Amazon has announced their biggest acquisition yet, by offering to pay $13.7 billion for the Whole Foods grocery chain. This sent the whole retail industry into a shock, eroding billions in market capitalization. Yet most of it was out of fear of the unknown, since it is not immediately obvious why Amazon would go that route.
There is no doubt that groceries is one of their biggest focus points (it is the largest retail category), but Whole Foods with 431 store locations is hardly a big play. Turning them into “Amazon Foods” like some suggested, or even using them for last-mile delivery doesn’t sound realistic at all.
What often happens when big companies like Amazon make moves like this, is that it is easy to focus on now rather than on why. Now the stores could be used as Amazon’s order pick-up points, but that is not worth the $13.7 billion price tag. The why is how does this acquisition play in the bigger world of Amazon’s strategy.
Ben Thompson in a great article “Amazon’s New Customer” discusses that the Whole Foods acquisition might be about building what he calls the Amazon Grocery Services:
“What I expect Amazon to do over the next few years is transform the Whole Foods supply chain into a service architecture based on primitives: meat, fruit, vegetables, baked goods, non-perishables (Whole Foods’ outsized reliance on store brands is something that I’m sure was very attractive to Amazon). What will make this massive investment worth it, though, is that there will be a guaranteed customer: Whole Foods Markets.
In the long run, physical grocery stores will be only one of the Amazon Grocery Services’ customers: obviously a home delivery service will be another, and it will be far more efficient than a company like Instacart trying to layer on top of Whole Foods’ current integrated model.”
The idea behind Amazon Grocery Services, as Ben suggests, is that it would be a service powering Whole Foods, Amazon Fresh, and any other customer-facing grocery outlet.
We think it doesn’t stop there, as the Grocery Services could by itself be a marketplace, just like the e-commerce marketplace Amazon already runs. Allowing sellers to integrate into a food-specific supply chain powering Amazon’s grocery outlets. Whatever the end result is going to be, we think ultimately this acquisition will lead to a platform.
A few months ago Zack Kanter in a thoughtful piece “Why Amazon is eating the world” wrote:
“Each piece of Amazon is being built with a service-oriented architecture, and Amazon is using that architecture to successively turn every single piece of the company into a separate platform — and thus opening each piece to outside competition.”
Examples listed include the Amazon computing cloud AWS, the fulfillment network Fulfillment by Amazon (FBA), etc. Amazon has built services which it both uses for its own operations, and has exposed for the world to use. This is forcing them to avoid stagnation and high prices by applying external pressure.
The key is this insight: “By carving out an operational piece of the company as a platform, they could future-proof the company against inefficiency and technological stagnation.”
In Amazon Is an E-Commerce Infrastructure Company, Not a Retailer we wrote that despite common categorization as a retailer, Amazon is investing all their resources in building infrastructure. They still remain a retailer, but by focusing on them being a retailer one misses what they are working on for the future.
This year Amazon has done a few experiments in the brick-and-mortar market. They have announced the prototype cash-register-less store Amazon Go, opened a new books store in New York City, and now have made the big acquisition of Whole Foods. But all those are parts of a bigger plan - we won’t know what that plan is, but it’s definitely not opening thousands of retail stores.
Amazon wants to build a platform for groceries.