Earlier today, Amazon announced that it has agreed to buy Whole Foods for $13.7B, supercharging Amazon’s food effort. The market for groceries is roughly $500B, of which Amazon will immediately own $15B. Amazon is expected to do a total of $180B in total retail sales in 2018, but could exceed that number as it builds on its grocery platform.
In our piece on The Future of Retail we identified three viable categories in the future of retail: 1) Online Shopping; 2) Automated Brick & Mortar; 3) Empathic Offline Retail. And we think Amazon gets it:
They’re playing the long game, aggressively denying short term gains to establish itself as the owner of the operating system for commerce in the future. But Amazon also gets the fact that not all retail is best suited for the internet, which is why we’ve seen them dabbling in automated brick & mortar concepts.
With its purchase of Whole Foods Amazon is taking another big step forward in its attempt to lead in all three categories.
1. Online Shopping. Check. Amazon is already the clear leader.
2. Automated Brick & Mortar. The Whole Foods purchase positions Amazon to experiment with concepts like Amazon Go in a big way, pushing forward its efforts in automated brick and mortar. As we wrote previously:
This automated model works best for commoditized goods from large chain retailers and grocery stores where price is the primary selling point. Categories in which personalized service, a unique experience, and technical expertise matter less. In these commoditized categories, reducing human overhead means lower prices, which will help retailers defend their territory.
Amazon Fresh was previously available in close to 20 cities in the US. Whole Foods gives Amazon an additional 456 brick & mortar locations from which it can test automated concepts.
3. Empathic offline retail. Whole Foods is arguably one of the best grocery experiences built for scale, leveraging three uniquely human capabilities: creativity, community, and experience.
When it comes to integrating Whole Foods into Amazon’s current efforts, we see the first step as the addition of 1-hour delivery, through Amazon’s Flex network, from Whole Foods. This is likely to take 1-2 years before it is implemented across the entire Whole Foods store base. Next, we see the Amazon Go concept being integrated, although it will be some time before it’s rolled out on a larger scale. We don’t expect Amazon Go to be widespread until at least 2021.
The degree to which Amazon succeeds in each of these three categories is the degree to which they will be the dominant operating system of retail in the future, and they are well on their way. And Amazon sees the synergies between these categories. Whole Foods’ physical assets (real estate, warehousing and distribution capabilities, etc.) will accelerate a retail flywheel for Amazon to expand their brand as the everything store, available everywhere consumers think to shop.
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