Question

Why did Amazon decide to acquire Whole Foods? Discuss the benefits and challenges they face with the acquisition. Is this a good deal for Amazon?

Answer 1

Amazon bought Whole Foods not because it wanted to know how to operate stores. Amazon bought Whole Foods to learn about the grocery business so it could convert grocery consumers to online.

Benefits: Below are key benefits to Amazon by acquiring Whole Foods:

• It makes Amazon a national grocery competitor overnight
• Now Amazon can get the necessary "deal dollars" to compete in groceries
• Amazon obtains a grocery distribution system
• Amazon obtains great locations
• Amazon can change the Whole Foods brand in important, positive ways
• Amazon can personalize grocery shopping like it did general merchandise
• The deal is cheap
• This is a serious attack on WalMart
• This could be a huge win for Amazon shareholders

Key Challenges:

By purchasing Whole Foods, many believe Amazon will transform the retail grocery industry. But this business has become extremely sophisticated, intensely competitive and powerful new competitors like Lidl are entering the U.S. market. With the purchase of Whole Foods (1.2% market share), Amazon will still have less than 2% of the market share of U.S. grocery retail sales. Which means over 98% of groceries are being purchased at stores not named Whole Foods.

Here are four key challenges Whole Foods will face and how Amazon might overcome them.

1. Revenue dip – Over the past two years, Whole Foods has experienced a drop in same store sales as customers have left to find lower priced natural foods at traditional supermarkets. Amazon will likely sacrifice some margin by lowering prices which should help to lure back old Whole Foods customers and entice new ones.
2. Consumers not biting – Online grocery purchasing has never been widely adopted in large part because customers want to see and touch fresh produce products before they buy. Whole Foods could overcome by reminding customers of their high standards for freshness and winning them over by delivering it.
3. Margin crunch – Grocery products have razor thin margins which has always made the added cost of home delivery a major challenge. Whole Foods margins are larger and can better absorb delivery costs. Plus, the option of curb-side pickup can make online ordering more cost effective.
4. Acquiring a taste – High margin brick and mortar retailing on a national scale is new for Amazon. The company has proven its ability to innovate and dominate in the ever changing, hypercompetitive online retailing and now in cloud services.

Walmart started with a smaller piece of the market pie 30 years ago and now controls the largest share of the U.S. food and grocery market at 14.5%. Walmart’s innovative systems and processes reinvented the grocery business. The retail grocery environment today is tougher, but given its insatiable appetite for growth, it’s not a stretch to think Amazon could do the same.