Taking Stock

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Amazon Acquisition Has Wide-Ranging Implications For Whole Foods, Other Retailers

This one caught most of us by surprise. While many analysts thought that Amazon would soon need to acquire a bricks and mortar enterprise to both to defend against Wal-Mart’s growth and as a learning lab to expand Amazon’s food presence, none of us thought that Whole Foods would be the target.

There had been some industry chatter that Amazon CEO Jeff Bezos might go after BJ’s (reportedly for sale) or one of the many regional food chains that could be looking to sell. You know, a more modest first step.

However, after watching Bezos’ acquisition strategy over the past five years, it’s clear he doesn’t believe in baby steps. Being “in” means being “all in.”

Beyond the initial shock of the blending of two of the country’s most well-known brands is the fact that Amazon is paying $13.7 billion in cash to acquire a retailer whose sales last year were $15.7 billion and whose recent metrics have been descending.

But this deal is much more about future opportunities than it is about price-to-earnings ratios and same-store sales.

With the swipe of a pen, Bezos and Amazon are about to transform the grocery business. And I’m not talking about a doomsday scenario for most other food retailers. If Bezos is able to spin his magic, certainly all retailers will be impacted to some extent. The possibility of shipping a case of “365” brand coconut water (or perhaps Amazon brand coconut water) from an Amazon fulfillment center to a residence in rural Pennsylvania has real growth potential. Even more basic would be Amazon’s ability to utilize WFM’s existing stores as in-house distribution centers for local deliveries.

Of course, if I ran Instacart, Whole Food’s same-day delivery provider, or UNFI, the retailer’s long-time primary grocery supplier, I’d be plenty worried. One could easily visualize those services being handled directly by Amazon, whose core business is essentially rapid distribution.

On the other hand, the bricks and mortar grocery business will remain a low margin industry because of its heavy reliance on labor and capital as well as having to account for shrink. That formula applies to discounters as diverse as Aldi and Costco and upscale operators like Whole Foods, Wegmans and even Eataly. As brilliant as Bezos is and as innovative as Amazon has demonstrated to be in its 23-year history, there’s no penicillin available to significantly improve margins when operating grocery stores of any type.

I’ve read a lot of commentary over the past week about this ginormous deal. Clearly, there are many different predictions about the future of Amazon in the traditional grocery business and the strategies that those existing brick and mortar operators need to adapt to a game changing deal like this. One of the best pieces came from Ken Cassar, an analyst from Slice Intelligence (intelligence.slice.com), an organization that measures digital commerce activity and customer loyalty. In an essay titled “Brick-And-Mortar Grocers Must Reinvent Or Die,” Cassar asserts, “From this day forward, brick-and-mortar grocers can no longer think about themselves as brick-and-mortar grocers. They must look at their stores as an asset, but their stores can no longer define them. They need to rethink their businesses from the consumer outward, but they need to begin to lead the consumer, rather than react to her. Most Americans do not buy groceries online – it is incumbent upon grocers to take consumers on a path towards doing so before Amazon does.”

He continued, “1. Every store must have a drive-through pick-up staffed with knowledgeable employees. 2. Grocers need to quickly develop the ability to precisely know what is in stock in every store in real time. 3. Grocers have to become experts in all forms of digital user interface, from Web sites to mobile apps to voice ordering to IoT (Internet of Things) commerce. 4. The grocery CTO (Chief Technology Officer) just became the most important employee at every grocery chain in America. Retailers that laugh off the impact of Amazon’s acquisition of Whole Foods will simply not exist 5-10 years from now.

“For brands, this acquisition needs to be viewed as an opportunity they have no choice but to seize. Every grocery chain in America is going to need to begin a process of deep collaboration with their brand partners to reinvent grocery shopping.

“The opportunities vary by category and by retailer. Brands need to help retailers redefine themselves in a way that is in tune with their markets and customers rather than collaborating to clone Amazon.

“Amazon’s biggest weakness is its own self-confidence. It has historically been uninterested in insights and ideas from its brand partners. Traditional grocers, though, have historically been highly dependent upon insights and ideas from brands. It is imperative that brands up their digital IQ in order to be the partners that grocers need right now.”

Yes, all retailers will have to accelerate their digital-driven offerings – whether that is by adding a delivery option to their platforms (a challenging task) or improving their “click and collect” models.

Two years ago, WFM co-founder and CEO John Mackey predicted that Amazon’s entry into grocery delivery would be the company’s “Waterloo.” Shortly after this deal was announced, in a “town hall” meeting with associates in Austin, TX, the 63-year old chief executive told the assembled group, “We’re all Amazon people. We’re one large tribe, one large family.”

Of course, nearly $14 billion would make almost anyone a believer.