Marrying Amazon and Whole Foods: Balancing Separation and Integration

Sanjay Khosla and Mohanbir Sawhney

Imagine a hard-charging, aggressive, tech geek marrying a health and wellness-obsessed conscious capitalist. What should this union look like when they both live under one roof? Should the two companies be kept separate or should they be integrated? Should Amazon absorb Whole Foods and make it a delivery, pickup and browsing destination for its vast e-commerce empire? Or should it keep Whole Foods at arms-length to preserve the culture and the customer relationships that the upscale grocer has carefully built?

The answer is yes. And yes. We believe that Amazon needs to integrate some aspects of its business with Whole Foods while keeping other aspects very separate. Too often, integration versus separation in acquisitions is seen as a “black-and-white” decision. But black and white are extremes. The secret is to find the right shade of gray in between. Our take – integrate the aspects of the business that offer competitive advantage through economies of scale and separate the aspects of the business that offer competitive advantage through customer intimacy. The key to making the marriage of Amazon and Whole Foods is to strike the right balance between mindless integration and hopeless separation.

Integrate the aspects of the business that offer competitive advantage through economies of scale and separate the aspects of the business that offer competitive advantage through customer intimacy

A business can be viewed as set of assets, capabilities and relationships that have been built up over time. Let’s look at Amazon and Whole Foods through this lens. Amazon has built unmatched capabilities in logistics, analytics, data infrastructure and automation. It has also built a powerful base of customer relationships through its Amazon Prime program, which is estimated to have 80 million members, almost 60% of its customer base in the United States. At its core, Amazon is a data, logistics and customer-centered company. On the other hand, Amazon lacks physical points of presence and it has struggled with the online grocery business with its Amazon Fresh program.

On the other side of the marriage, Whole Foods has created a powerful brand image centered around organic food, conscious capitalism and a strong commitment to local communities. It also has a loyal base of customers who love to shop at the beautifully designed stores featuring fresh, organic and local produce. But Whole Foods is struggling with competition from much larger players like including Costco, Kroger and big-box retailers like Walmart and Target. As organic food becomes more mainstream, competitors have ramped up their organic offerings and are able to offer a “good enough” experience at much lower prices than Whole Foods.

These assets and capabilities can be categorized into two groups – those that benefit from economies of scale and those that benefit from customer intimacy.  Interestingly, Amazon leads in the scale-sensitive assets and capabilities while Whole Foods leads in customer-intimacy centered assets and capabilities. This bifurcation is the key to deciding what to integrate and what to separate. Amazon’s scale-sensitive assets and capabilities include distribution centers, logistics capabilities, supplier base, analytics, store automation and a vast store of customer data. Whole Foods is weak on most of these dimensions, except for its unique supplier relationships in organic foods. So these aspects of the business should be integrated as quickly as possible. Amazon should integrate the back-end of Whole Foods’ business with its back-end so that the combined entity can benefit from even greater scale in logistics, procurement and IT infrastructure.

On the other hand, the success of Whole Foods over the years is rooted in its unique culture, its pleasing store design and its deep relationships with local and organic suppliers. Customers love the experience of shopping at Whole Foods. Costco and Walmart may offer organic produce, but they can’t hold a candle to the shopper experience that Whole Foods provides. Whole Foods also owns prime real estate in upscale neighborhoods across the United States and its stores have valuable storage capacity for frozen products. These are aspects of the business that Amazon should keep separate and distinct. It should retain the Whole Foods brand (perhaps call it Amazon Whole Foods), the theater-like shopping experience, the dedicated Whole Foods employees and the vast base of small-scale suppliers of organic produce. Amazon should make Whole Foods even more like the Whole Foods of the past – an upscale store with a delightful shopping experience that is differentiated from the mainstream grocers who are barging into the organic food business.

While some aspects of the business should be integrated quickly while others should be kept separate for a long time, there are other aspects of the business that should be gradually converged over time. Perhaps the most important in this third category is the online grocery business and store automation. In the online grocery business, Amazon should combine its data and last-mile delivery skills with the valuable real estate of Whole Foods to create an unmatched pickup and delivery service for fresh produce and meat. It should also leverage its cutting-edge Just Walk Out store automation capabilities to create a “automated store within a store” in Whole Foods locations. The Whole Foods stores will then offer a combination of an extremely high-touch and an extremely high-tech shopping experience. The physical design of the stores will also need to evolve over time to separate the storage, pickup and delivery functions of the online business from the space dedicated to the in-store shopping experience. Some space in the stores may also be dedicated to display of non-grocery Amazon products that can benefit from demonstration and display, such as Amazon Echo products.

Amazon and Whole Foods will need to learn together how to create the best blended experience for online as well as in-store shoppers. To do this well, Amazon should infuse a culture of experimentation within Whole Foods so that it can test and learn in areas like home delivery, store checkout and store layout. This will require aligning the entire Whole Foods team behind one dream and one plan and ensuring role clarity on who does what by when.

If Amazon can strike the right balance between integration and separation of the two businesses, it can create an omni-channel grocery shopping experience that no competitor can match. The combined entity can keep prices low while preserving the high quality of the in-store experience. It can also crack the code for success in the online grocery delivery business – something nobody has quite figured out yet. The North Star for making these choices should always be the customer experience and customer obsession – something that Amazon and Whole Foods have in common.

If Amazon can strike the right balance between integration and separation of the two businesses, it can create an omni-channel grocery shopping experience that no competitor can match.

In a marriage, both partners need to change and evolve as they try to build a life together. This is what Amazon and Whole Foods need to do – focus on integrating the aspects of the business that unite them as a couple while separating the aspects of the business that define them as individuals. Done well, this can be a match made in heaven.