For years, Amazon has been taking steps to get into the grocery space. Buying Whole Foods Market is a clear sign that Amazon is transitioning from dipping its toes in the water to jumping in head-first. At the same time, Amazon looks to be just the partner Whole Foods needs to turn its fortunes around.
Amazon’s acquisition of Whole Foods will be the tech giant’s first step in dominating the online grocery delivery market. But that outcome wasn’t always inevitable. In 2007, Amazon launched AmazonFresh, a grocery delivery service. Over the past 10 years, this service has grown, but it's still only limited to only a handful of major metropolitan areas.
The main obstacle has been in Amazon’s distribution network. The tech company has some of the most advanced fulfillment centers and warehouses around the country, and has leveraged these to fulfill users’ orders quickly and set a new standard for what they could expect from an online order. But these warehouses don't help Amazon in the grocery space. There are fewer than 100 of them in the U.S. and many are located near airports. This makes sense for sending out clothes and media, but doesn't work for shipping perishable food items that need to arrive the same day.
By purchasing Whole Foods, Amazon now has over 400 stores to leverage for online orders. This gives it a food distribution network that rivals some of its biggest competitors’. And it moves Amazon away from relying on airports for distribution and brings it into local neighborhoods. By using its advanced and efficient technology for fulfilling online orders, Amazon will set a new standard for online grocery shoppers.
Amazon is also likely to utilize its premium loyalty program, Prime, to draw in even more customers. As of last year, the average Prime customer spends more than twice as much as a non-Prime member does. Also, nearly 50% of all U.S. households are estimated to be Amazon Prime members. Amazon Prime has proven to be a massively successful loyalty program. The integration of Whole Foods makes this core offering even stronger.
Whole Foods also stands to benefit greatly from the deal. Amazon and Whole Foods have similar customer bases and strong penetration in high-income households. Yet while Amazon is focused on reducing prices, Whole Foods is known for its above-market costs.
Going forward, expect to see Whole Foods’ prices to become much more competitive. Amazon adds a lot of buying power to Whole Foods and will likely make strong moves to decrease in-store prices. This is especially important now, with the rise of discount grocers like Aldi and Lidl in the U.S.
Furthermore, with the development of Amazon Go, the company’s “checkout-free” grocery store concept, Whole Foods shoppers might see an elimination of checkout lines and the convenience of never having to pull out their wallets.
Now that Amazon has acquired Whole Foods, it’s hard to understand why the companies did not combine sooner. They both have huge potential to gain from their partnership, and their competitors should be terrified.
Tom Caporaso is CEO of Clarus Commerce.