Amazon, Whole Foods Deal a Big Win for Consumers

 
 
What does Amazon's $13.4 billion deal for Whole Foods say about the future of retail? Harvard Business School professors Jose Alvarez and Len Schlesinger see good times ahead for consumers as well as both companies.
 
 
by Jose Alvarez and Len Schlesinger
Source: 400tmax

Editor's Note. Online retailing behemoth Amazon announced June 16 that it would acquire upscale grocery chain Whole Foods Market in a deal valued at more than $13 billion. Though the company has dabbled with the idea of a brick-and-mortar footprint in the past, Friday’s announcement marks a pronounced concretization of those plans. Why did this happen? What are the ingredients for success? We asked two HBS experts.

Jose Alvarez is the former president and CEO of Stop & Shop/Giant-Landover, with nearly 20 years of experience in the supermarket industry. Len Schlesinger is the former executive vice president and COO of Au Bon Pain and has spent his 20-year academic career researching strategy, entrepreneurship, and organizational change for more than 250 major corporations and organizations.

Jose Alvarez: A Great Deal

I think this can be a great deal for Amazon if it is executed appropriately. First of all, Amazon needed to find ways to reduce last-mile delivery for grocery, the last frontier of e-commerce in the United States. This acquisition gives Amazon more than 400 convenient locations in key Amazon Fresh [Amazon’s grocery delivery service] cities where consumers can pick up their groceries, eliminating huge costs for Amazon as it strives to penetrate the grocery e-commerce space. For Amazon Fresh to be successful, the company also needed to acquire more expertise in perishable grocery procurement. This deal gives Amazon a seasoned group of perishables specialists.

In my view, the synergies going the other way are also quite significant. Whole Foods has a massive cost disadvantage compared to their traditional grocery competitors. Their recent poor performance stems from a major strategic mistake they made about four years ago. Whole Foods in its current incarnation is a niche business that can only profitably sell “food for the 1%” but is trying to sell to everyone.

Originally the company had limited market penetration in the neighborhoods in which its stores were located. Because their products were so expensive, the stores ended up drawing customers from a wide trade area.

When Whole Foods changed its strategy and attempted to expand to 1,000 stores, it could either build stores more closely together, creating cannibalization, or build lower cost stores in areas that had more price-conscious consumers. The strategy change led to the massive expansion of the more affordable 365 private label brand and the introduction of the smaller “365 store” format to reduce operating costs. The trouble is that the 365 private label is regarded by many as an inferior quality brand, while the 365 store format isn’t efficient enough to compete against traditional grocers.

Amazon can help with both these problems. It can help Whole Foods buy high-quality products more cost effectively and thus improve gross margins while keeping customers satisfied. It can also use its process and technology expertise to take enormous costs out of the supply chain and store operations while improving the in-store experience.

Another important piece of the puzzle will be the role of Whole Foods founder and CEO John Mackey. Amazon’s Jeff Bezos will have to determine his fate, but it may very well be time for the next generation of leaders to take over.

All things considered, I think we will see more disciplined and efficient store execution from Whole Foods going forward and faster penetration of Amazon Fresh. Amazon will also use Whole Foods stores as a proving ground for its many innovations like Amazon Go. This will be a great deal for Amazon but an even better one for consumers.

Len Schlesinger: Managing Culture Conflict

The most common reaction to the news of the Amazon-Whole Foods acquisition was surprise. Nobody saw it coming. But now that it has been announced, countless experts are rushing to tell the world what it means. As yet another “expert” asked to play that role, let me take a few steps back to put the proposed transaction in context:

Amazon founder and CEO Jeff Bezos has been explicit about his desire to sell everything to everyone, everywhere, all of the time since Amazon’s inception. Twenty years ago he visited my HBS classroom and made that very assertion. The company’s efforts in food over the past few years with Amazon Fresh and more recently with the technology-assisted grocery store Amazon Go are clear evidence that food plays a key role in its current go-forward strategy.

Since his first letter to stockholders, Bezos has expressed an unqualified commitment to delivering unparalleled value to the consumer. Amazon’s evolution has represented a continual reinvention of retailing approaches in multiple categories. There is no reason to believe it will not attempt to improve value delivery at Whole Foods and thereby increase the attractiveness of the brand to large numbers of customers who currently do not shop there because of its image of high prices.

Retailers are discovering the power of virtual and physical channels that interact seamlessly in support of the customer. Amazon has begun to test that logic with its venture into physical bookstores. The proposed acquisition of Whole Foods catapults those efforts and provides extraordinary opportunities for experimentation in and execution of integrated retailing.

Amazon has mastered the “test and learn” approach to large-scale innovation that most companies aspire to. Whole Foods provides Amazon with an incredible platform for the transformation of an industry. Not everything it tries will work (it never has), but it has been more right than wrong over the years.

The most interesting tension in this deal lies in the comparison of Amazon’s obsessively customer centric culture with Whole Foods’ notions of Conscious Capitalism, an approach to a more balanced set of commitments to customers, employees, communities, and investors. The management of these differing approaches will represent one of the earliest challenges for all the parties in this deal to address.

Given the jump in Amazon’s stock price after the announcement, shareholder approval of the deal has virtually paid its total cost. When people suggest that Amazon has overpaid for Whole Foods, they completely miss this point.

I look forward to being a beneficiary of the kinds of industry changes that this deal will drive for consumers everywhere. And as an active observer of retail for the past several decades, I eagerly anticipate innovations that I can’t possibly imagine or comment on today. That’s what makes this deal so exciting.

Related Reading:

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