Last week, Amazon announced plans to acquire grocer, Whole Foods. At first glance this seems like a smart solution to the convergence of physical and digital commerce and a logical progression for the e-commerce giant that has been trying for years to expand its physical footprint and grocery offering.
- Whole Foods customers are likely to benefit from Amazon doing what it does best-driving down supplier costs and driving out retail inefficiencies-likely leading to lower prices (causing some to term the combined entity “half paycheck”) and expanded e-commerce options (Whole Foods currently sells online, but in limited geographies).
- Amazon customers may benefit from access to Whole Foods products, plus the perks of Amazon’s supply chain infrastructure. This could mean expansion of grocery delivery, BOPIS (buy online pickup in-store) using Whole Foods as pick-up locations and integration of Whole Foods into Amazon IOT (dash buttons, Alexa, Echo).
- The combined company “Whole Amazon” will benefit from an expanded customer base (there’s likely some overlap among Amazon Prime users), cross-selling and up-selling potential (for example, giving Prime users access to free same day grocery delivery above a certain purchase amount) and the ability to charge more for Prime.
- The broader market could benefit from Amazon as a grocery platform that becomes a physical and digital marketplace, doing for bananas what it did for books. Amazon could leverage the infrastructure of the combined entity to support online and offline grocery sales and delivery for other retailers, local farmers and small CPG brands.
Imagine a day, in the not so distant future when you don’t just use Amazon Alexa to make your grocery list. Instead you teach it to configure a combination of perishable and non-perishable foods, keeping in mind your preferred brands, as well as semi-prepared meals (think Blue Apron).
It uses AI to make personalized product and meal recommendations-including sponsored recommendations from advertisers-and to replenish staples like milk, eggs and your favorite brand of organic peanut butter, based on past orders and order frequency. For smaller orders, you’ll just press your dash button and blueberries will arrive in an hour.
Finally, it offers you the option of same day grocery delivery (for a nominal fee unless you’re a Prime user) or in-store pickup, complete with an estimated delivery time or arrival time depending on your location and traffic patterns.
Not so fast. There are battles to be fought on multiple fronts.
- Whole Foods is known for providing customers access to an assortment of niche brands and locally sourced produce. But small, local suppliers may suffer if Amazon applies pressure on them to reduce their costs or accept more responsibility, such as drop shipping to customers homes, which could damage supplier relationships.
- Multichannel retailers have been able to fend off Amazon in the grocery sub-sector because it lacked a physical presence. This acquisition has the potential to change the game. Competitors will not sit idly by, especially in the retail sector and grocery sub-sector, which are already characterized by razor-thin margins and stiff competition.
- Customers aren’t just buying Whole Foods and Amazon products, they’re buying into the brand culture. And these cultures couldn’t be more different. Amazon wins on price, assortment and convenience. Whole Foods attracts customers seeking quality and willing to pay a premium. Merging or preserving those cultures will be tough.
- However, Amazon Prime customers represent a potential cross-over of Amazon and Whole Foods cultures with customers who value and are willing to pay for convenience. Assuming those same customers are willing to pay for higher-end groceries, this move could enable Amazon to expand this customer segment.
But this isn’t just about Amazon and Whole Foods. In some respects, the challenge they face are the same obstacles surrounding any merger or acquisition. There is a bigger story here, the story of physical and digital worlds converging (or colliding). This dynamic is felt most acutely in retail, but it has the potential to impact nearly every industry.
Retailers have long struggled to keep pace with changing customer behavior. While that is true of every brand in every industry, high fixed costs for infrastructure (both physical and digital) makes them more vulnerable to the winds of change. A shift in the real-estate market and home buying patterns could render their store locations irrelevant.
Yet at the same time retailers struggle to maintain the relevance of their physical presence, they also have to invest in building and strengthening digital commerce and connecting it to their physical offering. The reality is these are siloed businesses that have grown up-like distant siblings-under the same roof but lacking a common upbringing.
Combining those two worlds inevitably leads to inconsistencies across the four Ps–disparate pricing, different product assortments, disconnected “places” and dissimilar promotions. While Amazon has built an impressive empire, it has yet to wrestle with these issues, which can make or break a multichannel retailer.
Mr. Bezos, welcome to the fray.