Why Amazon bought Whole Foods.

The following article is a written adaptation of a episode from Thrilling Tales of Modern Capitalism, Slate’s podcast about business in the news and how they got there.

In 2017, Amazon entered the grocery business by throwing Whole Foods into its shopping cart. Amazon spent more than $ 13 billion to buy this 40-year-old supermarket chain known for its organic products and, at times, sky-high prices. In the world of groceries, shopping has been a cataclysmic event. “The Whole Foods acquisition was the wake-up call that sparked all of these multi-billion dollar investments in digital grocery capabilities,” said Jon Springer, editor-in-chief of the trade publication Winsight Grocery Business. “It was like, Oh, my God, we’ve got to do something about it.

The COVID pandemic has shifted the industry’s focus towards food delivery, which has only strengthened Amazon’s strengths. And now people in the grocery world, people on Wall Street, just people in general, are extremely curious about Amazon’s ambitions in supermarkets, given the company’s habit of taking a scoop. demolition in any market with which it is involved. “Everything is done differently today because of Amazon, and the grocery industry is one of the last industries to be affected by that influence,” Springer said.

Whole Foods itself has revolutionized this industry. From a health food store in Austin, Texas that opened in 1980, it has become a household name and changed the whole conversation around grocery shopping. Gary Fine, a former Whole Foods employee, says, “Whole Foods was a mission-driven company, and the mission was to change the world, to have good things, and to change the way people eat. Well you know what? They won. They won. You can get organic food, you can get natural food anywhere, you can go to your little corner store, you go to Safeway.

But the demand for organic and natural foods created a new problem for Whole Foods: other supermarket chains were upping their level. And that competition could take advantage of the fact that Whole Foods – or, as people called it, Whole Paycheck – had gained a reputation for high prices. Conventional grocery stores have started to replicate Whole Foods’ organic offerings, but much cheaper. In 1997, Whole Foods launched a line of private label products called 365 Everyday Value. The idea was to make items more affordable, but it was not enough. In the mid-2000s, CEO and co-founder John Mackey realized that Whole Foods no longer stood out from the crowd. He said in an interview in 2004: “When we started, our ideas were really on the fringes of culture. And what has happened over time is that they’ve migrated from bangs to kind of cool and hip. And now he’s entering the mainstream.

Whole Foods had grown rapidly, by far, on the basis that it brought something new to every neighborhood it opened a store. But once the general public caught up with what Whole Foods was doing and started doing it cheaper, the luster of the business started to wear off.

In 2006, Whole Foods shares fell almost 40% as competition weighed on sales. In 2008, amid the financial crisis, the stock fell 76% and John Mackey sold part of the company to a private equity group. Whole Foods struggled for the next several years, but faced increasing pressure from disgruntled investors. And according to Jon Springer, the problem the company faced was simple: The competition got tougher. “Consumers didn’t have to go to Whole Foods anymore to get what you could find in Whole Foods. “

Mainstream grocery chains like Safeway and Kroger, with their larger scale and often greater efficiency, offered organic food at cheaper prices in stores right next to consumers across the country. In the past, Whole Foods had managed to beat its competitors by buying them out. But these rivals weren’t like these independent health food chains. They were bigger and well resourced, and they knew how to compete. Whole Foods was in trouble. “They were practically against the wall here,” Springer said, “and Amazon came out of nowhere and said,“ Here’s what we’re going to pay for you. Let’s make a deal. ‘ And apparently it all fell into place very quickly, and that was a big relief for them. “

According to Springer, the sale “was received as a monumental blow” in the grocery industry. “The stock of every conventional supermarket and Walmart around the world has just been devastated by this single announcement.” The fear wasn’t so much about what Amazon would do with Whole Foods in particular; it was just the fact that the big and bad Amazon was finally entering the grocery business in a major way.

Online grocery shopping has been Amazon’s white whale for some time now.

For Amazon, the acquisition of Whole Foods was in part just a way to encourage people to purchase Amazon Prime memberships, joining Amazon’s powerful loyalty program in exchange for discounts on their groceries. But there is more to it. Many people believe that Amazon viewed buying and operating Whole Foods as a way to learn more about the world of grocery shopping and then use that knowledge to start a larger grocery chain and more traditional. Now, the company may be taking its first steps in this direction: new stores are popping up across the country under the Amazon Fresh banner. “People expect Amazon to roll out hundreds of these Fresh stores, not just dozens but hundreds, in the years to come,” Springer said.

Amazon Fresh stores tend to be smaller and less extravagant than Whole Foods stores, and they come without any of the Whole Foods baggage. “They’re a little more local,” says Springer. “They’re cheaper to build and operate, and they don’t have any reputation issues or expectations that come with a Whole Foods, in terms of how you would expect a special experience at Whole Foods and if they don’t. not. , it is a problem. They have a reputation for price to overcome in the consumer’s mind that an Amazon Fresh might not necessarily have, and it isn’t harder or probably easier in some ways for Amazon to pass the power to a brand. of its Prime program. -new store rather than trying to adapt it to a store that was developed for a different purpose.

But a huge national chain of Amazon Fresh stores might not even be Amazon’s end goal. These Fresh stores could well be Trojans for Amazon’s real purpose, which is same-day grocery delivery to everyone, everywhere. Online grocery shopping has been Amazon’s white whale for quite some time. Groceries are a constant part of most people’s spending, and it’s sort of the only online shopping niche that Amazon hasn’t yet managed to dominate. Before the COVID pandemic, online shopping was only 2-3% of the $ 800 billion in groceries. Since the start of the pandemic, it has hovered around 10 or 11%. Even as the pandemic recedes, people expect online grocery shopping to continue to escalate. But it is a delicate matter.

Springer explains, “With food, you have multiple temperatures. You have fresh, frozen, fresh, delicate items, grapes, bananas, things that can be crushed and that needs to be handled by someone. Grocery shopping is a great and resilient thing because it is efficient. They are near you. You provide the manpower to pick the items and pick the ones you want. So when you go online and order your groceries, now you trust someone or something else to make those choices for you, to make sure the cold products stay cold, to make sure the products frozen ones stay frozen, the time it takes to get it to your home. It’s a really complicated thing. And again, what Amazon saw in their experiences was that this was going to be difficult to do from a centralized warehouse within a 150 mile radius. We have to be very close to the consumer. This is the advantage of grocery stores.

Huge expansion of Amazon Fresh stores may be a traditional grocery chain game, but it’s also a way to get food-specific warehouses in each neighborhood ready to fulfill online grocery orders that people go through, of course, their Amazon accounts. But as Amazon tries to grow its grocery business, it encounters a familiar foe. Walmart has already followed Amazon in online shopping, hoping to catch up. And now, Amazon is chasing after Walmart, America’s # 1 food vendor, when it comes to groceries. As Springer puts it, “They’ve got what each other lacks, basically. Walmart has 2,800 stores or something in the United States and a growing e-commerce business. And Amazon has e-commerce and a small handful of stores.

So here we are talking about two corporate giants fighting to consolidate and dominate the fastest growing grocery industry. We’ve come a very long way since a 25-year-old vegetarian in Austin opened the first Whole Foods Market. Of course, John Mackey has always been more of a businessman than a hippie. He developed Whole Foods through rapacious acquisitions. He was in charge of Wall Street and private equity. He has been open to the fact that he is not a fan of the unions. Maybe an Amazon acquisition has always been his fate.

Listen to the full episode using the reader below, or subscribe to Thrilling Tales of Modern Capitalism on Apple podcasts, Covered, Spotify, Stapler, or wherever you get your podcasts.

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