From Alibaba to Instacart: The Most Insightful Reactions to the Whole Foods Amazon Deal

After news broke last Friday that Amazon is acquiring Whole Foods, a lot of commentary emerged as everyone is trying to suss out that exactly this will lead to. No wonder. Combine Amazon and a $800 billion market in the US, and you get everyone’s attention.

Here are some select comments and reactions worth reading and thinking about.

Let’s start with a prediction, not a reaction: Scott Galloway, of L2, spoke to Business Insider on May 8, 2017, back when an acquisition of Whole Foods by Amazon was just a rumor:​

My prediction is that Amazon will acquire an organization like a Whole Foods or Wegmans as they have not figured out grocery. They need distribution and these companies have been beaten up, some of them have been beaten up so badly that they might be worth the acquisition price just for the distribution. They could close the stores down and just use them as warehouses.

​Indeed, it makes sense to think of Whole Foods stores as warehouses, once they are part of Amazon. Those may be warehouse consumers can walk in to and buy groceries themselves. But the core of their usage will shift over time. More on that in a separate article shortly.

For Alibaba, which has been investing in brick-and-mortar retail, this sounds like confirmation. (Also, nice way to get some publicity for yourselves as well there, Alibaba!) The Street:

Alibaba Group Holding Ltd. (BABA) and Amazon.com Inc. (AMZN) may be the world’s most dominant e-commerce players, but they are both making moves into the brick-and-mortar space because their access to large troves of data and their fulfillment abilities allow them to provide for a better customer experience in physical stores.

Amazon announced on Friday that it was buying Whole Foods Markets Inc. (WFM) for $13.7 billion, further solidifying this play, while Alibaba has been working on its “new retail,” strategy for some time now.

“This deal is a total validation of our strategy,” Alibaba Head of External Affairs Brion Tingler told TheStreet. Both players are learning that when you hit a certain level of success in online sales, the next step is to help offline players better utilize their strengths.

​I would assume though that with Whole Foods the situation is very different than with Alibaba’s “New Retail” initative –Alibaba bought the Chinese mall operator Intime for $2.6 billion at the start of this year-. For Amazon, it’s about groceries and the specific needs of that category, for Alibaba it seems to be more about a multichannel sort-of approach. In other words: Amazon will remodel the Whole Foods stores to create and improve a seamless overall experience, while Alibaba seems to be looking for distribution. Each direction does not exclude the other per se, but the focus of the two companies seem to differ significantly from each other. ​In China, there is certainly a far larger vaccuum when it comes to offline shopping than in Western markets like the US. (That said though, I still don’t fully understand Alibaba’s offline strategy there. If someone can point us to analysis going deep on this topic we’d appreciate it!)

Amazon’s Whole Foods deal will certainly lead to a lot of confused conclusions being made by offline retailers and their consultants. It is just fascinating that Alibaba, of all companies, seems to be amongst them on this.

More quotes from analysts and executives can be found in this excellent overview at CB Insights.

Bloomberg: “Bezos’s Grocery ‘Waterloo’ Is Now His Biggest Opportunity“, regarding Whole Foods’ struggle:

Viewed over the long arc of Amazon history, Whole Foods seems like an unlikely fit. It has more than 460 stores in the U.S., U.K. and Canada, with leases to manage, windows to be washed and employees who show up early to sweep the floor. In the past, physical retail and all of its associated complications have seemed anathema to Bezos — expensive, inflexible obligations whose costs are difficult to defray by advances of technology.

Moreover, Whole Foods itself is a struggling franchise, with seven straight quarters of declining same store sales and a larger existential problem — that the organic food revolution it pioneered has now been co-opted by everyone from Wal-Mart to Kroger’s to Sprouts Farmers Market to the food truck that’s sitting outside your office building. Add to that its stubborn “Whole Paycheck” reputation as a high-priced purveyor that has kept discount shoppers from ever walking through its doors; and the arrival this year of activist shareholder Jana Partners, who the pugnacious Mackey indelicately dubbed “greedy bastards.”

​Bloomberg is spot-on here. With Amazon, a move such as this is not just about food but about everything relating to eating:

Then there’s Amazon Restaurants service, which currently delivers prepared meals in a few cities to the homes of Prime members. Meals are 20 percent of Whole Foods business; Amazon can take its sushi, tacos and sandwiches and expedite delivery to people’s doorsteps. It’s a longer term opportunity that can help Amazon peel away customers from rivals like Wal-Mart and Uber, with its Uber Eats service.

​The New York Times on what Amazon will or can do technology-wise: “Amazon’s Move Signals End of Line for Many Cashiers“:

Imagine this scene from the future: You walk into a store and are greeted by name, by a computer with facial recognition that directs you to the items you need. You peruse a small area — no chance of getting lost or wasting time searching for things — because the store stocks only sample items. You wave your phone in front of anything you want to buy, then walk out. In the back, robots retrieve your items from a warehouse and deliver them to your home via driverless car or drone.

Amazon’s $13.4 billion purchase of Whole Foods, announced Friday, could speed that vision along. Amazon has already made shopping for almost everything involve spending less time waiting, doing work or interacting with people, and now it could do the same for groceries. It’s already trying with a store in Seattle, Amazon Go, that has no salespeople or checkout lines. […]

Of course, Amazon is not saying they are planning anything drastic. But it certainly makes no sense for Amazon to keep operating Whole Foods stores the way they are operated now. It also would not fit with Amazon’s modus operandi. Amazon will not follow a hands-off approach with Whole Foods, no matter what current statements say:

At this point, Amazon said, it had no plans to lay off Whole Foods workers or use Amazon Go technology to automate cashiers’ jobs.

