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Amazon has been trying to conquer the grocery business for a decade. At first, Amazon Fresh was only available in a few places, primarily in spots where the company already had a major presence, such as Seattle.
But eventually it grew, and now you can get fresh groceries from Amazon in major metro areas, including the Washington, DC, suburbs where I spend most of my time. That means that I can now buy eggs, butter and milk from Amazon and have it delivered within two hours.
But there are limits. If I’m not in a major metro area, I can’t buy from Amazon Fresh at all. When I can buy from Amazon, the price can be substantially higher than what I’d find a local grocery store. Naturally sometimes, I need an item a lot sooner than two hours from now.
A lot of people share my concerns about buying groceries from Amazon. Many people still want to examine food items or read labels before buying, just as they want to feel the fabric of suits, or want to see the screen of a new television before they buy.
These concerns, along with many others, help explain why Amazon has decided to spend $13.7 Billion in cash to buy the Austin, Texas, food retailer Whole Foods. But there’s more to it than just that.
Perhaps most important factor is that companies’ customer bases share similar demographics, largely higher income shoppers and millennials who are technologically savvy.
There are other synergies as well. Buying whole foods 431 stores gives Amazon a physical presence in far more communities a lot faster than it could ever accomplish on its own. It also gives the Amazon two things it needs in the grocery business, grocery marketing knowledge and access to suppliers.
Whole Foods has years of experience selling high-end food products at prices that make them profitable and the company can help Amazon by teaching the company how to buy and sell items that are perishable.
Whole Foods also has long established relationships with quality food purveyors that are close to the sources of supply. The company can, for example, buy fresh organic strawberries directly from the farmer who grows them.
But there’s more to the acquisition than that. By having those 431 stores, Amazon now has a way to allow customers to pick up their purchases almost immediately. While other stores, including the Kroger grocery chain, already have the ability to deliver online purchases to curb-side, it can take a couple of hours. Amazon now has the potential to do this much more quickly.
Some of Amazon’s competitors, including Best Buy and Micro-Center already have the ability to deliver online purchases almost immediately. You can buy an item from Micro-Center online, and pick it up within 18 minutes. Best Buy can take a few minutes longer, but in the case of both retailers, your purchases will be ready usually before you can get to the store.
If Amazon can do quick turnaround deliveries for groceries, it will give Whole Foods a big advantage because consumers can pick up purchases in less time than it would take to shop in the store themselves. This capability would also enable Amazon Fresh to provide a real advantage by allowing fast pickups at Whole Foods stores.
Once Amazon has all of those Whole Foods stores, there’s no reason that such pickups have to be limited to food. Amazon can also use those stores as pickup locations for non-grocery products and it can use its existing positioning software to predict what products are most likely to be useful by stocking them in a Whole Foods location, even if they’re not otherwise visible to shoppers in the store.
There’s one other obvious benefit to Amazon, which is to provide another set of locations from which to sell its internet devices. Amazon has been setting up pop-up stores in shopping malls for a while now where you can buy a Kindle tablet, an Echo speaker or any other Amazon device. Now Amazon has more locations for electronic product sales and distribution.
Of course if Amazon just wanted to sell devices and provide a place for fast pickups, it could have just acquired Radio Shack and it would probably have cost a lot less for more locations. By buying Whole Foods, Amazon is in a position to add a core competency to its existing capabilities. This will allow the company to make a big difference in how it prices and markets food.
For both companies, this is a winning proposition. Amazon has the money and the marketing expertise that can help Whole Foods grow and it can help the grocery company become more technically savvy.
Amazon also gets a chance to learn from Whole Foods about how to run a national grocery chain. While Amazon already sells food items, it has a lot to learn about how to do it well and efficiently.
It will be interesting to see if Amazon can learn how to make money in the grocery business where profit margins are often razor thin.