In buying Whole Foods, Amazon spreads might-and furthers its threat

Amazon's $13.7 billion acquisition of Whole Foods is, by far, its biggest deal to date-an outsize gesture that manages all at once to achieve the following:

  • Highlight both the breadth and focus of its strategic ambitions
  • Underscore the electronic titan's need for scale to drive its grocery business
  • Show the limitations of online-only retail for certain product categories

Unveiled in an announcement on June 16, Amazon's shift from online to offline via Whole Foods is not unique. Amazon's Chinese counterpart Alibaba pursued a similar strategy with its $629 million deal in 2014 for a 35% stake in China's Intime department store chain. Last year, Alibaba spent a further $2.6 billion to complete its buyout. Similarly, Amazon has been stepping up its own physical retail presence with the rollout of dedicated brick-and-mortar bookstores, as well as testing a cashier-free grocery store called Amazon Go, open for now only to the company's employees.

Catching the fish that slipped through the net

The need for scale is central to Amazon's strategy. In its key segments, Amazon needs to extend its reach as far as possible, and the Seattle-based giant also wants to capture those parts of a customer's shopping basket that it does not currently dominate. The Whole Foods deal not only adds more selections to Amazon's current offerings, it also allows the e-commerce titan to provide a more complete buyer experience, from online to offline and vice versa. Amazon's ultimate goal in this acquisition is to capture the customers and products that have, somehow, slipped through the net.

To be sure, Amazon has attempted to make inroads into the grocery business for some time now but has met with mixed success. Its Amazon Fresh food delivery has not enjoyed the same triumph as the company's traditional online retail and vastly popular Prime services. The Whole Foods deal shows that the grocery business is different. The fast-moving perishable nature of the products being sold demands a different approach, and is one that can be better-run through a combination of local stores and online ordering rather than on the large centralised warehouses relied upon by Amazon's other commercial operations.

Whole Foods could be just the first vertical in the offline business that Amazon ventures into. Footwear, clothing, and electronic devices could all be good options as well for Amazon to acquire in the future. By having both physical and online stores, customers that prefer to see physical products before purchase would then be able to try out the product first and then buy them online afterward.

The Amazon Go initiative is one such example. Its trial cashier- and checkout-free store uses "Just Walk Out Technology" to track items that have been lifted from and returned to the shelves, monitors the virtual cart, and then charges customers accordingly. Like similar efforts in the past, Amazon Go also highlights the firm's behemoth retail ambitions-and its potential to drive disruption further.

Adding more to the customer's shopping basket will also give Amazon more data

If Amazon can tie its existing customer accounts to the people who purchase at Whole Foods, Amazon will be able to support all aspects of its business by utilising the data to improve sales performance and advertising across its website or apps. "Just Walk Out" technology is a potential longer-term extension of this strategy, but the Whole Foods deal will provide Amazon with more immediate short-term gains.

Amazon's competitive threat continues to spread

Amazon is often viewed as a competitor alongside other leading technology players like Apple, Facebook, Microsoft, and Google. While it does provide services in many of the same categories as those tech giants, Amazon's competitive threat, however, spreads much further-which should stoke fear, if not admiration and awe, into many a rival's heart.

For more information on this and related topics, visit our Media & Advertising research service.

Qingzhen (Jessie) Chen is Senior Analyst, Advertising Research, within the IHS Technology Group at IHS Markit

Also contributing to this piece is Jack Kent, Director for Operators & Mobile Media, likewise with the IHS Technology Group at IHS Markit

Posted 23 June 2017

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