Erik Brynjolfsson, director of the M.I.T. Initiative on the Digital Economy, said Amazon’s plans could be much bigger than simply automating stores.

“The bigger and more profound way that technology affects jobs is by completely reinventing the business model,” he said. “Amazon didn’t go put a robot into the bookstores and help you check out books faster. It completely reinvented bookstores. The idea of a cashier won’t be so much automated as just made irrelevant — you’ll just tell your Echo what you need, or perhaps it will anticipate what you need, and stuff will get delivered to you.”

​That last quote gets perfectly at the bigger picture here. And the next question then is how the Whole Foods stores will fit into this world.

But all strategy musings aside, let’s not forget how small Amazon and Whole Foods are in the grocery market right now. The Economist:

Amazon controls a measly 0.2% of America’s grocery market; Whole Foods has just 1.2%, according to GlobalData, a research firm and consultancy. By Chinese standards, Amazon looks slow: Alibaba, another e-commerce titan, bought a 32% stake in a Chinese grocer last year. […]

Whole Foods […] has about 450 stores in America, Britain and Canada, but American shoppers are now buying a wide range of organic foods at other grocers, without having to put up with Whole Foods’s steep prices or its hipster clientele. […]

E-commerce accounts for just 2% of America’s food-and-beverage sales. Even as Amazon has raced into other segments of goods, it has only tiptoed into grocery. Amazon Fresh, a grocery-delivery service that it started ten years ago, is still in only a handful of cities.

If (!) Whole Foods is the last, most important missing ingredient​ for Amazon’s grocery business, this could change fast:

Amazon is in the business of changing customer habits: once a shopper gets used to buying goods from Amazon, usually after joining its “Prime” free delivery programme, that shopper is likely to buy more and more goods from Amazon. Morgan Stanley estimates that those who subscribe to Prime spend at least three times as much on Amazon as those who don’t. That shoppers stock up on groceries so often explains much of the appeal of the market to Amazon. If Amazon can enmesh itself in that frequent habit of buying milk and bread, experience shows that customers will turn to Amazon for other types of goods, too.

​As per the miniscule market numbers above, regulators will most likely not be an obstacle:

[…]regulators are unlikely to intervene. The deal, after all, gives Amazon less than one-fiftieth of the grocery market. Indeed, it seems far more probable that a company such as Walmart, wary of Amazon’s dominance, might swoop in and make Whole Foods a higher offer (Amazon is paying about a 27% premium to the stock’s closing price on June 15th). Barring that, the deal will likely go through, Amazon expects, within the next six months.

​(Don’t rule out the Trump factor though: The US president hates The Washington Post (owned by Bezos) and has made clear on numerous occasions that he will take a hard stance towards Amazon, not last because of this. If anything, the current US administration is, at the least, unpredictable. We’ll see.)

It is unclear as of now what exactly this will mean for Instacart. The delivery startup inked a multi-year deal with Whole Foods not long ago. Whole Foods is the first and only nation-wide partner for Instacart. And the partnership looked like it were about to deepen.

Amazon on the other hand doesn’t need Instacart. The company has Amazon Flex and is, overall, building out its own logistics infrastructure.

Bloomberg: “Instacart Tries to Hang On to Whole Foods as Amazon Swoops In“:

Instacart has about four years left in a delivery partnership it signed with Whole Foods in 2016, said a person familiar with the matter. The contract made Instacart the exclusive delivery provider for Whole Foods perishables, including produce, deli meats and baked goods, as well as nearly all non-perishable items, the person said. Instacart believes Amazon’s purchase won’t affect the arrangement, said the person, who asked not to be identified because the details are private.

This “war” statement certainly doesn’t make it look like Instacart sees a potentially fruitful partnership with Amazon in the near future (and rightly so, I’d say):

“From the beginning, we’ve been committed to helping grocers compete online,” Instacart wrote in an emailed statement. “That’s more important than ever given Amazon just declared war on every supermarket and corner store in America.”

​Still, it’s unclear what this will really mean for Instacart:

Whole Foods accounts for less than 10 percent of Instacart’s revenue, said the person, without clarifying whether that includes delivery fees or other sales generated from those transactions. […]

“While Instacart could lose their crown jewel of Whole Foods, they may gain in a swell of demand from the rest of the market, and even more mid-range and budget stores coming to them for services to try and compete with Amazon,” [Brian Frank, who invests in food-tech companies through his FTW Ventures fund] said.

And, as said before, buying Whole Foods provides Amazon outside the US with nothing. This is purely a US story, for now.

​More on this topic:

Post Whole Foods, What Will Amazon’s Grocery Strategy Outside the US Look Like?
* Amazon to Acquire Whole Foods Market for $13.7 Billion
* Amazon Flex and More Highlights from #Shoptalk17
* What Amazon Go Will Look Like in an Amazon Flex World
* How Amazon is Expanding its Uber-Like Delivery Service Amazon Flex
* How the Food Delivery Space Evolved From 2011 to 2017
* Here Are Two Ways To Deliver Meals Profitably
* How Amazon Fresh Made a Former Department Store into a Pickup
* Kroger, Uber and The Tripartite Nature of Online Groceries
* ‘AmazonFresh Pickup’ is the Tech Giant’s next Fulfillment Center Concept

2 comments

  1. […] From Alibaba to Instacart: The Most Insightful Reactions to the Whole Foods Amazon Deal […]

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  2. […] Look Like in an Amazon Flex World ​* Analysis: Whole Foods in an Amazon Go/Flex/Fresh World ​* From Alibaba to Instacart: The Most Insightful Reactions to the Whole Foods Amazon Deal * ​Post Whole Foods, What Will Amazon’s Grocery Strategy Outside the US Look […]

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