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The retail sector in general, and food retailing in particular, experienced an earthquake-sized shock on June 16 when Amazon announced it was buying Whole Foods for $13.7 billion. While Amazon has been signaling serious commitment to online food retailing, the past is littered with companies that cumulatively spent billions in venture capital on various online grocery businesses. Eventually, they all stumbled on either the delivery problem (people need or want to be home when the groceries arrive if anything perishable is included) or the touch problem (people want to pick out the bananas, apples, and fish that look best to them). If these problems can be solved, the combination of Amazon and Whole Foods is probably the last and best chance for anyone to succeed in the online grocery retail space.
Amazon has the deep pockets to survive in the online grocery business for a while and patient enough stockholders that it has no real pressure to turn a profit in that segment anytime soon. Amazon also knows as much about delivery as anybody else and already has the infrastructure so that its cost of delivery is assumedly lower than any competitor could achieve. Because it can spread its fixed costs over all its other businesses, it just isn’t possible for anybody else to beat Amazon on the ordering and delivery costs if it chooses to use its Whole Foods purchase as leverage to make a really big move in online groceries.
The touch problem is harder, but again Amazon has a lot of experience in this area. They may not have a solution, but assumedly they know a lot about what it takes for customers to buy products they couldn’t touch first and which sort of products are most amenable to e-commerce.
Most intriguing is the prospect that Amazon does not use the purchase of Whole Foods simply as a knowledge source to grow its online grocery business, but instead gets more innovative. Others have already suggested that Amazon could use Whole Food stores as pick up points for online purchases completely unrelated to groceries. That is possible, although grocery stores don’t have loads of unused space lying around ready to hold stacks of boxes until somebody comes to pick them up. More likely, and promising, is that Amazon might use Whole Foods to blend online and in-store food retailing.
Imagine a world in which you could “purchase” all the canned goods, dry goods, paper products, and household products you need online and at Amazon’s low prices. Then you proceed to your local Whole Foods where those purchases are ready for pick up. You pick out your produce, meat, fish—all the things you want to see in person—at the store, then pay for everything at once and leave with a full set of groceries. This world combines the best of Whole Foods (high quality selection and goods that people like to peruse and buy only after seeing them) with the best of Amazon (low prices from its volume buying power).
It’s not exactly online grocery shopping as it has previously been envisioned, and there is no reason that the model I sketched above would have to be the only channel that Amazon-Whole Foods would construct. I am sure fully online shopping is part of the plan and that some shoppers will continue to experience Whole Foods strictly through the brick-and-mortar stores. However, the convenience of online ordering with in-store pick up combined with the ability to choose some items like produce, meat, and fish while in the store would be innovative and quite possibly the best use of both companies’ competitive advantages.
If Amazon and Whole Foods go down this road, they won’t have proven pure online grocery retailing can be successful. They will, however, have created an innovative and likely highly successful business that takes full advantage of their talents and the synergies that they can create together. If I was another food retailer, that is the future I would be most afraid of seeing come true.
