TGIF – The Amazon Effect

The big news of the day, the week and perhaps the decade for retail is Amazon buying Whole Foods. It looks like a really compelling fit. Amazon needed help cracking the urban retail market and Whole Foods needed help in pretty much everything. Amazon has a disruptive business model. It has had the greatest influence on how people make purchases today. The Jeff Bezos led company started off selling books. Amazon has shaken up every aspect of retail. Today they just torpedoed the grocery business.

Amazon the Disruptor

Amazon sent shockwaves throughout the North American retail chain with news it is buying Whole Foods, in an all-cash deal. It will be the biggest deal in Amazon history. It will be the biggest deal in the history of the $800 Billion grocery business. With this deal, Amazon will immediately be the 5th largest grocer in the US. It won’t stop there. It’s going to be a game changer of great proportions. Amazon has built an empire and has proven that it can and will compete with nearly everyone. The Amazon effect has reached nearly every industry. It changed the retail business. It changed the server and storage business. It has changed the logistics, delivery and distribution business. Only Amazon could get the mailman to work on Sunday! Amazon has even disrupted Hollywood, breaking into show business when so many others failed. Amazon won an Oscar this year, the first time for a streaming video provider. The company has been active in original content with Amazon Prime series for a few years.

The opportunities are boundless for Amazon with these physical stores integrated with its web based stores. There is quite a bit of overlap between its existing Prime members and Whole Foods shoppers. Amazon has mastered the study of consumer behavior. It has been tracking people’s purchases and searches for years and know more about people than they perhaps know about themselves. It has so much data and metrics to analyze. Amazon has been an innovator in the artificial intelligence space, and knows a great deal about human behavior and continues to sell people things that they want or need in a very efficient and easy manner. Amazon is pretty good at selling things that you don’t need too…

Amazon is paying nearly $14 Billion for Whole Foods. That comes down to roughly $30 Million per store. The grocery business is a tough business. It’s hyper-competitive. The profit margins are very low. Amazon knows low margin business. It was clear that Bezos wanted to get into the food business when he rolled out Amazon Fresh. But early experiences saw the difficulty of providing fresh food sold over the web. People generally don’t like bruised bananas and moldy berries. Most prefer to see the meat and touch the fruit before purchase. Having Whole Foods stores will enhance the Amazon Fresh pickup model, where you have the option to buy merchandise online and pick it up within 15 minutes. It’s clear that Amazon doesn’t plan to stop here. What Amazon is likely thinking; they just purchased over 400 upper-income area hubs throughout the country to distribute pretty much everything they sell. Competitors be warned.

What does this mean?

We ask ourselves this question all the time. Clearly all retail stores have been struggling, and this will make things even more difficult. Drug stores are on watch too. Amazon could be a huge player in the prescription drug industry and it already thrives on selling dry goods. Warehouse stores like Costco will feel the pressure. But how about this; online food delivery is expected to grow 15 times faster than the restaurant business through the end of the decade. People would rather order meals online and have them delivered to their home than go out to eat these days. Amazon will no doubt capitalize on this trend. There will be more white Amazon vans coming to the neighborhood.

Generally, mega deals don’t work. This one looks like it will. It should be good for consumers but possibly bad for jobs. Amazon will drive already competitive prices even lower. It should bring Whole Foods prices down too. But it speeds up the irreversible trend towards automation. That’s been a job crusher. You know Google and Apple are watching with interest. I saw an interesting tweet this morning which said that a summer job returning shopping carts in the parking lot just became an entry level position in high tech. Perhaps so. It’s the Digital Age.

Have a nice weekend. We’ll be back, dark and early on Monday.

Happy Father’s Day!

– Mike

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