Groceries: Inside Amazon’s Acquisition of Whole Foods

Amazon’s is the most monopolistic and well positioned marketplace the Western world has ever seen. Last year they did $136B in revenue with double digit growth every year.

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Yet they haven’t even scratched the surface.

The US food retail and food services industry represents a $5.35T market (with $800B+ in grocery alone). That is 40x Amazon’s total global sales — everybody’s got to eat. The food space is the future frontier, and Amazon is betting big.

On August 28th, 2017, Amazon decided to buy Whole Foods. Consider this D-Day. The world of groceries will never be the same. Here is why.

Amazon’s been salivating over food delivery for years. But, try as they might, their efforts have fallen flat every time. Amazon Fresh had $10M in revenue in Q1 of 2016. That is chump change for Bezos.

(NOTE: For more on Amazon, my experience building a $1M Amazon brand and how they will kill ecommerce, see this post.)

The network problem

Amazon is a market. Amazon is a network effect. The reason why the company runs so well is so highly valued is its network of 3rd party sellers and massive customer base.

Jeff Bezos founded Amazon on July 5th, 1994. Since then the company scraped and fought its way to market leader status, constantly growing areas of the business.

They started with books. Books seemed easy enough to sell online and customers like options (just look at libraries). Bezos committed to crushing it with books. “Books, books, books. That is all we are ever going to sell.”

That was the mantra early on. Amazon committed and as they grew a larger and more diverse customer base, other options presented themselves. They branched out into media and digital and quickly Amazon started morphing into a full fledged Everything Store.

But the base was crucial. They attracted customers and used the demand to pull sellers to the site. With that the flywheel was born.

Imagine if Amazon had started selling everything from day one. There would be no message for customers, confusion for sellers and chaos all around.

Systematic Network Expansion

Today Amazon is doing the same with Whole Foods. Amazon’s existing supply and demand structure was lacking. Despite the most advanced logistics network in the world, Amazon couldn’t quite get grocery.

The reason lies in the nature of the product. Selling widgets is easy. 1,2, 2000… it doesn’t matter how much inventory and what type of products you stock. As long as you wait long enough, eventually you will sell them. It isn’t ideal but with enough money, turn time (speed of sales) is not critical.

This isn’t true with food. Milk spoils. Eggs break or go bad and bananas are blobs after a few days. Groceries have to go fast or the business collapses. This is part of the reason food service businesses are so hard. You need choices so customers can choose but with too much stock, waste and spoilage will wreck your profits.

Amazon suffered this problem for years. Amazon COULD NOT offer perishable products online. What would they do if they didn’t sell? Eat the lost?

And there is no way they could get brands and 3rd party sellers on board without the demand.

Whole Foods solves this.

Whole Foods is one of the most well known and respected grocery brands. Their fans love them, their health conscious options and the incredible customer service/experience. Plus Whole Foods has locations in all the major urban hubs.

Take a look at your average Whole Foods shopper. They are young, have money to spend and are culture and health conscience. This was not Amazon’s demographic initially — meaning Whole Foods opens up a whole new segment of the market to Amazon.

But it is much more important than that. Whole Foods is a functioning, balanced, profitable network. They produce and buy product and consumers eat it up. They have solved the logistics and inventory problems that Amazon couldn’t.

That means the initial supply and demand are satisfied. That means jackpot!

Now Amazon can leverage their vast customer base without risk of spoilage.

An example. Let’s say Whole Foods offers 3 products: bread, milk and cheese. And they sell 10 of each every week. Now Amazon can start listing bread, milk and cheese online. As online customers discover these options they can start to buy.

If Amazon decides to offer 3 extra units per product, now Whole Foods holds 13 of each per week. If nobody on Amazon.com bites, Amazon slashes prices in store and liquidates the product — no harm done. If however they sell out in a day, they can start to slowly scale up inventory — mitigating risk by first proving out demand.

And if the bread, milk and cheese get bought but the speed is slow, Amazon can pour FREE advertising through the platform and running marketing campaigns to boost awareness.

This phenomenon means Amazon’s supply and demand sides can increase proportionally and create a killer food flywheel, just like they did with retail.

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The other problem with food

How often do you grocery shop? If you are like most Americans, it is about 1.5 times per week. You get in and get out and spend on average 41 minutes.

I’ll bet you buy a bunch of the same stuff every single week too. A gallon of milk, a tub of yogurt, ½ lb of ham… whatever. Then you also add a little inspiration based off your cooking calendar, maybe a treat or two and you check out.

One other major reason online grocery shopping has taken so long to take off is the all or nothing nature of food. If you can order ½ your groceries online, would you? I’ll bet you would say yes but quickly discover that driving to the store to pick up the other ½ is just as painful and hardly saves any time.

That means online retailers like Amazon MUST offer EVERYTHING your family wants to make it worth your while. Previously that was impossible, thanks to the spoilage problem.

Now that Amazon has solved that, the game is on.

AI, Alexa and Automatic Ordering

Subscriptions make sense for everyday products. You are picking it up every week at the store, why not get it delivered automatically and save the hassle. That is what Amazon’s acquisition will soon do.

But the ordering interface online still sucks. Some people like walking down the aisles of the grocery store for inspiration. Either way searching online is not ideal for food discovery.

With Alexa and AI, this won’t be a problem. Imagine reading off a list of ingredients, Amazon cross-checking your existing kitchen supply and adding any items your recipe calls for.

Plus machine learning learns your preferences pretty fast. Imagine the Spotify of deserts or Pinterest of dinner items that orders automatically.

Is that the future Amazon is building? I certainly think so.

Amazon will win the home. Their ecommerce dominance is untouchable (for more on how Amazon is killing ecommerce, read this post), their tech is amazing and their efficiency is unrivalled.

When you see my view on their master plan, how hard is it to believe the pieces start to fall together?

Distribution Dominance

And despite all we have talked about, we have neglected one of the massive advantages Amazon gains from their acquisition: prime time real estate. Whole Foods has a nationwide network of 365 locations across all major metropolitan hubs. This gives Amazon an even more distributed and efficient network for last mile and same day delivery, making it even easier and cheaper.

Could Amazon start storing retail goods in Whole Foods locations? Who knows. I bet they do. They have already started upselling Alexa and Amazon products and seem quite committed to a 1+1 > 2 model.

And we haven’t even touched on drone delivery. 365 new locations. Imagine drone docking and transport centers on top of every location. It certainly simplifies the logistical challenges.

Closing Thoughts

Amazon acquired Whole Foods for $13B. The market caps of the top supermarket chains dropped ~ $13B following the news. In effect Amazon annihilated grocery and the market made Kroger, Costco and Walmart pick up the bill.

Source: MarketWatch

The book is yet to be written but in the eyes of enterprise, Bezos is god and Amazon is all powerful. If they successful pull of the strategies outlined here, which I see no reason to doubt, the monopoly of Amazon will be unstoppable. Even Antitrust won’t have the teeth to touch Bezos (for more on why Amazon is more powerful than the US government, check out this post).

Would love to hear your thoughts and opinions? Where is my logic flawed? Is this gameover groceries?

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BONUS: For more on the future of Amazon, retail and grocery, listen to this interview with Semil Shah, investor in Instacart and DoorDash.

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