When Amazon.com makes a move, the entire retail industry holds its breath. That’s never been so true as when Amazon decided to expand its online business in a direction that is decidedly. . . well, off-line. The recent $13.7 billion acquisition of brick-and-mortar retailer, Whole Foods, gives a hint of Amazon’s next moves and the strategy that they will be using to continue to grow sales. Despite the fact that Whole Foods itself saw a small operating loss in Q4 2017, Amazon’s physical store revenues (largely comprised of Whole Foods) were better than anticipated at $4.5 billion. What’s more, despite the price cuts Amazon put in place when it took control, brands selling through Whole Foods saw sales increase dramatically. So far, it seems like retailers have plenty to keep an eye on.
This broad-reaching deal has sent shock waves throughout the grocery industry — from grocery delivery services to companies that create meal kits. The massive amount of shopper information that is collected by Whole Foods is now under the control of data-hungry Amazon, and industry analysts are quick to see the benefits that can be gained from this new influx of information to the omnichannel retail giant.
Amazon Dominates Omnichannel
Has Amazon truly cracked the code on omnichannel? It is debatable, but then, there were plenty of doubts about its ability to thrive as an online-only marketplace. Amazon has since fully dominated online retail, accounting for 22.6 billion total minutes Americans spent with online retailers in December 2017 alone; that’s more than 360% longer than the next leading retailer, Ebay, and more than 750% longer than time spent shopping online with Walmart. Amazon also saw more than twice as many users than either of the two (via comScore and Statista).
Either way, the reality is that CEO Jeff Bezos is clearly on the path for full domination of the industry. However, while they scale out their physical footprint with the Whole Foods addition, mega-retailers such as Walmart and Target are busy building their online empires. Acquisitions abound in both spaces, with Walmart’s recent procurement of Bonobos, their latest foray into finding innovative pockets of e-commerce talent. The difference between the two seems to be the desired end-result. While Amazon looks to brick-and-mortar retailer for hyper-local delivery options, Walmart is still encouraging visits to stores — albeit with the ability to stay in your vehicle and have your online grocery order brought out to your car. Kroger’s ClickList offering is also being rolled out to rave reviews. All this makes you wonder: Why do they really need the addition to keep the machine churning out money?
What Whole Foods Brings to the Deal
The short answer is their deep history of shopper data. With thousands of data points and information from millions of shoppers, Amazon grocery leaders had to be thrilled at the potential of getting their hands on that material. With a $32 billion supermarket food service up for grabs, the convenience of shopping on the popular site plus the freshness and quality of Whole Foods may be a match made in retail heaven. The grocery buying patterns alone may be worth the deal cost, but when you add in the premium branded products, it’s easy to see why this deal was too good to pass up. Jeremy Stanley, Vice President of data science for Instacart says: “One of the wonderful things about groceries is that compared to other e-commerce purchases, groceries are habitual and frequent. People need groceries every week.”
Grocery stores have access to shopper data such as how often people purchase cereal, meat and milk on average. In light of the fact that Whole Foods operates more than 470 locations and logged about $16 million in net sales in 2017 alone, that data offers Amazon a level of information it commands in the online realm (per Statista). These details combined with Amazon’s upselling and cross-selling algorithms will help drive grocery e-commerce higher than ever. While brick-and-mortar grocery retailers such as Kroger are making strides with adding items to an online shopping cart, they’re still struggling with those revenue-rich items that exist in the checkout lane. Even better, Whole Foods has an upscale clientele with a higher level of disposable income, making them the ideal customer base with which to begin.
Amazon has their sights set on yet another attractive asset that Whole Foods brings to the deal: the option for vertical integration with their private label food brands. While Amazon has been toying with private label items for some time in other categories, this is another step towards owning the entire shopping experience. The deep analytical pockets of Amazon leverage the 80 million consumers’ worth of data to build analytical models that predict when, where and what shoppers will be interested in purchasing next. These private brands have better margins, and the power of Amazon can drive various quality levels by introducing multiple private brands, too.
What Does This Teach Us?
In order to compete in the future, retailers will need to have a strong omnichannel presence to understand and ultimately address the needs of a range of shoppers. While Amazon has a big jump ahead of competitors such as Instacart, a leader in the grocery delivery business, there is still plenty of space for innovation. The final mile continues to challenge retailers as they seek to get their items delivered to the door of eager shoppers. As reported by Forbes, any type of digital food and beverage shopping will represent a mere 5% of all ecommerce sales in the U.S. in 2018, and yet the number of U.S. shoppers who make CPG purchases online doubled between 2016 and 2017.
Analysts by no stretch believe that offline retail is dead — just that it will look quite different moving forward. Cutting-edge technology and deep wells of shopper data are the building blocks for a successful future retail business, regardless of the channel in which a retailer is competing.
Retailers everywhere will continue to watch the marriage between Whole Foods and Amazon to see where this omnichannel superpower lands in terms of rolling out new concepts. As this acquisition leads the industry in omnichannel presence and the practices it entails, it doesn’t mean complete domination. It pushes retailers to strategize and use these practices to reach shoppers and engage with them at the points in their shopper journey that prove most effective for producing sales throughout these various channels.