The Seattle giant believes selling you groceries is the key to selling you everything else.
At 9 a.m. on June 16, 2017, Whole Foods employees packed into the main level of the company’s Austin headquarters. Only an hour earlier Amazon had announced that it was acquiring the high-end natural grocer, and the corporate staffers were as shocked as the rest of the public. Amazon had been militant about leaks during the seven weeks that the two companies had been in negotiations, and the vast majority of those working inside the building had been unaware that the deal was afoot.
Now they were meeting their new overlords for the first time. Whole Foods CEO John Mackey introduced Jeff Wilke of Amazon, who had flown in for the gathering. Wilke, the e-commerce giant’s CEO of Worldwide Consumer, decided to play to his foodie audience.
“I wanted to tell you just a little bit about how Whole Foods changed my life as a start,” he said. “As I was sitting this morning, eating breakfast, watching the sun rise over this beautiful city—by the way, quinoa, blueberry, and some other vegetables…”
That’s when Mackey, a vegan who avoids refined foods and travels with a rice cooker, lightheartedly corrected him. “Those aren’t vegetables,” he said. “That’s okay. We’re learning.”
In that moment, it was clear why Wilke and his team needed Whole Foods. His comment may have been just a slip of the tongue, but it reflected a persistent issue for the company: Amazon has expertise in many areas, but food is not one of them. For a decade, Amazon—a company with $178 billion in revenue and seemingly limitless resources—had not come close to breaking the billion-dollar sales mark in its fresh food operation.
The lack of progress is not entirely the retail giant’s fault. Grocery is a notoriously difficult business—and that’s before you start layering on the costs and challenges of delivery. Scott Galloway, a professor of marketing at New York University’s Stern School of Business, boils the problem down to this: A head of lettuce has a margin of less than a dollar and can survive outside the fridge for no more than a day. How can a retailer deliver it at peak quality—and make a profit?
But with the $13.7 billion acquisition, Amazon had bought itself a real shot at remaking the $800 billion U.S. grocery sector—the last frontier of e-commerce and a massive one at that. Some 20% of retail spending goes toward food, but only 2% of those sales take place on the Internet. “Grocery is the Wild West for online,” says Carrie Bienkowski, the chief marketing officer of online grocer Peapod. “The size of the prize is huge, and it’s growing.”
The very thing that makes grocery delivery hard—that food goes bad—is the reason it’s so desirable to a company like Amazon. Because cheese grows mold and meat goes rancid and milk sours, consumers can’t hoard it in their cupboards or refrigerators indefinitely as they might toilet paper or laundry detergent. As a result, the average family hits the supermarket at minimum once a week; there’s nothing else you purchase or consume so much or so often. For Amazon, getting in on that frequency is critical to further ingraining itself in our routines and behaviors. “Food is the platform for selling you everything else,” says Walter Robb, the former co-CEO of Whole Foods. “It’s an everyday way into your life. There’s nothing else that happens quite that way.” Amazon’s quest is therefore about much more than just food. (...)
Amazon is partial to building businesses rather buying them. But after a decade of trying to grow its grocery operation on its own, it was time for the latter. The company started exploring the possibility of an acquisition, and spent the two years leading up to the Whole Foods deal “walking around to every grocer in the U.S. asking them to be its fresh supplier,” says Bain’s Cheris.
Then, in April 2017, Amazon got a call from a consultant working on behalf of Whole Foods. The grocer had seen a report that Amazon may have been interested in buying the chain in the past. Would there be any appeal in setting up a meeting?
That first rendezvous came during a tumultuous period for Whole Foods. Competition was fierce in natural and organics, the very category it had essentially created, and the grocer was struggling to shake its “Whole Paycheck” reputation. Facing slowing sales growth and a flagging share price, Whole Foods was now clearly in play. Just weeks earlier, activist investor Jana Partners disclosed an 8.8% stake in the company. In addition to Amazon, four private equity firms and reportedly supermarket chain Albertsons were among those who had expressed interest in a potential deal.
The tie-up solved a lot of problems for both parties. For Whole Foods, Amazon offered freedom from the relentless cycle of short-term quarterly pressures as it tried to fix the business. For Amazon, Whole Foods gave the company instant scale and the built-in demand it had lacked in fresh food. In a logistics operation, companies have a set of fixed costs and become more profitable by layering on incremental business. Thanks to Whole Foods, Amazon now had guaranteed and predictable volume for its grocery infrastructure.
Along with scale, Amazon was buying credibility. Most of the products consumers buy on Amazon are branded—a Sony TV, a Hot Wheels car, a S’well water bottle. But with the exception of a few products, such as Bolthouse Farms carrots or Cuties clementines, fresh goods don’t have brands, or at least not ones that the consumer knows. Instead, we decide where to buy our broccoli and tomatoes based on our trust in the retailer. That authority was something Amazon just didn’t have in fresh. Whole Foods supplied it—as well as providing Amazon shoppers with a more appealing story about where their food originated. “The idea of ordering groceries online is conceptual,” says Barnaby Montgomery, cofounder and CEO of Yummy.com, a Los Angeles–based online grocer with brick-and-mortar stores. “I don’t know where it comes from. I don’t see it. I don’t get it. It’s a barrier.” Having a physical place to shop turns “the conceptual offer into something more tangible.”
