Six Reasons Amazon Splurged On Whole Foods

Jeff Bezos wants to be a bigger part of your life than just books and electronics — so he’s moving into your kitchen

“The answer to this question begins with a number.” — Jeff Bezos


Let’s review the bidding.

Jeff Bezos is a brilliant Princeton engineer and the second richest person in the world with a net worth approaching $90 billion. He also happens to own the country’s leading political newspaper, a major movie studio, and an interplanetary exploration company. He is the founder of Amazon.

So what is he doing with a grocery store?

The pundits are asking if the acquisition of Whole Foods Market was just to increase food revenues for Amazon. But Bezos is having a “don’t pay attention to that man behind the curtain” moment.

Or is there more to the story? Something simple, something right before our eyes. Something he sees and we don’t?

For inquiring minds, we will need to go inside the Amazon deal, but I’m afraid in order to do that, we first have to get inside the mind of its chief dealmaker.

“There’s only one way out of this predicament,” Jeff Bezos repeatedly said to employees during tougher times, “and that is to invent our way out.”
Jeff Bezos, founder Amazon

During his weekly senior staff meeting, the Amazon chief executive posed a question to the new engineer, “how is your business performing?”

The engineer leaned forward and started by saying… “Well, I can answer that in several ways…,” when Bezos cut him off sharply and erupted at a decibel that was breathtaking even for those who saw it coming:

“The answer to that question begins with a number.”

In Bezos-speak, here is the Whole Foods strategy in six key metrics.

One Single Minded Maniac

Jeff Bezos is a driven founder as is Whole Foods CEO John Mackey. Both are customer fanatics. Their personal synergy is a big deal driver that most analysts have overlooked. Bezos isn’t shopping for an asset but has found a key partner that can help him build out the portfolio and act as a consigliere to the CEO.

The Hand-drawn Bezos Chart of Customer Value

Two Day Free Shipping

Customer obsessions aren’t unique to Bezos. People like Steve Jobs and Sam Walton enjoyed the same desire to keep shoppers happy. But it was Jim Sinegal, founder of Costco, that had the greatest impact on Bezos. He met with Sinegal and internalized the customer comes first mantra. You can see it in two day free shipping which brought in more customers and drove merchandisers to stock more inventory inside Amazon’s warehouse. The result is faster shipping and lower prices. Now Bezos sees bringing Costco level customer service to Whole Foods.

Source: www.consolidatedcredit.org

3rd Largest Consumer Spend

To use Warren Buffett’s expression, his company is so large they need to go ‘elephant hunting’ to find acquisitions that move the needle.

The list of targets is a short one when you’re valued at hundreds of billions. Merging two cultures requires such energy, it has to be worth the sacrifice.

Whole Foods is a win-win here. The company has a strong culture that would easily port to Amazon.

Second is share of wallet spent on food at a grocery store. Bezos gets to move away from games and books into the mainstream with this purchase.

Third, add Amazon skill in technology and AI, much the way they target book and electronic buyers with recommendation engines, Whole Foods looks like a once in a long time opportunity.

Whole Foods was a great retail grocer, but investment was limited by Wall Street (CEO and founder John Mackey was always fighting analyst expectations). Now Amazon can power them with technology and tools never dreamed of. Think Tesla meets Jeep.

It gets even more interesting, strategically.

Fourth and most interesting, food is the largest category after housing and transportation. With delivery technologies like automation and drones, Amazon takes market share and revenue from transportation. How?

Through transportation-tech, Bezos recovers the ‘wasted’ expense consumers lose getting to and from the grocery store.

That money is now heading towards Bezos.

6th Largest Organic Grocer

While they rank behind Costco and Walmart, and Kroger, Whole Foods dedication to customers of organic groceries is renowned. It owns over 431 stores across the country, which is their weakness. Amazon investment can power them ahead of Trader Joe’s and even into the 1,000+ sphere where they will compete more directly with Krogers.

Factor in a reputation for brilliant entrepreneurial leadership, an iconic brand, a Texas culture where Bezos is from (Whole Foods was founded in Austin), and a CEO like Mackey, looking to get Wall Street off his back and cater to customers. The deal starts to make if you will forgive, organic sense.

Bezos gains deep experience in a field he knows little about, food merchandising. There will be no steep learning curve.
Source: https://www.cbinsights.com

11 Segments in The Amazon Portfolio

With growth in AWS and fulfillment services, Amazon has to beef up its retail sector with a bold move. Bezos tried partnering as a way around lack of insight into merchandising and vendor relations. It didn’t work and he pulled back both with toys and electronics as a result of weak partner behavior in important categories.

He sees food as strategic, and now he owns a key to the sector that will never go away or become obsolete.
Source: http://www.visualcapitalist.com

12th and largest acquisition

We know Bezos is making history here, although we aren’t sure exactly how. Bezos is notoriously stingy when it comes to doing deals, he’d rather build.

Amazon was founded on July 5, 1994, in Seattle, WA. Which means Bezos has been waiting all this time, developed the expertise that has made Amazon arguably one of the most innovative companies in history, in order to make his largest acquisition — a grocer. The reason may not be clear, but you can be sure it’s no accident.

To Bezos, this isn’t just an acquisition, it’s organic.
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