Grocery and Food

The Amazon Effect on Whole Foods

It has been almost exactly one year since Amazon made its stunning buyout of specialty grocery retailer Whole Foods Market for $13.7 billion. So, what better time than now to take a look at how the whole thing is proceeding.

It’s difficult to assess with great precision whether sales and profits at Whole Foods have risen or declined under Amazon’s ownership. As a publicly held company, Amazon doesn’t break out results for its subsidiaries, so we’re left to surmise a lot. Thus, I would surmise that Whole Foods is probably performing a little better on the sales side, but isn’t chalking up big wins in profitability.

Part of the reason is the flywheel effect: Prior to Amazon’s buyout of the company, Whole Foods’ sales and profits had declined year over year for quite a while. Just prior to the buyout, Whole Foods’ annual sales were at about $16 billion, and declining. It’s likely that sales have increased because of Amazon’s influence and reputation. Amazon earned much virtuous publicity soon after the buyout for cutting some prices. But, in reality, the previous management had been cutting prices for a while, but shoppers didn’t notice.

Shopper Distrust

At that point, shoppers had learned to distrust Whole Foods, so they didn’t really believe that prices were coming down. When Amazon made a few price-cutting moves, shoppers believed that prices were actually falling because they trusted Amazon more. Bolstering that, Amazon is now rolling out a program that gives Whole Foods’ shoppers an extra 10 percent off some sale- and high-volume items if they’re Prime members. This will definitely help the price image and deliver perceived added value to Prime members.

As for profitability, there are many changes Amazon is making at Whole Foods that may pay off in the future. For instance, Amazon is turning to more centralized buying and stripping from store and regional management authority to bring in local products. There’s no doubt that centralized buying better leverages the buying power of an organization, while localized buying diffuses it. The question for Amazon is how far that can go before shoppers begin to perceive that Whole Foods has changed too much. Indeed, based on my own frequent visits to Whole Foods, it’s increasingly noticeable that many previously available products have vanished from the shelves. That’s not all good.

Mackey’s Annoyance

Incidentally, Whole Foods co-founder and CEO, John Mackey, has made no secret of the fact that the top-level executives Amazon has salted into the organization don’t always meet with his approval. “Amazon has probably gotten more disagreement from me than any other single person and possibly more than everyone else combined,” Mackey asserted. He added that he’s well positioned and ready to be fired by Amazon if it comes to that. Mackey didn’t specify why he has become an Amazon critic, but I would bet it’s about product changes that could rob Whole Foods of its previous identity.

Maybe the most important consideration, though, is what the future of Whole Foods holds under Amazon’s tutelage. As always, the future is inscrutable, but for sure there’s a lot going on at Amazon, much of which will affect Whole Foods’ path going forward. For instance, there’s the matter of delivery. Amazon has initiated delivery services from Whole Foods stores in 19 cities that feature one-hour delivery for a $7.99 fee and two-hour delivery for free if the order is for $33 or more. Just try to buy more than a couple of items at Whole Foods without parting with $33. Concerning delivery, it’s important to notice that other retailers that have attempted to fulfill high-volume online orders using working stores as depots find the system unworkable because of the crowding and store chaos it causes.

And then there’s Amazon’s new plan to augment its own delivery network. Amazon already runs a fleet of 35 aircraft delivering product to 70 package-distribution points. It now plans to start another delivery service to accomplish the costly “last mile” delivery. The idea is that entrepreneurs can lease Amazon-marked trucks and uniforms from Amazon to make deliveries using their own employees. Companies with up to 100 employees driving up to 40 trucks will be permitted.

Amazon Grapples with “Last Mile”

This concept offers to Amazon the same advantages that Uber and the like reap: Amazon will no doubt see profitability from the new delivery network while escaping obligations involved in hiring employees. Beyond that, the cost of failure is transferred elsewhere. In the future, this service will compete with UPS, FedEx and the USPS. The last has been the object of criticism from President Trump who claims, without data to back it, that the USPS loses money by being Amazon’s “delivery boy.” Not incidentally, Amazon founder and CEO Jeff Bezos owns the Washington Post newspaper, a frequent Trump critic. Bezos owns that newspaper personally. It isn’t an Amazon subsidiary.

Finally, as if to underscore its reach, Amazon has just acquired online pharmacy PillPack to enter the drug-distribution business.

So, in sum, the future looks pretty good for Whole Foods, and better than it would have been without Amazon and, I’ll confess, better than I thought it would be. Yet, let’s keep in mind that despite all the publicity constantly heaped on Whole Foods and its new owner, Whole Foods remains a very small player in the total food-distribution universe. Its stores are thinly spread across the landscape and together they don’t even have a two percent share of food sales in the U.S.

But regardless of the size of Amazon’s footprint in the food business, it casts a long shadow. There’s hardly a supermarket chain left that hasn’t done something to react to Amazon, whether the current moment calls for action or not. Even the smallest chains have instituted some sort of delivery or pick-up option. The largest chains are now deeply involved in customer-relationship technology, among other forms of technology. We may decide someday that the food industry’s competitive defenses erected to blunt the Amazon-Whole Foods combination are the most important feature of this whole saga.

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