Ben Thompson on Amazon’s Whole Foods buy
Bezos bought a customer, not a retailer
Ben Thompson is one of the smartest people thinking deeply about the new economics of our era. He disassembles the Whole Foods acquisition by Amazon with cutting logic: Amazon wins in its many markets by employing a consistent approach, which is to construct a high fixed cost services capability that allows for high scalability, and to use it for its own offering and to rent it to others.
For example, AWS was motivated by the need to support Amazon’s book (and later everything else) e-commerce business, which allowed the company to offer the various modules of that service to others. Voilá, a $10B+/year business on top of the high efficiency of the e-commerce operation, which itself is a service for others. 40% of products sold on Amazon are offered by other vendors.
He parses the Whole Foods acquisition as following the same pattern: it is building Amazon Grocery Services, and needs Whole Foods (or an alternative) as the first-and-best customer:
Amazon’s New Customer | Ben Thompson
WHOLE FOODS: CUSTOMER, NOT RETAILER
This is the key to understanding the purchase of Whole Foods: to the outside it may seem that Amazon is buying a retailer. The truth, though, is that Amazon is buying a customer — the first-and-best customer that will instantly bring its grocery efforts to scale.
Today, all of the logistics that go into a Whole Foods store are for the purpose of stocking physical shelves: the entire operation is integrated. What I expect Amazon to do over the next few years is transform the Whole Foods supply chain into a service architecture based on primitives: meat, fruit, vegetables, baked goods, non-perishables (Whole Foods’ outsized reliance on store brands is something that I’m sure was very attractive to Amazon). What will make this massive investment worth it, though, is that there will be a guaranteed customer: Whole Foods Markets.
In the long run, physical grocery stores will be only one of the Amazon Grocery Services’ customers: obviously a home delivery service will be another, and it will be far more efficient than a company like Instacart trying to layer on top of Whole Foods’ current integrated model.
I suspect Amazon’s ambitions stretch further, though: Amazon Grocery Services will be well-placed to start supplying restaurants too, gaining Amazon access to another big cut of economic activity. It is the AWS model, which is to say it is the Amazon model, but like AWS, the key to profitability is having a first-and-best customer able to utilize the massive investment necessary to build the service out in the first place.
I suggest you read the whole thing.
Originally published at stoweboyd.com.