The biggest story in technology of 2017 is also a retail one; Amazon’s surprise $13.7 billion acquisition of Whole Foods.
There are not many days when you can claim that the retail industry has changed this fundamentally. Investors reacted immediately, wiping between 4% and 12% off the value of some competitive retailers in the USA, including Walmart, Kroger, Sprouts and Target, according to Zero Hedge. Tesco and Sainsbury’s in the UK - where Whole Foods also has stores - also had notable share price dips as soon as the announcement was made.
For Amazon this deal offers a tremendous ability to apply further pressure on the grocery market. Combining Whole Food’s physical store network with Amazon’s ability to harness technology for efficiency and customer service creates a whole new paradigm.
With Amazon as its owner, Whole Foods could build out a faster, tech-based check-out process for in-store shoppers, maybe using Amazon’s “Just Walk Out” checkout technology, launched last year in the USA. It can also increase penetration of Prime-Now delivery (within 1 hour) and its ability to offer it to more customers near the 400+ locations.
Perhaps more importantly the deal gives Amazon access to 400 Whole Food stores in prime locations globally. Whole Foods has a highly recognizable brand in the grocery industry, with a reputation for offering healthy, organic and fresh produce. The company also brings with it an enviable profit margin that can help Amazon buffer the costs of delivery.
According to McKinsey, in the UK it costs roughly £5 to pick items off the shelves for an £80 order and £8 to deliver them - wiping out the industry’s typical 2% profit margin many times over.
Amazon has already entered the grocery business with its Amazon Dash and Dash Wand, Amazon Pantry and its Amazon Go experiments – which have had numerous detractors but they could be about to go big.
The Whole Foods deal gives Amazon the ability to raise its grocery bar even higher. Any grocers not concerned about this need to think again. Amazon has a history of moving into marketplaces and making a massive impact.
We have seen from history that Amazon is prepared to make steep investments in research and development, and, as the National Retail Federation says, “Conquering the online behemoth is an unrealistic goal.”
The Economist referred to this as something that made an entire industry “shudder.” This is an excellent choice of words under the circumstances. History is defined by both trends and turning points. Trends have been driving things for a while but this is definitely a turning point.
For grocers, the need to take a long hard look at how they operate, innovate and compete with Amazon has never been greater.