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All-Natural and Highly Scalable: Whole Foods + Amazon

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Back in 1999 (the year that Whole Foods opened its 100th store), Amazon invested heavily in a grocery delivery startup called HomeGrocer. Sales peaked at $1.5 million per day, but unfortunately HomeGrocer couldn’t stay fresh past the dot-com expiration date. Eighteen years later, two of the most iconic brands in the modern era may join forces to disrupt the grocery sector forever…or will they?
The proposed Amazon acquisition of Whole Foods would be more than 10 times the size of its second largest acquisition, Zappos (where I buy all of my shoes, by the way) in 2009. It’s a big retail acquisition, but it’s the matter of a tech company buying such a large retail footprint that makes it the closest-yet shot across the bow of what has already been a brutal year for brick-and-mortar retail.
The deal is not done, and there are rumors of a bidding war for Whole Foods. But we’ve been excited to follow the story for the past week and here are a few of our takeaways.
Omni-Channel Retail is Still a Thing
Physical retailers have been slowly going digital for about two decades now, with online sales a steady 10% of revenues across the industry. Along with Walmart’s purchase of jet.com and bonobos.com, Amazon’s acquisition of Whole Foods only reinforces the fact that digital and physical need each other now more than ever. Consumers have been slow to move their grocery spending online, with only 12% of U.S. online adults buying groceries online for delivery, and just 11% ordering for in-store pickup. Kroger’s ClickList and Meijer’s Shipt are moving fast to work out the kinks and help consumers become more accustomed and trusting of the omni-channel grocery experience. This only speeds that up.
Organic is Here to Stay
If anyone thinks this is a threat to the organic food movement, think again. In 2015 Costco surpassed Whole Foods with $4B in organic food sold, to Whole Foods’ $3.6B sold. Wellness, sustainability, and values-driven shopping are steady forces – particularly in grocery – made possible through digital transparency.
Online Grocery Is Tough
One of the biggest eCommerce problems that grocers struggle with is tracking and managing perishable items. Grocery is a complex data model, with hundreds of tricky attributes. Is this stored frozen, refrigerated, or room temperature? How many strawberries in a pint? Are these good spots or bad ones? Amazon may still struggle to figure this out but we think these are two innovation-driven companies that can pull it off.
Like All-Natural Peanut Butter and Locally-Sourced Jelly
The obvious reason for Amazon to buy Whole Foods: an established brand with 450 physical stores in great locations with a loyal following. One of the most difficult parts of digital grocery is the need to see, touch, feel, and even smell the merchandise. Only a physical presence can do that , along with giving the customer immediate access to the food (when Cousin Eddie and his family stop by unexpectedly.) The not-so-obvious reason for Whole Foods: access to one of the most sophisticated supply chain, warehousing, and fulfillment networks ever conceived.
Amazon is a Retail Efficiency Powerplant.
Walmart may be the subject of a few cultural jokes and sneering, but you might think twice about those jokes when you realize they are the $482B gorilla of retail.  Walmart pioneered supply chain and allocation computing to get there, but Amazon is using technology a few other ways to become incredibly efficient. With $482B in revenue, 5,000 locations, and about 2 million employees, Walmart is pulling in about $96.4M per store and about $241K per employee. With $136B in revenue, 100 fulfillment centers, and about 341,000 employees, Amazon is getting about $1.3B per location and nearly $400k per employee. That is incredible efficiency that will reveal even more amazing things to do with kale.
Customers Are Great. Customer Data is Even Better.
Amazon has become the superhero of one-to-one customer marketing and personalization. They know you, your browsing habits, when you buy, when a review will get your attention, what shipping price will keep the checkout funnel moving, and exactly what to pair the item with. Are Whole Foods customers already Amazon Prime members? Probably!
We’re Going to Eat Anyway
You grocery shop to solve the buying-of-the-food problem, but what you’re really getting to is the eating opportunity. The opportunity to enjoy time with your family, or save time with a prepared meal, or impress your coworkers with a wonderful box of donuts (hint.) The way we eat as a society is highly fragmented. Who is present at the table is up for grabs.We eat on the fly and eat fluidly. Eating is happening anywhere and everywhere. We also eat thoughtfully and elaborately, and with more choice than ever. These are the experiences that will ultimately win and keep customers and is the long view to make grocery work.
Can We Out-Amazon Amazon?
It’s way too early to tell. I hesitate making predictions, but the Amazon/Whole Foods story has been fun to watch and there is too much not to share. My favorite quote comes from Crystal Kim, who wrote in Barron’s last week:
No other retailer food or otherwise has ever been able to make “drunk shopping” a thing. Don’t believe me? Google: drunk Amazon shopping.
 

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Jim Hertzfeld, Principal and Chief Strategist

Jim Hertzfeld is Principal and Chief Strategist for Perficient, and works with clients to make their customers and shareholders happy through insanely great digital experiences.

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