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Amazon wants to sell you groceries, plus everything else
July 2, 2017, 3:31 pm
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Last week Amazon announced its largest acquisition ever: a $13.7 billion deal to buy Whole Foods, the popular, pricey, and frequently organic grocery chain. The purchase underscores just how seriously Amazon values its future role in the $600 billion a year grocery business in the US.

Moreover, the food retailing industry is not very concentrated at the top. Aside from Walmart, which controls close to a fifth of all food and beverage sales, no other grocery chain has more than a tenth of the US market.

It has long been a dream of tech companies to break into the grocery business, and there is a similarly long list of tech companies that have failed in the process. But the tide may be turning in favor of grocery delivery services. A report earlier this year estimated that 20 percent of grocery purchases would be made online by 2025, representing $100 billion in sales.

By purchasing Whole Foods, Amazon buys its way into a business it has long been trying to crack, sets itself in a much stronger position for online grocery sales, and acquires 460-plus retail stores that can be used for an assortment of operational purchases, from holding delivery lockers to becoming distribution centers for food deliveries.

Online sales could certainly be a large part of this whole deal: Amazon has name recognition in that, and has built warehouses and shipping infrastructure across the country. But that infrastructure has not been optimized for groceries, and picking up Whole Foods is a quick method for Amazon to buy its way into a challenging skillset: managing inventory that, unlike the many gadgets and home goods Amazon sells, frequently expires or spoils.

Amazon did not just buy Whole Foods grocery stores. It bought 431 upper-income, prime-location distribution nodes for everything it does. If Amazon can manage to transform current or future Whole Foods locations into combo grocery stores / delivery and pickup locations, it could rapidly open up online ordering to more and more customers.

Keeping Whole Foods locations up and running should also make Amazon a more formidable competitor to Walmart and other top grocery chains. Walmart and Amazon have long been retail rivals, approaching sales from different ends of the spectrum: exclusively online for Amazon, and mostly in-store for Walmart. But both companies are rushing toward the center.

Amazon is leveraging what others like Target and Walmart have already figured out: that grocery is one of the highest frequency purchase categories in retail. This should be a red flag for Amazon competitors. Once Amazon wins the high frequency purchase, they are likely to win other purchases — from blenders to lamps to shirts — due to convenience buying.


 

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