Why is Amazon’s Whole Foods Acquisition Important?
With Amazon wanting to get its claws into the physical retailing market, a lot of questions have stemmed from their recent acquisition of Whole Foods. Today, we’ll look at what’s happened since the acquisition, along with its current and potential effects on ecommerce and packaging.
Earlier this year, natural food store Whole Foods was spiraling before they were bought out by retail giant Amazon. Although the supermarket chain appeals heavily to a consumer base that increasingly prefers organic produce, the price tags were ultimately driving people away. Competitors like Kroger, who offered organic food at around 15 percent less on average, were drawing Whole Foods customers in droves. Whole Foods had lowered their prices a bit in response, but it appeared to be too little too late. Their nickname “Whole Paycheck” was there to stay.
In the nick of time, they were swept up and stabilized by the almighty hand of Amazon. It was a perfect convergence of need on the parts of both companies: Whole Foods needed a rescue and Amazon needed to expand its grocery network and obtain physical locations for the sake of distribution. So, to the tune of almost $14 billion, the deal was sealed, and Amazon had boots on the ground.
It’s easy to see why this is big news — there is almost always more to Amazon’s moves than meets the eye. It likely means a significant foray into the grocery industry, and when Amazon comes into a market, no one is immune to the effects. It’s possible that they want to transform their newly acquired locations into something akin to the cashierless grocery store they’ve been testing in Seattle, where customers walk in, grab their food, and walk out again. Whole Foods’ reputation as a purveyor of top-quality natural produce combined with Amazon’s notoriety as the undisputed king of efficient commerce promises to be a potent combination.
We in the packaging industry are paying rapt attention as well because Amazon makes up a massive percentage of the items that are shipped nationwide on a daily basis. Right now, it takes a lot of packaging material to send these goods where they need to go — especially so if they’re time- and temperature-sensitive, like perishable food. When they have access to a sprawling net of physical locations, it could completely change the way Amazon stores and ships their products.
From traditional grocery to shipping companies to ecommerce, news of the acquisition has caused no small concern among everyone involved. The implications are far-reaching, and we’re waiting to see how competitors respond, the demographics they target, and what shape the Whole Foods franchise will take when the dust has settled and they are firmly a part of the Amazon brand.
What We Know
It’s now been three months since the merger announcement, and we’ve seen some of the earliest indicators of Amazon’s plans for whole foods. After finalizing the deal in late August, their first move was to slash prices by up to 43 percent. This opening salvo of savings showcases a clear intent to go after retailers that had previously given Whole Foods a run for their money like Amazon’s eternal nemesis, Walmart, and the aforementioned Kroger.
It had an immediate effect, as stock prices for Walmart, Target, Costco, and Kroger immediately fell by 4.7 percent, 5.1 percent, 7.2 percent, and 9.2 percent, respectively.
Image source: KING 5 News
Amazon didn’t acquire the grocery chain to slash prices and profit, however. In fact, I’d be surprised if the profit from Whole Foods (or what little it was raking in by comparison) was much of a driving force for this deal at all. Knowing that Amazon isn’t ever interested in small measures, it’s likely that they’re much more interested in driving mass traffic to these new locations and heavily publicizing their newly augmented grocery brand.
If they’re planning a serious move into the grocery industry, the most valuable asset for them right now is attention. By cutting prices for a chain widely known for quality produce at a cost that often became a barrier, they’re removing the only barrier stopping many consumers from shopping there. If they can bring prices to a competitive level, Whole Foods’ reputation will ensure that shopping there becomes a natural choice for customers — in every sense of the word.
The Retail Effect
In response, competitors already lowering their prices as they attempt to maintain their edge. On September 8th, Target announced that they had reduced their prices on thousands of items, from “cereal and paper towels to baby formula, razors, bath tissue and more.” They didn’t acknowledge it, but the timing of such sweeping price cuts so soon after this merger went into effect is extremely suspect. They’re not the only ones, as Walmart and others have followed suit.
These corporations know that if they don’t push back against Amazon early while they’re just moving in, they’ll soon be fighting this war on a new front — and not in their favor. Until now, they’ve been mostly fighting in Amazon’s territory: the world of online retailing. This time, however, they’re defending their brick-and-mortar home turf. If Amazon proves it can outplay corporations like Walmart and Target in the realm of physical retail, it doesn’t bode well for the old guard.
By lowering Whole Foods’ prices, Amazon is also targeting the much-coveted millennial demographic. A generation that is as frugal as it is health-conscious was only being held back by price tags. CNBC quotes Credit Suisse analyst Robert Moskow: “The consolidation of [Amazon and Whole Foods] is likely to accelerate the trend we have already seen among millennial consumers who have rejected traditional Big Food brands in favor of more authentic, trendy offerings.”
Amazon is precisely what Whole Foods needs to break through to millennials, says Forbes. They’ll be able to capitalize on the organic, fair trade, and enthusiasm that already exists within the Whole Foods experience while using their resources to fill in the shortcomings that exist. For example, Whole Foods has been behind the curve technologically, especially regarding home delivery. Home delivery is the entire business plan for AmazonFresh, and it’s likely that they’ll incorporate that into their version of Whole Foods.
This, coupled with a simple and intuitive online shopping experience and loyalty/subscription system means that Whole Foods will fit the bill well for younger shoppers. Control over that demographic has historically been a contentious issue between Amazon and Walmart. Now that Amazon owns one of the trendiest grocery franchises and is making it more accessible than ever, they’re hitting Walmart where it hurts in rapid succession.
What Does It Mean For Packaging?
The home delivery issue brings up a host of other questions in the realm of packaging. Since Amazon now has access to hundreds of potential fulfillment centers, they may be able to change both the form and the amount of the packaging that they use.
Right now, a lot of material is involved in making sure goods get from point A to point B. They travel long distances, so retailers like Amazon are forced to use boxes within boxes, and keep sensitive items cold using dry ice packs. Cities are becoming more congested, and it’s getting harder to ship things on time without alternative methods of delivery or local hubs, especially when more consumers expect same-day delivery for groceries. This is where Whole Foods comes in.
After the deal, Amazon owns hundreds of locations around the country that it can use not only to ship grocery orders a much shorter distance but to enable consumers to come directly to them and shop physically at a nearby location. For packaging, this could mean lighter, smaller, less resource-intensive bags and insulators. It’s much easier to keep something cool on someone’s fifteen-minute commute home or a short delivery drive than it is between cities.
In an interview with Packaging Digest, Scott Deutsch, President of Erhardt + Partner, talks about the likelihood of Amazon creating its own climate-controlled delivery vehicles specifically for grocery order fulfillment:
“For Amazon, I expect it to eventually design a custom vehicle, similar to what the United States Postal Service (USPS) has done. These branded vehicles will account for dry, chilled and frozen goods. Since products will all be local, delivery routes will enable less traditional box packaging. Consumers would be quite comfortable with the same shopping experience they are familiar with of the grocery bag. These bags would provide greater cross-selling opportunities by using the bag real estate for advertising and promotional benefits.”
Overall, it appears as though we’re about to step into a future of omnichannel grocery shopping, spearheaded by your local Whole Foods and Amazon. We’ll be given the option of either an extremely streamlined grocery store experience, or fast and easy delivery, according to our location and preference. Packaging will likely follow current trends, becoming more sustainable and less resource-intensive as consumer demand drives innovation in that direction.
Much of the uncertainty lies in how the competition will respond. What franchises like Walmart will do to maintain a hold on their brick-and-mortar empires will define much of what is to come for the grocery industry. One thing is certain: they’ve got a real fight on their hands.