Amazon Eats Whole Foods: That Simple?

There were numerous analyses over the weekend about the acquisition of Whole Foods by Amazon: from the obvious ones including dire predictions for InstaCart, to declarations that Amazon Fresh is not working, to justifying the stock hits for other grocers, to a great one in the NY Times by Farhad Manjoo.

Here is another simple reason. At the end of the day, Amazon is looking for a very simple goal: get every consumer to spend hundreds of dollars weekly on Amazon.

There are two ways to do this: one, get every consumer to order DIFFERENT items each week: through a huge offering of products and SKUs, and two, get every consumer to order pretty much the SAME items each week: groceries.

The first strategy is called Amazon Prime. When consumers buy general merchandize, they simply won’t buy the same thing each week. But they might buy different items each week IF Amazon takse the friction out of buying anything. Remove payment friction. Remove shipping fees. Offer all kinds of products and SKUs. Amazon has executed this brilliantly.

The second strategy of getting consumers to buy pretty much the same thing every week has a potentially higher weekly spend ($100 to $200 per week) but it is also more difficult to crack. Some of Webvan’s team have been at Amazon for over 15 years working on Amazon Fresh. Large, automated, centralized distribution centers coupled with delivery vans to the home. Why is this model not pervasive? There really are three types of consumers who buy groceries.

  1. Those who will never buy groceries online.
  2. Those who will buy online for home delivery, but are an early adopter niche.
  3. The mass market of consumers, who MAY buy groceries online, but hasn’t been cracked

The first type of consumer will always goes to the physical grocery store, for a variety of demographic and psychological reasons. The grocers whose stocks got hit last Friday would do well to serve this demographic with as many non grocery SKUs as possible for growth.

The second type of customer is great for Amazon Fresh (as it was for WebVan) but Amazon’s strategy is simple: broad pervasive plays with lowest the cost structure and margin. Make a little per person, from a LOT of people. An early adopter niche doesn’t quite fit that profile.

The third type of consumer is really attractive for Amazon. Just like Amazon Prime with general merchandize is now up to more than 65M consumers, it would be wonderful for Amazon if 65M consumers bought groceries weekly. What could be the strategy for cracking this?

The simple view would be that Prime will now cover in-store delivery from Whole Foods. That’s certainly a prime reason why Amazon ate Whole Foods. But there is more to it than that. Look at Tesco in the UK for a hint. And my previous post on Medium for another hint.

I’ll share a longer blog post, coming soon! Send me comments if you have any thoughts or observations!