Why Amazon Bought Whole Foods
The retailer’s $14 billion bet isn’t just about the future of food. It’s about the future of commerce—especially for rich urban consumers.
Amazon announced on Friday morning that it’s buying Whole Foods for just under $14 billion, the retailer’s largest acquisition ever. The purchase holds implications for the future of groceries, the entire food industry, and—as hyperbolic as this might sound—the future of shopping for just about anything.
But let’s not get ahead of ourselves. At the simplest level, the deal represents a straightforward confluence of interests. Amazon needs food and urban real estate, and Whole Foods needs help.
The e-commerce giant has been expanding into groceries and physical locations, including bookstores, ironically working itself back into the brick-and-mortar business that it’s also disrupting. Whole Foods, meanwhile, offers the biggest name in yuppie groceries and a fleet of urban locations, which can double as Amazon warehouses. Meanwhile, the grocer is in a tailspin, its stock price cascading as revenue growth has fallen every year since 2012. Investors had for weeks been pushing the company to sell itself to a larger grocer, like Kroger. That Whole Foods ended up with Amazon is poetic justice, considering that, in 2015, CEO John Mackey said Amazon’s move into grocery delivery would be “Amazon’s Waterloo.” Doubters of Amazon’s strategy can point to the fact that groceries are a terrible, low-margin business. That’s true—almost as terrible and low-margin as e-commerce, where Amazon has already demonstrated that it can hypnotize Wall Street’s myopic financiers, while it spends tens of billions of dollars building a global warehousing and delivery infrastructure for a shopping future that is moving online. In short, Whole Foods was in a free fall, and Amazon is the perfect net to catch it.
That’s the most straightforward analysis. But then again, Amazon always seems to be not just several moves ahead of its competitors, but playing another game entirely—chess versus checkers, as they say—so it’s worth thinking through some of the more long-term, hypothetical implications of this deal.
First, this is about food as a delivery service. Amazon understands that the most important value in American retail today is what’s is technically known as “consumer convenience” and what is commonly observed as “human sloth.” E-commerce is soaring and food-delivery businesses are taking off because human beings are fundamentally lazy and they don’t want to leave the couch to buy stuff. That’s why grocery stores and restaurants are seeing fewer shoppers and diners passing through their shops, as Americans are ordering more of their produce and meals online. A study commissioned by the market-research firm Euromonitor for Blue Apron’s public filing projects that the online market is projected to grow 15 times faster than the rest of the restaurant business through the end of the decade.
In the last few years, Amazon has expanded its online grocery business, AmazonFresh, but it hasn’t quite mastered online groceries the same way it’s mastered books and media. With Whole Foods, which will continue to operate under its own name, an Amazon Prime subscription might operate just like Costco membership. Maybe Prime members would get deals on Whole Foods produce, and they could elect to have the fresh veggies and organic dips delivered to their homes and apartments. The Whole Foods purchase is a $14 billion bet on the future of food that comes in boxes.
Amazon is terrifying for its competitors in part because its low-margin business pulls each industry it dominates into a kind of deflationary whirlpool. If Whole Foods follows the Bezos playbook, shoppers can expect prices to fall, and investors will expect revenue to rise. Indeed, news of the partnership sent grocery competitors’ stocks plummeting. Stocks for Kroger, Costco, and Dollar General all fell more than six percent within the hour. The merger might be even worse news for Instacart, the grocery-delivery service that has had a close relationship with Whole Foods.
Second, this is about Whole Foods as a distribution hub—and Amazon as a physical retail presence. Several analysts have said that Whole Foods’ urban and suburban locations are so valuable for Amazon’s delivery business that the deal could be worth it even if the grocer all but stopped selling food. “Amazon did not just buy Whole Foods grocery stores. It bought 431 upper-income, prime-location distribution nodes for everything it does,” tweeted Dennis Berman, the Wall Street Journal’s financial editor. Amazon is trying to become Walmart—not just an online megalith, but also a physical retail powerhouse with dynamic pricing and stocking strategies—faster than Walmart can become Amazon.
In a way, this strategy continues a pattern I wrote about several years ago, which is Amazon following in the footsteps of the last century’s retail behemoth, Sears. That company rose to prominence with its 500-page “Consumer’s Bible,” which popularized the mail-order business. But in the early 1900s, as families moved into cities, Sears followed, building more than 300 stores between 1925 and 1929 that specialized in the hardware needs of the growing middle class. Amazon, too, rose to prominence with a browsable couch product—its website and delivery service. But the future of its business may be more urban and suburban stores that both hold merchandise for delivery and permit consumers to shop. The future sometimes looks like a familiar reconstruction of the past.
Third, this is about Amazon as a “life bundle,” particularly for affluent Americans. Several years ago, I predicted that Amazon Prime was becoming the cable bundle of the future —an annual subscription to a fleet of diverse services that gave the retail company a dependable revenue stream and a growing, devoted customer base. Indeed, more than half of American households with income over $100,000 are already Prime subscribers, and they spend more than $1,000 a year with it. With Whole Foods, where wealthy families regularly spend $500 a month, Amazon could expect its richest customers to spend thousands of dollars a year through Amazon. As Whole Foods customers are urged to sign up for Prime—and as Prime customers get enticing deals at Whole Foods—Amazon’s penetration of the affluent yuppie market should grow (even as it offers discounts to lower-income Americans).
After today’s announcement, several people on Twitter joked that between Prime and Whole Foods, Amazon may now account for a majority of some urban Millennials’ discretionary spending. What’s not a joke, however, is that Amazon’s life bundle, like TV’s cable bundle, is fundamentally about the merchandizing of convenience, which is often indistinguishable from sheer human laziness. Driving to the movies and parking is a pain, and cable offered several cineplexes worth of video offerings on the couch. Similarly, driving to the grocery store, finding parking, seeking out the produce section, and waiting several minutes in Line 6 is a pain. What’s not a pain? Lying on your couch, watching Downton Abbey on Prime Video, and shouting to your Amazon daemon, “Alexa, I need six heirloom tomatoes and a bottle of extra-virgin olive oil for tomorrow’s delivery.” Choose your narrative: Amazon is winning, because Americans are so harried today they don’t have time to shop, cook, or dine out; or deep down, the human race tends toward sloth, and the company is building a global delivery system on the scaffolding of mankind’s indolent nature.