Amazon, the world’s biggest online retail platform that sells everything from contraceptives to coffins, stirred a market storm in the U.S. with its announcement on June 16 to buy premier grocery store chain Whole Foods for $13.7 billion. Whole Foods has 450 stores, physical, brick and mortar, across America, where people can see, smell or feel items ranging from organic beef to chemical-free lip balm.
That is where Americans who look for — and can afford — the boutique grocery shopping experience go. Quite the opposite of Amazon. The unusual union has triggered a lot of plausible explanations about the objective behind the deal. But the immediate outcome was that just the announcement made Amazon founder Jeff Bezos richer by a couple of billion dollars, making him the second richest person in the world. Amazon stock prices are rising and Mr. Bezos’ personal fortune has grown by more than $10 billion in the last two months.
According to Business Insider, just the past week, Amazon’s market cap has grown by $18 billion. Competing retail companies, such as Walmart and Target, lost $31 billion combined in market cap in the same period.
The decision to buy Whole Foods is, in some ways, merely yet another step in the march of Amazon that started as an online bookstore in 1996 and has now grown to raking in above $135 billion in annual revenue.
Mr. Bezos’ motto is to sell everything to everyone, and food is a key component in the success of that strategy. Amazon’s existing distribution strategy is not the right fit for expanding the sale of perishable food items. Whole Foods, on the other hand, has gained for itself an image of providing fresh, safe and dependable food, but its business model has run into a crisis.
While its steep prices were not a deterrent to a loyal customer base, its attempts to expand the number of stores turned out to be a risky decision. Because high quality, high priced grocery by definition is not expandable beyond a point.
Therefore, the question that animates pundits of all hues is what next. Amazon could use these stores as contact points for its online customers for all products, for one. It can also use the Whole Foods experience in dealing with perishable items to ramp up its food sales. There is an increasing appetite for less processed food, but the premium that Whole Foods charges for that is unaffordable for most people. If Amazon could use technology and other management processes to take that food to a larger number of people in a more cost effective way, that could be a huge advantage to the company and its customers.
But there could be challenges. Market rivals beaten in valuation after the announcement of the deal could try to stop the deal. Reports suggest that Walmart is trying to push back Amazon, by contemplating a counter offer to Whole Foods on the one hand and pressuring its technology vendors to quit Amazon’s cloud and other IT services. While customer advantage is desirable, Amazon’s business model is based on controversial labour management practices. “The most interesting tension in this deal lies in the comparison of Amazon’s obsessively customer-centric culture with Whole Foods’ notions of Conscious Capitalism, an approach to a more balanced set of commitments to customers, employees, communities, and investors. The management of these differing approaches will represent one of the earliest challenges for all the parties in this deal to address,” Len Schlesinger, Professor at Harvard Business School, wrote in Forbes .
By taking over a physical store chain, Amazon is experimenting with the new frontier of retail. The way it plays could impact not only the way people eat but also the way they relate to each other. Disruption is not an event. It is a process, and who better to show it than Mr. Bezos?
