Taking Stock

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Out Of The Gate, Amazon Wasting Little Time  Making Changes, Moving More Boxes At WFM

On August 28, Amazon completed its $13.7 billion acquisition of natural/organic retailer Whole Foods Market (WFM) months before many analysts predicted that the deal would be given government approval. A few days prior to the actual acquisition the Federal Trade Commission (FTC) said that it would not undertake any further investigation of the takeover.

Bruce Hoffman, an acting director at the FTC, said in a statement that the agency looked at the “proposed acquisition to determine whether it substantially lessened competition.” And, he said, the FTC “decided not to pursue this matter further.”

The all-cash deal gives Amazon approximately 470 stores in the U.S., Canada and the U.K. which produced annual revenue of nearly $16 billion. And aside from purchasing WFM’s physical units, the acquisition will likely give the Seattle-based company valuable data on how people shop in stores while also allowing the large primarily internet merchant to utilize its own data to enhance its relationship with current and future Whole Foods customers.

As for the changes within the stores themselves, that process has already begun with Amazon reducing prices on dozens of popular products including meat, seafood and produce items. Orange signs that display both the Whole Foods and Amazon logos indicated reduced priced items with the additional message of “more to come.” Even though we counted fewer than 50 price cuts, those reductions were significant and eye-catching. But we don’t expect Amazon to turn Whole Foods into a discounter. While immediate price reductions (most greater than 30 percent) take solid aim at changing WFM’s “Whole Paycheck” image, we believe Amazon’s long-term plans won’t be as noticeable inside the stores as they will be in just having a brick and mortar foundation from which to work. The average price reduction of the items that we measured was about 35 percent.

And those price reductions are already paying dividends (perhaps aided by the unbelievable mojo created by anything Amazon). According to internet tech company Foursquare, which tracks location intelligence, Whole Foods customer counts increased 25 percent during the first week under Amazon ownership.

“We’re determined to make healthy and organic food affordable for everyone. Everybody should be able to eat Whole Foods Market quality – we will lower prices without compromising Whole Foods Market’s long-held commitment to the highest standards. And this is just the beginning – we will make Amazon Prime the customer rewards program at Whole Foods Market and continuously lower prices as we invent together,” Jeff Wilke, CEO of Amazon Worldwide Consumer, said in a statement.

Besides pricing there isn’t that much more in-store fixing that’s needed at Whole Foods. Merchandising is still very good, in-stock conditions remain solid and while WFM’s in-store culture has slipped a bit in recent years, it still grades out very well when compared to most others in terms of customer engagement and shopping experience. Perhaps Danny Wegman could improve Whole Foods’ store operations, however don’t expect much expertise from one of the most successful companies of the past 50 years, but one with little experience when it comes to operating physical stores.

Looking further ahead, as it may impact the WFM store base, analysts questioned the viability of utilizing Instacart of Whole Foods’ home delivery system and also wondered if primary grocery supplier UNFI (which has partnered with Whole Foods for nearly 20 years) would continue in that role in the long-term. Whole Foods reportedly represents approximately 35 percent of UNFI’s $8.5 billion annual revenue.

“Contractual obligations aside (the UNFI pact reportedly is valid for another eight years), why would the new Whole Foods need to utilize the services of an outside distribution organization when distribution is essentially the foundation of Amazon’s business?” queried a supermarket executive who already competes with Whole Foods and Amazon. “As for Instacart, Amazon will no longer need a third party – they already have the delivery skills to use their existing stores as mobile hubs, which will prove very effective for Amazon in urban areas, where Whole Foods has multiple concentrated locations and the use of home delivery is bigger.”

Another area which Amazon is already concentrating on is accelerating the pace to build a Whole Foods centralized merchandising model. Beginning in April, those vendors who call on WFM will no longer be allowed to promote their products or check to make sure they are stocked and displayed correctly, according to the Wall Street Journal. Whole Foods announced last year that it would move many procurement and merchandising functions to its corporate headquarters in Austin, TX. Amazon is seeking to ramp up the timeline to consolidate. WFM executives will meet in late September in Seattle to refine its plan which is expected include a significant reduction or elimination of independent third-party brand supported providers.

Other expected changes will be the availability of the WFM’s private label items (365, Whole Foods, etc.) on Amazon’s website. And, those Amazon customers who are members of its “Prime” program are in line to receive further discounts. Further information is expected about that link soon, but at this time its 80 million “Prime” members will be able to receive free delivery within two hours via the company’s “Prime Pantry” program and one hour (with a $7.99 fee) with its “Prime Now” offering (those programs are now only available in select markets). Amazon also plans to offer a “Click & Collect” model by adding “Amazon Lockers” at certain WFM stores. Both its “Prime Pantry” and “Amazon Lockers” programs could also serve as an accelerator for Amazon’s recently announced meal solutions kit offering that it has already being tested in several markets. Morgan Stanley is estimating that 38 percent of Whole Foods’ customers are already “Prime” members, and another 2.5 million current WFM shoppers who are non-members, could join its premium service.

And then there’s current management and culture to consider. “Certainly, insuring that execution at store level remains strong is a priority for any food retailer, and truthfully Amazon has virtually no experience in dealing with something as labor and capital intensive as operating grocery stores. So, you might not see much change in that regard,” said one stock analyst who primarily covers the retail food industry. “However, as far as leadership, expect many changes. As witnessed by other Amazon acquisitions, they want to bring in a younger core of executives who are more data-driven and can potentially integrate themselves more effectively into the total Amazon culture. I’m relatively sure that the more laid-back management style of Whole Foods will be changing sooner rather than later.” His comments were echoed by others.

This deal is the largest Amazon acquisition to date. However, as powerful as Amazon has become and as fast as it has expanded its presence in the grocery industry (with the help of its Amazon Fresh business), Wal-Mart remains the dominant grocery retail player with about $200 billion in annual food sales (about 20 percent national market share). Kroger ranked second with $115.3 billion in grocery sales last year. Overall, Wal-Mart’s annual sales last year were $485 billion, more than three times that of Amazon’s total revenue.

And, in related Amazon news, the fastest growing company in America announced it is searching for a second headquarters in North America that will be “the full equal to Amazon’s headquarters in Seattle.” The new parallel universe is expected to employ 50,000 associates. Amazon said it is prepared to spend more than $5 billion to build the new complex.

Stay tuned. Expect the changes to continue to a hurried pace.