The real reason they did it: logistics.
We have just passed the two year anniversary of Amazon’s biggest acquisition to date: the $14 billion takeover of Whole Foods.
Why did they do it? Many people have written about Amazon’s plans to expand in food. Others have noted Amazon’s intentions in brick-and-mortar retail. There’s a third reason which may prove to be even more important in the long run.
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In short — it’s all about logistics.
First of all, it’s critical to understand that the Amazon deal with Whole Foods is partly about real estate. If you think about it, Amazon gains 465 stores, each of which controls close to 50,000 square feet of space in the ground plus much more above ground. Imagine if Amazon decides to create a direct-to-consumer fleet in order to give you direct-to-consumer fulfillment from every single store? That’s exactly what some people think Amazon will do. And, in fact, this is one of Amazon’s biggest objectives.
They are pursuing what’s called frictionless commerce. When you order an item, they want you to receive it as quickly as possible so that you can gain instant gratification. What if you could have a fleet of messengers ready to deliver your goods immediately using every Whole Foods store as a launching pad?
Number two, this is about cross-selling. Amazon wants to be able to cross-sell whole foods and vice-versa. Already if you go to a Whole Foods today, you can buy Amazon Echo devices for $99.99 — a dramatic slashing of the price from $179.99. Amazon wants to use Whole Foods to sell more Amazon goods.
Third of all, this is about new solutions. When Amazon announced its entry into the prepared foods category, Blue Apron’s stock price was slashed. Imagine what happens now since Amazon can take advantage of the 465 stores and the huge kitchens that every Whole Foods represents? They could use those capabilities to provide a dramatic increase in growth for prepared foods.
Fourth, this is about e-commerce fulfillment. Amazon is seeking to provide same-day, and in some cases, same-hour fulfillment. With 465 stores, Whole Foods has a footprint across the entire country. With a network of distribution centers, Whole Foods can give Amazon entry to every major market. Imagine if the next time you buy from Amazon, you got it in one hour, fulfilled directly from a Whole Foods location?
A fifth issue is robotics. What if Amazon decided to use its investments in automation to slice the labor costs in the food business? The food industry employs over 3 million people. With Amazon’s labor-saving technology, could they cut those costs and accelerate the speed at which Amazon can deliver an order right to your doorstep?
And a sixth issue is reverse logistics, as pioneered by GENCO (now Fedex). It costs 10x as much money for products to go backward in the supply chain in comparison with forward. When you return a product, the company loses money. With 465 locations, can Amazon find a way to slash those reverse logistics costs?
In the end, for Amazon, it may be all about logistics and the last mile.
Finally, this will be a catalyst for more new deals. Just a few days later, Target acquired Grand Junction, which was an e-commerce and last mile logistics company in which Cambridge Capital had invested.
Why did they do it? Like every retailer today, with one eye on their business and the other eye on Amazon.
Stay tuned for more to come.
Benjamin Gordon is an entrepreneur, advisor, and investor for companies in transportation, logistics, and supply chain technology. Benjamin is the CEO of Cambridge Capital in West Palm Beach, a leading investor in the supply chain sector. He is a published author at Data Driven Investor, Fortune, Modern Distribution Management, SupplyChainBrain, and CNBC. He hosts BGSA Supply Chain, the industry-only CEO-level conference for all areas of the supply chain. Benjamin graduated from Harvard Business School and Yale College.