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Amazon’s Whole Foods Acquisition: Motives

 3 min read / 

Taking only 73 days to complete, Amazon’s acquisition of Whole Foods was the fastest in US history (of those greater than $5bn). The Federal Trade Commission recently suspended its investigation into whether the takeover would lessen competition, paving the way for the biggest retail deal of the year so far at an approximated £10.7bn.

So what exactly are Amazon’s motives in the colossal deal?

Whole Foods – A Strong Brand

Whole Foods is a huge supermarket chain that only sells food without artificial preservatives, colours, flavours, sweeteners and hydrogenated fats. Based on 2014 revenue, it is the 30th largest retailer in the US, and has built a strong brand image. This perhaps is a major short-term reason for the takeover as Amazon can profit from the stores as they are, before implementing their own ideas as this article will later demonstrate.

AmazonFresh

By acquiring 440 US shops in prime locations, the distribution network for Amazon’s grocery delivery service – AmazonFresh – should be strengthened. Analysts at Bernstein expect that the shops that Amazon gain will ‘no longer look like stores in 5 years time’, highlighting the clear intentions to bolster the distribution network. Despite being available in some US states, London, Tokyo and Berlin, the rollout of the service has been much more gradual than expected; the revitalisation of the distribution network comes at a favourable time.

This is also likely to be Amazon’s primary reason for the acquisition with AmazonFresh Pickup, a service that allows customers to pick up groceries 15 minutes after ordering, being introduced in March. The deal will certainly help scale up the service and improve the selection of items available for customers.

Negotiation Power

A weakness in Amazon‘s spell as an online shopping giant is the grocery aspect of their business, and the takeover will almost certainly bring about a major improvement in  market share in the sector; the ‘market power motive’ is indeed a reason for the deal. This increased dominance in the sector would echo the effects of their power in the publishing industry, where the company can negotiate much lower prices from publishers who need their products available on Amazon. Cutting costs and offering competitive prices to consumers has been the primary strategy for Amazon since its birth 20 years ago, and this deal definitely seems to follow along the same lines. Amazon has already cut in-store Whole Foods prices, and further price falls are promised.

‘Amazon Go’ Stores

The company announced plans to create ‘Amazon Go’ stores where no staff are required on site; instead, there would be an autonomous experience for customers. This would indeed follow the cost-cutting focus of the online shopping giants, through rationalisation whereby no staff at the shops would be needed. Acquiring Whole Foods would provide physical sites to put the idea into practice quickly. Having already opened an Amazon Go shop in December 2016 for employees and analysts expecting another store to be opened this year for the general public, this also seems like a major reason for the takeover.

The Verdict

Amazon’s acquisition seems to be smart business: diversify the business by both expanding and strengthening the grocery side of the business – a counter-cyclical, long-run strategy that looks likely to pay off.

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