The analysts were right. Amazon is doing all of the above—cutting prices and leveraging Whole Foods’ locations to build an on-demand food-delivery service. And that on-demand food-and-meal delivery service may be set to take off. A study commissioned by the market-research firm Euromonitor projected that the market for such services will grow 15 times faster than the restaurant business through the end of this decade. And this might just be the beginning. Greg Greeley, Amazon’s head of Prime, is transitioning to a new position overseeing Whole Foods’ integration into the company, CNBC has reported.
It would be a mistake to treat every Amazon announcement as an Amazon accomplishment. On-demand Whole Foods delivery could turn out to be a giant mess. Indeed, Amazon has struggled with grocery-delivery services before, shutting down its Amazon Fresh program in several cities last year. Six months from now, the dominant news story about “Whole Foods Prime” could be a wave of anecdotes about overwhelmed Whole Foods workers in Virginia Beach or Cincinnati, or tales of zucchini that arrived so lukewarm and smushed as to resemble ratatouille. Execution matters, and excellent execution isn’t an inevitability, even for a logistics master like Amazon.
But it would be a bigger mistake to analyze Thursday’s news in a vacuum, because this announcement is bigger than heirloom tomatoes and two-hour delivery windows. In the broader context of Amazon’s ambitions—to build an operating system for the home, to expand into pharmacies and health care, to become a hit-making television production studio—this is the logical next step in turning Prime into the ultimate “life bundle,” a single membership program to bind consumers to every possible commercial need. As Amazon extends into more product areas, it can own both the search platform and the product, so that when a dad says to the smart speaker on his counter, “Alexa, I need brown rice and pork,” the product that arrives is an Amazon-branded box containing Amazon–Whole Foods–branded rice and pork.
This sort of vertical integration is invaluable for Amazon. For one thing, the creation of an on-demand Whole Foods product makes the company’s Prime subscription more valuable. Enriching Prime is arguably Amazon’s most important goal, given the lifetime value of a Prime subscriber. What’s more, as Amazon becomes the top-of-mind destination for not only books but also toiletries, medicine, and chicken breasts, it becomes the first-stop destination for all of its customers’ searches.
And what comes with search volume? Advertising. Indeed, Amazon’s ad business—which includes sponsored ads on Alexa, suggested items on Amazon search pages, and even ad boxes around the internet on other sites—grew 60 percent last quarter, faster than Google’s or Facebook’s, albeit from a lower base. The business is on track to make as much as $10 billion in revenue by the end of this year, or about one-quarter of Facebook’s total revenue in 2017. As Amazon draws more consumers into its orbit, it will also pull competitors into a deflationary cycle: Each time the company enters a new industry, like those for grocery stores or pharmacies, the stock valuations of the sector’s largest companies decline, as investors anticipate that Amazon will pull down the industry’s profits to zero in order to draw in consumers and maximize cash flow.