Amazon may finally be able to break into the grocery industry by purchasing Whole Foods for $13.7 billion. While Amazon already has a grocery delivery service, AmazonFresh, which it first launched about 10 years ago, it has struggled to grow in the supermarket business.
Amazon excels at ecommerce and, for the most part, has been very successful in using its model and technological capabilities to offer and expand its array of products. Consumers enjoy ordering almost everything from books to electronics to household goods to clothing online and having these items delivered almost immediately to their doors. With groceries, it’s a bit different. Many consumers prefer going to the grocery store, especially when it comes to perishable items like fresh fruits and vegetables.
To address this problem, Amazon has plans to expand into retail locations and already has a few experimental physical stores. This acquisition allows Amazon to accelerate the entire process by immediately bringing in 460 physical Whole Food stores and $16 billion in sales.
Competition with Walmart
The transaction intensifies the competition between Amazon and Walmart. While Amazon focuses on building brick and mortar stores, Walmart is ramping up its ecommerce capabilities most noticeably with the acquisition of Jet.com for $3.3 billion. The Jet.com acquisition seems to be paying off with Walmart’s online sales growing at their fastest rate in the last five years.
Walmart is also using acquisitions to build its apparel business in order compete with Amazon, which owns a number of in-house fashion brands including Society New York, Lark and Ro, Scout and Ro, Franklin and Freeman, Franklin Tailored, James and Erin, and North Eleven. On the same day the Amazon – Whole Foods deal was announced, Walmart said it would acquire men’s fashion retailer Bonobos for $310 million. Previously Walmart acquired ModCloth, an online women’s clothing store, for an undisclosed sum and Moosejaw, an online outdoor retailer, for $51 million.
Amazon’s acquisition of Whole Foods and push into physical retail locations will be concerning to Walmart, whose strength lies in its brick and mortar stores, many of which sell groceries. Although online sales from Jet.com have picked up, Walmart still trails behind Amazon, which is undoubtedly the dominate player in ecommerce.
Potential Challenges Ahead
Some challenges still lie ahead for Amazon, as it will need to figure out how to reverse Whole Foods’ decline. The natural food store has struggled now that organic products have become mainstream and are available in almost every grocery store, including Walmart. Some speculate that Amazon will use its technology to automate cashier jobs to cut costs, which Amazon has denied. Amazon will also determine the best way to integrate Whole Foods and AmazonFresh. Will it leave Whole Foods to operate as a separate like Zappos, or will it combine the two entities under one roof? Despite these obstacles, Amazon has a better chance of succeeding in the grocery industry with Whole Foods than without it.
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