by Charles Moore, President, Premier Products
Amazon’s Whole Foods purchase seems counterintuitive. Why would the highest valued company in the world—with a business model that puts retailers like Whole Foods out of business—want to acquire them? Sure, it would make Amazon the second largest retailer of the long term double digit growth trend in organic consumer products overnight (Costco will still be #1). But couldn’t Amazon achieve this on its own without partnering with the beleaguered Whole Foods which has continued to have issues with negative same-store sales comps? Let’s explore some of the more hidden gems Whole Foods brings to Amazon:
If you shop at Whole Foods, you shop on Amazon
The two have the same consumer and can parlay that to increase sales in both venues. 75% of Whole Foods shoppers have made at least one Amazon purchase in the past month—significantly higher than the average among non-Whole Foods shoppers (50%), according to Gfk, a New York-based research firm. The study also revealed a higher incidence of Amazon Prime membership among Whole Foods shoppers than among U.S. consumers as a whole (50% versus 37%). This would make for a seamless transition for the customer who now might have the option to get their favorite Whole Foods items from Amazon online.
Whole Foods brings excellent promotional insight
Whole Foods brings knowledge of how Amazon’s brick-and-mortar competition thinks. The grocery industry is a $668 billion per year industry (2016 Progressive Grocer Magazine), with the majority of it still being done in brick and mortar retailers. It is forecast that this pattern will shift as much as 20% to online by 2025. A big opportunity for Amazon to address in this space is online promotions. On-shelf price promotions are one of the major advantages brick and mortar stores still have over Amazon’s online grocery offering, as well as manufacturer coupon redemption (although Amazon does offer its own coupons). Everyone wants a deal, but they want to be able to understand it. After looking at the large amount of internet chatter from both vendors and customers, Amazon’s promotions, or lack thereof, are just confusing. The traditional supermarkets live and die with promotions. If Amazon can adapt the tremendous effect of promotions on brick and mortar to their own platform, they will grow even faster.
Amazon now has Whole Foods’ private label and stores
Whole Foods has created one of the best private label brands in the industry, serving as a model for how Amazon can replicate a private label online. The 365 Everyday Value brand comprised over 13% of Whole Foods sales in 2014, accounting for $1.8 billion in sales. Private label brands have better margins, so Amazon can go to school learning from Whole Foods’ success and put some worries about pricing at bay.
Amazon can repurpose existing Whole Foods warehouses to be “mini warehouses,” providing Amazon more credibility in the perishable arena. Whole Foods currently has 11 distribution centers which focus mainly on perishables. Perishables will be the biggest hurdle Amazon will have in their foray into food, already having proven a difficulty for them in the past. The main reason people still go to a brick and mortar supermarket is because they believe it is hard to deliver fresh and good quality perishables. Amazon is going to have to change their minds.
The organic game changer
In my opinion, the most precious gem Whole Foods provides is its organic supply. For years, supply has been the largest problem in organic food. In 2014, organic food comprised 5% of total food sales, but less than 1% agricultural acreage in the US is dedicated to organic food. Whole Foods customers expect organic food and although they have been successful in supplying it, it hasn’t been easy. Now, with the financial backing of Amazon, Whole Foods will be able to stave off loss of supply contracts from much larger retailers like Costco, Walmart, and Kroger, ensuring the steady flow of organic supply.
Amazon needs to successfully leverage these resources to make their purchase worthwhile. Whole Foods has much more value than meets the eye and could be Amazon’s solution to their grocery missteps, leading to the revitalization of the entire grocery industry-starting with organic supply.
Please note: This article contains the sole views and opinions of Charles Moore and does not reflect the views or opinions of Guidepoint Global, LLC (“Guidepoint”). Guidepoint is not a registered investment adviser and cannot transact business as an investment adviser or give investment advice. The information provided in this article is not intended to constitute investment advice, nor is it intended as an offer or solicitation of an offer or a recommendation to buy, hold or sell any security.