Friday, June 23, 2017

(The Big Disrupt) Amazon: Why Amazon buying Whole Foods is "awfully scary"

It wasn't that long ago when Netflix founder and CEO Reed Hastings described Amazon as "awfully scary" and with it's recent purchase grocery retailer Whole Foods, nothing but fear and awe was palpable. 

Amazon's acquisition of Whole Foods must have sent shivers of fear down the spines of Rodney McMullen (CEO of Kroger foods),Doug McMillon (CEO of Walmart) and Brian Cornell (CEO of Target) as it most certainty spooked their investors which saw them and other lose $22 billion of their market cap.     

Besides getting slammed every quarter, there are a number of reasons why Walmart, Kroger, Target and others should fear Amazon, number one and two by far being  customer retention and the last mile problemFor obvious reasons, most companies tend to focus on acquiring new customers more than keeping them but grocers has been notorious for eschewing the use of loyalty programs until recently and now find themselves competing directly with a company that has possibly the most impressive loyalty program in history in Amazon prime with an obscenely high customer retention rate of 96%  

No player in the grocery market can compete with this level of customer loyalty and with Amazon almost certain to lower Whole Foods infamously high prices (the company didn't earn its unwanted "whole paycheck" nickname for nothing), offer store and price perks to encourage Whole Foods shoppers to join Prime and over time cut inefficiencies out of Whole Foods business to the point Whole Foods stores become merely highly automated distribution networks in all but name, grocery retailers are going to have real problems, staying in business among them. 

However, what should keep grocery executives across US up at night is that Whole Foods effectively eliminates Amazon's most prominent weakness, it's inability to solve the last mile problem (getting goods from distribution centers to customer's doorsteps)It's no secret that Amazon has had a hard time mastering fresh food delivery but with the purchase of Whole Foods, Amazon now has a distribution system that effectively solves which makes Amazon even more formidable.  

What this means is Amazon now can increase the product range it offers to prime members as well as regular customers online and provide greater click and collect payment options which improves Amazon's already impressive distribution network. Add to that Amazon finally being able to reach customers who like the traditional shopping experience and like to touch and feel fresh food before they buy it,  Amazon 13.7 billion is looking like a bargain already. 

All this is terrible news for grocery retailers but this is nothing compared to why everyone is terrified to compete with Amazon, deflation. As mentioned before, Amazon will almost certainly lower prices at Whole Foods which will force other retailers follow suit which will have a deflationary effect on the price on food which has already been at record lows for years. This is no shock to grocery retailers as groceries is a low margin business but unlike its competitors, Amazon isn't under pressure from Wall street every quarter to make money which means can lower prices and take hits to its bottom line its competitors can't do without billions wiped off their market cap every quarter. 

It's not all bad news as Amazon and Whole Foods currently represent just 0.2 and 1.2 of the grocery market as things stand and market leaders Walmart and Kroger's have much larger distribution networks. Walmart has been especially aggressive in growing its online presence and is growing faster online than Amazon of late and is best placed out of all retailers to compete with the Seattle based  tech giant. 

However, Walmart executives aren't deluded enough to think that Amazon and Whole Foods won't take market share off its competitors as it systematically grows it's distribution network and strips the fat out of it through the use of automation and tracking software dramatically improving Whole Foods supply chain. 

In sum, if Amazon is on a quest for world domination, it took a very large step in the right direction.     

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