Prime Foods

Amazon had a good week last week.  There were a lot of sales on their various signature products (Echo, Kindle, Fire, etc) in lieu of Father's Day, they launched the Dash Wand with Echo so that you can 'say it or scan it', and they agreed to purchase the Whole Foods grocery chain for $13.4 Billion.  A good week indeed.

It is the Whole Food deal that I want to focus on.  As someone who has spent a couple of decades in a variety of retail positions, from floor sales to manager to vendor rep, as well as some opinions on where automation may take us, this deal raised my eyebrows and got me going, "Hmmm."  With that in mind, I read a few articles, starting with two from the Grey Lady:

• Amazon to Buy Whole Foods for $13.4 Billion
• The Amazon-WalMart Showdown That Explains the Modern Economy

Both articles are worth your time (if you haven't already read them), but the focus of both is too narrow.  They both only scratch the surface of why Amazon might have agreed to buy a brick-and-mortar grocery chain.  Yes, they have been dabbling with physical locations for the last year or two: Amazon Go being one and they now have a physical book store or two.  Yes, they want to take more market share from WalMart.  But to swallow a nationwide chain when they have been spending two decades destroying nationwide chains is a different animal all together.

Why Swallow a Brick

Grocery stores are a close margin business.  Whole Foods has seen profits double that of more traditional markets due to their focus on organic foods which have a higher margin.  However, as other chains have followed suit with their own in-house brands of organic foods, Whole Foods has had to lower their pricing to keep people walking through the door.  This caused some of the investors sitting on the Whole Foods board to get nervous and clamor for changes that then led to this deal with Amazon being made.

Amazon is used to narrow margins.  They have built their reputation on cutting margins to the bone and getting away with it BECAUSE they do not have the overhead associated with that many physical locations.  To have both low margins and actual stores with their power bills and maintenance and labor needs seems to go against how they have been successful.

But there is more to it than that.   Amazon has been messing with physical stores because they know that there are some things that will not sell on-line, or not as well.  Produce is at the top of this list.  Most people want to pick their own tomatoes out of the bin.  They do not trust some 'picker' not to give them the ones from the bottom that are bruised from the weight of all of their siblings on top.  At least, I don't.  That means a physical location.

There is also another thing that Amazon can not get from their websites and that is a deep look at shopper behavior in a store.  Amazon is a data driven company.  They know how long you stay on a product page on their site.  They know what you search for and what you click and what you've bought from them in the past.  They know how to recommend things to you that you might actually buy... on their site.  They do not know how to do that in a IRL store.

With the Whole Foods acquisition, they now get to see that without the pain of building out their own chain of stores.  Before they add any technology of their own to the stores, they will get a granular look at who buys what where through store data and the Whole Foods Market Rewards loyalty program.  Keep in mind that most Whole Paycheck customers are affluent or at least aspiring affluent: people who are willing to pay for perceived quality.  Amazon is then going to feed that into AWS (where they really make their money), compare it with their on-line numbers for similar products and start to make predictions.

First Year Changes

The press has had a field day predicting all kinds of wild changes that Amazon will enact in Whole Foods.  Often in the face of public denial from Amazon:

Drew Herdener, an Amazon spokesman, said in a statement the company has “no plans to use no-checkout technology to automate the jobs of cashiers at Whole Foods and no job reductions are planned.” - Bloomberg 

 I have no special insight into Amazon's thinking, but I do know what I would do in their place.  It would not start at the consumer facing part of the store.  At least, not visibly.  Here's the steps that I would enact:

1. Purchasing Power.  Amazon can exert immense power on manufacturers and suppliers.  They want volume discounts on EVERYTHING.  Even though Whole Foods has an extensive line of store branded products, someone makes those for Whole Foods and Amazon is going to ask them to sharpen their pencils.  They will order more of all of this and we will see it on the Amazon site very soon.  This will help with margin and make this chain more profitable quickly.
2. Distribution.  Whole Foods no doubt has a good distribution network, but is it as good as the one Amazon uses to drop products on our door steps?  I would guess not.  Plugging the restocking models and grouping WF distribution centers with Amazon DCs will allow them to run a closer Just-In-Time model and reduce spoilage, one of the biggest costs to produce retailers.
3. Loyalty.  Market Rewards, meet Prime.  Prime, meet Market Rewards.  These will be connected or combined almost immediately after the deal goes through.  And it will go through.  There is going to be a lot of crossover between these two programs.  Amazon will be able to directly compare the habits of individuals on-line versus physical retail.  What are they buying where?  Why?  How can we capitalize on this?  And that is aside from making it easy to use your Prime account to buy things from Whole Foods at the store.
4. Surveil.  They will add cameras and other sensors to the store.  Not for security, though that will be an added benefit.  No.  They want to watch us walk the aisles.  Where do we stop?  What do we almost buy, but then put back?  What in-aisle information is used and what is ignored?  They will heat map the store.  This will give them the information that they need to make effective changes farther down the line.

I do not believe that Amazon will go after the cashiers and other in-store jobs.  At least not initially.  They may add self-scan aisles of some kind (maybe a bring your Dash Wand check out?), similar to other grocery chains, but more to understand the consumer preference for that experience rather than a labor saving initiative.  Amazon does not know what works for the consumer in a retail store.  They need to learn first and test a few ideas before they make sweeping changes.  At least that's how I would handle it.

Longer Term

Will Amazon automate the heck out of Whole Foods?  Absolutely... if looked at over a long enough time frame.  But they are going to do it right/profitably.  They aren't going to dump a bunch of capital intensive hardware into nationwide chain of stores if they won't see return on it.  That's what they need to understand first.

Then they will start to play.