Amazon’s acquisition of Whole Foods fits neatly with Jeff Bezos’ strategic vision of making Amazon the ‘everything’ store. This latest announcement is in line with Amazon’s unpredictable strategic moves which can take everyone by surprise. Shashank Venkat decodes the e-commerce giant’s latest acquisition and explores its impact on Amazon’s fast growing Prime subscription service.
Last week, Amazon rattled the grocery industry with its acquisition of Whole Foods Markets Inc
valued at approximately $13.7 billion. This new business raises the stakes of Amazon’s long-standing battle with Walmart to become the numero uno grocery store for people in the US, and gradually even the world.
The e-commerce giant had already made clear its intentions of owning a huge chunk of the grocery business when it launched its AmazonFresh delivery service a decade ago. Present in the US, UK, Germany and Japan, the service offers groceries to customers for a small monthly membership fee
. However, AmazonFresh has only met with limited success because traditional shoppers prefer to buy groceries in person, instead of purchasing these items online. Currently, Amazon owns about 18% market share among online grocery shoppers
in the US.
The Whole Foods acquisition is all set to give more legs to the AmazonFresh service. In addition to exposure to Whole Foods’ high-paying customers, Amazon gets access to around 450 bricks-and-mortar stores owned by Whole Foods in the US, Canada and the UK. These physical locations, primarily in upscale cities, can act as Amazon’s distribution nodes and fit with their vision of quick and convenient deliveries. In addition, Whole Foods will give AmazonFresh the much-needed credibility in the grocery space, as the high-end grocer is known for the quality of its products.
Amazon can also use this move to further its experiments in the bricks-and-mortar space. As part of this initiative, the company had recently launched Amazon Go, a prototype store in Seattle. Amazon Go automates much of the shopping process, with shoppers getting a check-out free experience. Using machine learning technologies, shoppers are directly charged from their Amazon account. This uber-cool concept, if successful, can easily be spread across all the Whole Foods stores, pushing shoppers to offload more of their grocery purchases online. This works for Amazon since it makes people that much more comfortable with shopping for groceries online. Moreover, Amazon can use Whole Foods stores to showcase its impressive line of products such as the Amazon Echo, Fire Tablets, Fire TV devices and Kindle.
‘Prime’d for success
The biggest beneficiary of this acquisition will undoubtedly be the Amazon Prime subscription service. With Jeff Bezos focused on expanding Prime memberships, the Whole Foods business will give Amazon access to a premium customer base who shop for organic groceries. Amazon will be able to push better discounts for Whole Foods customers through Amazon Prime, enticing them to subscribe to their service. Add to that, the quick and efficient deliveries or the convenient click-and-collect model, and it becomes an even more enticing proposition for prospective Whole Foods customers turned Prime subscribers. This hits Amazon’s sweet spot – more affluent customers who will spend more time on Amazon’s e-commerce site or app, shop more and drive more revenues for its e-commerce business.
In fact, the success of this acquisition will be the biggest advertisement for Amazon’s flagship Prime subscription bundle. Among the shoppers who do buy groceries online, more than half of those are Amazon Prime members
who have no qualms buying bread, eggs and other perishables online. In that sense, Whole Foods gives a great chance for Amazon to increase subscriptions and total wallet share for Prime.
With Whole Foods, Amazon will also be able to get a lot more insights into the grocery shopping preferences of customers, enabling the company to design better experiences and optimise its operational processes. Also, grocery shopping will increase the frequency of buying on Amazon, another move that plays right into the hands of Amazon with cross-selling and up-selling opportunities.
The Amazon Prime membership fees, although often overlooked in favour of revenues from the giant e-commerce and cloud infrastructure businesses, is also becoming a significant money spinner for the company. Amazon charges $99 a year for Prime subscribers in the US. According to reports
, US has 80 million Amazon Prime members which account for $6.4 billion in revenues. Importantly, Prime members tend to spend an average of around $1,300 per year compared to the $700 spent by non-Prime members. This is significant because the steep discounts Amazon is likely to offer for Whole Foods groceries, can be easily offset by the additional revenues earned by newer Prime members. In fact, taking into account the thin margins in the grocery business, Amazon Prime can become the backbone around which the company generates profits.
From my own experience, ever since I started subscribing to Amazon Prime, I have found myself shopping for daily items online instead of visiting physical stores to pick up items. There is something about the ease and convenience of shopping online that can easily transform physical shoppers to digital shoppers. And if Amazon is able to integrate Whole Foods into its operations seamlessly, it may have just pulled off a grand grocery heist!
What’s next for Amazon?
With its diversified line of businesses, Amazon is quite capable of pulling a rabbit out of the hat. According to some reports
, the company has plans to purchase Slack, a workplace productivity app. Amazon is also in talks to buy Big Basket
, India’s largest online grocer, to expand its rapidly increasing footprint in the country
. It is clear that Amazon Prime will be significant to the future forays of Amazon into e-commerce, entertainment and other diverse services. Borrowing from Derek Thompson of The Atlantic
, the Amazon Prime subscription bundle is all set to become the ‘life bundle’ of the future with its shopping, entertainment and delivery solutions – all rolled into one unique package.