Amazon Buying Whole Foods: Most Surprising Thing

For years, Whole Foods CEO John Mackey was convinced that grocery stores and e-commerce didn’t mix. And I was more surprised than most when the news broke last week that he’s selling Whole Foods to Amazon (AMZN) for $13.7 billion.

In the late 1990s, at the peak of the dot-com boom, Mackey tried his hand at e-commerce, just like everyone else. Wholepeople.com, Whole Foods’ e-commerce subsidiary, didn’t end well: The company had hoped to take it public, but instead spun it off and took a $500,000 write-down. “I realized within a few months this business model doesn’t work,” Mackey told me in 2002, two years after WholePeople was spun off into something called Gaiam. He righted the Whole Foods ship by refocusing on brick-and-mortar retail and going on an expansion boom, which would boost the stock price five-fold at its peak.

Even at a high-end specialty grocery store nicknamed “whole paycheck,” there were inescapable truisms. The grocery business is among the most pedestrian of retail endeavors, and what little profit there is depends largely on fobbing off a lot of the work onto customers. They drive to stores, pick and pack the inventory, bring it to the cash register, then haul it home. “Americans would like home delivery, but they aren’t willing to pay for it,” Mackey told me then.

While Mackey returned to brick-and-mortar retail in 2002, increasing sales nearly six-fold, Amazon leapfrogged from books and music to produce and diapers, and built a subscription-delivery service called Prime. Sales grew 35-fold over the past 15 years, and it became one of the most highly valued public companies.

Even just two years ago, Mackey told Bloomberg Businessweek that Amazon Fresh, the decade-long effort by Amazon CEO Jeff Bezos to get into the grocery business, would be “Amazon’s Waterloo.”

But now Mackey, 63, one of the most successful traditional retailers of the past generation, is going into business with Bezos, 53, the man most responsible for turning traditional retail on its head. So did Mackey finally see the light, or did he simply grab the lifeline Bezos was holding, saving himself from drowning in a nasty proxy fight with hedge fund Jana Partners? Or did Bezos realize that e-commerce isn’t going to kill off traditional retail?

Both are true. Mackey can duck the proxy fight and get back to business, working for Bezos. But e-commerce is dead. So, too is brick-and-mortar. It’s all just retail now. Tom Forte, an analyst at Maxim Group, told me: “The best business plan, as far as serving the consumer, involves online and offline aspects.” Those who only do one or the other are doomed.

Three years ago, Whole Foods (WFM) started dabbling with online ordering for pickup, and then teamed up with Instacart to handle delivery. Amazon recently started producing private-label food.

But there’s a bigger fight looming. For more than a decade, Mackey has been battling with Walmart (WMT) and other discount grocers. He’s still fighting Walmart, which joined forces with Jet.com in 2016, but now he’s got Bezos on his side. On the same day that Bezos, who wrote the book on e-commerce, was buying Whole Foods, Walmart, which rewrote the playbook of brick-and-mortar retail, bought a small omni-channel retailer, Bonobos, in a much smaller deal.

Walmart vs. Amazon is the main attraction now. Everything else is just a sideshow, until maybe Alibaba shows up and it becomes a global free-for-all.

Walmart is trying to fight Amazon on its own terms, not those set by Bezos, by doubling down its strengths: a massive number of stores and employees, and one of the world’s most sophisticated and far-reaching supply chains. Although Walmart does more than three times the sales of Amazon, betting against Bezos (or Mackey) has been a poor wager. Either way, it’s going to be a spectacular showdown.

John Pletz writes about technology and startups for Crain’s Chicago Business. He previously covered Whole Foods for the Austin American-Statesman.