By: Eli Verschleiser
Amazon’s big push off your computer screen and into brick-and-mortar shopping is one of the biggest, if not the biggest business stories of 2017.
The impact of its $13.7 billion acquisition of Whole Food Market is hard to measure: Lower food bills for shoppers at the organic-focused, 431-store chain sarcastically nicknamed Whole Paycheck for its mercurial pricing; The ability to pick up and drop off online Amazon merchandise at lockers in many of those locations; And a huge boost in the fledgling online grocery shopping market, expected to grow overall to 20 percent of sales by 2025, as Amazon taps Whole Foods channels. Amazon will reportedly offer Whole Foods shoppers its Prime delivery and streaming service as a customer rewards program, driving loyalty to both brands.
It’s even speculated to affect the automobile industry, as fewer Americans will need to load up a minivan full of food and toiletries if they can tap a few keys, click and wait for a truck.
But is Amazon really making a strategic move by merging with another big established brand? It doesn’t always work out well.
Remember when AOL and Time Warner merged? It seemed like a great idea at the time, when AOL, with its dial-up beeps and “You’ve Got Mail” catchphrase was the hottest property on the internet, and Time Warner had tried and failed to establish a hit online presence. AOL got access to cable subscribers and content while Time Warner got millions of established web surfers and emailers (relatively new at the time).
“Merging the cultures of the combined companies was problematic from the get go” wrote Columbia Business School professor Rita Gunther McGrath in a 2015 Fortune column. “... The business was up against a phenomenon I refer to as transient advantage; namely when a combination of capabilities that at one point made a firm a leader, erodes and is replaced by the next form of competitive advantage.”
The Amazon/Whole Foods deal makes sense now, as both companies are among the leaders in their respective fields, but so much is in flux it’s hard to see very far down the road.
Will Whole Foods continue to ride the wave of shoppers lured by the notion of healthier eating? Will Amazon continue to dominate online sales? Will people show equal enthusiasm for Whole Foods produce they can see and touch and smell in the store, once given the chance to click on a sample image?
Because it mastered online shopping by making it fun and easy does not mean they can master highly competitive, neighborhood-focused retail grocery. What makes Amazon fun is the personalized home page full of recommendations based on your browsing habits. Amazon can guess what you might buy at Whole Foods from your online searches and buying history, and perhaps send you a coupon, but there’s no way to create a personalized view of supermarket aisles.
JP Morgan analysts speculate that Amazon bought Whole Foods rather than another chain because demographic data show that most of its Prime customer base overlaps with Whole Foods locations, so they can reinforce that base and create more symmetry between online and on-shelves.
But as this strategy takes hold, and competitors start to suffer, we may begin to hear more shouts about anti-trust. As Dana Blankenhorn points out in a column in Investorplace, Amazon has numerous customers that rely on its web services, fulfillment and other behind-the-scenes offerings to survive. The Whole Foods deal now threatens to put some of them out of business or cut profits because of the size and scope of the new partnership. They may well feel betrayed and press for action, especially if Democrats return to power. For now, Amazon, with Whole Foods has just a small share of the grocery market, compared to rivals like Wal-Mart, but its 80 million Prime members represent huge untapped potential.
Another reason Amazon may stumble is that retail margins in grocery are already razor thin, and the company is cutting prices in order to boost its market share and create a value proposition for the new company. “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,” a company executive said in a statement.
But cutting prices will force other cost cutting measures – will this mean longer lines at checkout, dirtier stores, or some other deterioration of the shopping experience? As others have pointed out, this is where Sears went wrong.
Retail in almost every sector is struggling. Toys R Us is bankrupt, department stores are on fumes, sporting goods chains like Dick’s are struggling, electronics chains serve as mere showrooms for online competitors like Amazon, and in grocery, Wal-Mart will continue to dominate because of its one-stop-shop appeal, including all the above sectors at convenient locations.
Along those lines, there are signs Amazon has its eyes on another retail chain, Kohl’s department stores. The two recently announced an agreement to let customers walk into Kohl’s stores to return Amazon merchandise that’s too big, too small, not as ordered, or that they just grew bored with before it arrived. That allows increased foot traffic to Kohl’s, where loss leaders will undoubtedly lure visitors inside. It also allows increased spending by people who live within a short drive from these locations and are prone to impulse buying (some of which they will keep).
Rapid growth has worked for many tech companies (Microsoft, Apple, Intel, Facebook) but when you begin to branch in too many different directions this segmentation isn’t always a recipe for success. Amazon is now looking for another headquarters in addition to its Seattle base of operations.
Seems to me like a two-headed monster in the making, spreading its tentacles in many directions at once. Let’s hope it does not become too unwieldy to make sound decisions.
About the author:
Eli Verschleiser is a financier, real estate developer, and investor in commercial real estate. In his Philanthropy, Mr. Verschleiser is on the board of Trustees for the American Jewish Congress, Co-Founder of Magenu.org, & President of OurPlace, a non-profit organization that provides support, shelter, and counseling for troubled Jewish youth.
Mr. Verschleiser is a frequent commentator on political and social services matters.
Follow on Twitter: @E_Verschleiser