At 9 a.m. on June 16, 2017, Whole Foods employees packed into the main level of the company’s Austin headquarters. Only an hour earlier Amazon had announced that it was acquiring the high-end natural grocer, and the corporate staffers were as shocked as the rest of the public. Amazon had been militant about leaks during the seven weeks that the two companies had been in negotiations, and the vast majority of those working inside the building had been unaware that the deal was afoot.
Now they were meeting their new overlords for the first time. Whole Foods CEO John Mackey introduced Jeff Wilke of Amazon, who had flown in for the gathering. Wilke, the e-commerce giant’s CEO of Worldwide Consumer, decided to play to his foodie audience.
“I wanted to tell you just a little bit about how Whole Foods changed my life as a start,” he said. “As I was sitting this morning, eating breakfast, watching the sun rise over this beautiful city—by the way, quinoa, blueberry, and some other vegetables…”That’s when Mackey, a vegan who avoids refined foods and travels with a rice cooker, lightheartedly corrected him. “Those aren’t vegetables,” he said. “That’s okay. We’re learning.”
In that moment, it was clear why Wilke and his team needed Whole Foods. His comment may have been just a slip of the tongue, but it reflected a persistent issue for the company: Amazon has expertise in many areas, but food is not one of them. For a decade, Amazon—a company with $178 billion in revenue and seemingly limitless resources—had not come close to breaking the billion-dollar sales mark in its fresh food operation.
The lack of progress is not entirely the retail giant’s fault. Grocery is a notoriously difficult business—and that’s before you start layering on the costs and challenges of delivery. Scott Galloway, a professor of marketing at New York University’s Stern School of Business, boils the problem down to this: A head of lettuce has a margin of less than a dollar and can survive outside the fridge for no more than a day. How can a retailer deliver it at peak quality—and make a profit?
But with the $13.7 billion acquisition, Amazon had bought itself a real shot at remaking the $800 billion U.S. grocery sector—the last frontier of e-commerce and a massive one at that. Some 20% of retail spending goes toward food, but only 2% of those sales take place on the Internet. “Grocery is the Wild West for online,” says Carrie Bienkowski, the chief marketing officer of online grocer Peapod. “The size of the prize is huge, and it’s growing.”
The very thing that makes grocery delivery hard—that food goes bad—is the reason it’s so desirable to a company like Amazon. Because cheese grows mold and meat goes rancid and milk sours, consumers can’t hoard it in their cupboards or refrigerators indefinitely as they might toilet paper or laundry detergent. As a result, the average family hits the supermarket at minimum once a week; there’s nothing else you purchase or consume so much or so often. For Amazon, getting in on that frequency is critical to further ingraining itself in our routines and behaviors. “Food is the platform for selling you everything else,” says Walter Robb, the former co-CEO of Whole Foods. “It’s an everyday way into your life. There’s nothing else that happens quite that way.” Amazon’s quest is therefore about much more than just food. (...)
Amazon is partial to building businesses rather buying them. But after a decade of trying to grow its grocery operation on its own, it was time for the latter. The company started exploring the possibility of an acquisition, and spent the two years leading up to the Whole Foods deal “walking around to every grocer in the U.S. asking them to be its fresh supplier,” says Bain’s Cheris.
Then, in April 2017, Amazon got a call from a consultant working on behalf of Whole Foods. The grocer had seen a report that Amazon may have been interested in buying the chain in the past. Would there be any appeal in setting up a meeting?
That first rendezvous came during a tumultuous period for Whole Foods. Competition was fierce in natural and organics, the very category it had essentially created, and the grocer was struggling to shake its “Whole Paycheck” reputation. Facing slowing sales growth and a flagging share price, Whole Foods was now clearly in play. Just weeks earlier, activist investor Jana Partners disclosed an 8.8% stake in the company. In addition to Amazon, four private equity firms and reportedly supermarket chain Albertsons were among those who had expressed interest in a potential deal.
The tie-up solved a lot of problems for both parties. For Whole Foods, Amazon offered freedom from the relentless cycle of short-term quarterly pressures as it tried to fix the business. For Amazon, Whole Foods gave the company instant scale and the built-in demand it had lacked in fresh food. In a logistics operation, companies have a set of fixed costs and become more profitable by layering on incremental business. Thanks to Whole Foods, Amazon now had guaranteed and predictable volume for its grocery infrastructure.
Along with scale, Amazon was buying credibility. Most of the products consumers buy on Amazon are branded—a Sony TV, a Hot Wheels car, a S’well water bottle. But with the exception of a few products, such as Bolthouse Farms carrots or Cuties clementines, fresh goods don’t have brands, or at least not ones that the consumer knows. Instead, we decide where to buy our broccoli and tomatoes based on our trust in the retailer. That authority was something Amazon just didn’t have in fresh. Whole Foods supplied it—as well as providing Amazon shoppers with a more appealing story about where their food originated. “The idea of ordering groceries online is conceptual,” says Barnaby Montgomery, cofounder and CEO of Yummy.com, a Los Angeles–based online grocer with brick-and-mortar stores. “I don’t know where it comes from. I don’t see it. I don’t get it. It’s a barrier.” Having a physical place to shop turns “the conceptual offer into something more tangible.”
by Beth Kowitt, Fortune | Read more:
Image: The Voorhes
