Analysing Amazon’s deeper strategy behind its acquisition of Whole Foods.
In the past few days, the news coverage of Amazon’s impact on Whole Foods is going through all media channels. After they’ve closed the acquisition this Monday the 28th of August, there are almost hourly updates with new strategic movements in order to dominate the highly competitive food market. Obviously, all these actions follow a particular bottom line which gradually becomes visible. From the very first announcement on, I had a very clear vision what might come in the future and as it looks like now, my initial assumptions slowly seem to become true.
Many stories, one solid truth behind
Currently, a lot of rumors going around why Amazon actually acquired Whole Foods. Especially because of the fact that they will lose some serious money fighting giants like Walmart or Target, it seems like a risky venture. The first period will require a lot of money to keep the pressure on all established competitors in the market. But if they don’t want to earn some money on the midterm, what is this acquisition all about?
Well, history has shown that Amazon is all about a verticalized infrastructure, excellent customer-centric service, and natively digital solutions. Apart from their ambitions with Amazon Fresh, taking over Whole Foods is bringing the digital player in a completely unknown environment. But that’s exactly the point where probably Bezos and his executive committee wants to place their company. Following my very first intuition, the overall strategy behind this huge acquisition is all about three important things that Amazon strongly needs to take their food commerce to the next level: product branding, sourcing, and supply-chain. Let’s have a closer look on each important point:
Would you’ve bought an ‘Amazon’ branded coffee, honey or toast? Probably not. And that’s exactly where the current structure of Amazon Fresh hits its limitations. Currently, they can only operate as a regular reseller by offering third-party products to their customers. You can easily order frozen meals from Tyson, snacks from Sargento or household products from P&G brands. All products have been properly advertised in TV commercials, print ads or on the web. That’s why people have favorite brands or simply trust them over a long period. For the launch of Amazon Fresh, these indicators of trust through well-established products have been a critical requirement to succeed. At the same time, this dependency on suppliers means lower margins and more complicated, horizontal supply-chain structures. Within their regular habit, Amazon needed to verticalize their business model to generate more profit out of the expensive delivery process that fresh food simply requires. Therefore, the own-brand strategy of Whole Foods with their “365 by Whole Foods” perfectly fits into Amazon’s need for a verticalized product brand. And it even can be combined with existing customers, for example, offering Amazon Prime special promotions.
Following this reasonable strategy of verticalization, branding is not the only issue. Especially in the current trend of organic, sustainable and healthy food, consumers want to know where their daily food is coming from. In the past, Whole Foods did a great job on this and positioned themselves as a mostly organic grocery store. Establishing a network of reliable sources took a while and putting this message out to all customers probably even longer. For this reason, it would have been a huge investment of Amazon to establish their own sourcing pipeline and even more effort to develop a strategy how to communicate this to potential customers. Now thanks to the acquisition, Amazon is in the extremely comfortable position to use Whole Food’s sourcing network by offering the same products and focus more on fighting competition. Additionally, they can invest a lot of money using their main business as a cash cow. One first hit was to just drop some prices by almost 43% in the first days after the acquisition was closed.
Obviously, Amazon is the biggest player when it comes to infrastructure and logistics. It is not without reason why even bigger companies simply employ Amazon instead of building up own logistic hubs. But with emerging high-density urban situations, delivery gets more and more complicated. Factor in the necessity of a complete cold chain for fresh food and the whole process gets exponentially difficult. Therefore, logistic experts tend to focus more on smaller and decentralized hubs directly placed in the city. It makes delivery faster through smaller transporters with fewer headaches on long distances and congested highways. Now, migrating the Whole Foods chain to the existing logistic infrastructure of Amazon could have a huge impact on the efficiency of the supply-chain. They can use all existing stores as small interim storage facilities and satisfy customers through even after delivery. Additionally, it enables the internet giant to offer a bricks and clicks model in all Whole Foods stores.
My final conclusion
In the end, Amazon’s acquisition was well planned with a strategy that is obviously even more comprehensive than the mentioned three points. When you’re aware of their development history and Bezos’ recent accomplishments it was always about owning a market completely by verticalization and customer-centric thinking. For me, the takeover was reasonable in many ways and could possibly offer more value to the customers through a stronger competition. The only thing to be cautious about is Amazon’s huge impact on all suppliers who hopefully don’t suffer from the pricing cuts and discounts. Same goes obviously for the quality of the products themselves.
Hi, I’m Nicolas, based in Düsseldorf in Northwest Germany! Mostly, I’m interested in new trends in digital marketing. When it comes to communication strategies, I really like all kind of online channels due to their traceable reliability. My articles are more likely for open knowledge exchange and therefore reflect my subjective point of view. For further professional exchange, let’s just get connected on LinkedIn & Twitter.