Thoughts on Why Amazon's Purchase of Whole Foods Makes Big Cents

Amazon announced that it is acquiring Whole Foods for approximately $13.7 billion. Investors in both companies reacted positively, suggesting synergies are expected. Looks look at how this acquisition should create value.

1. Amazon Will Reduce Operating Expenses at Whole Foods. The masterful use of data and analytics to streamline operations will mean that everything Whole Foods does can be re-engineered. The grocery business is low margin, so getting cost out will really help Whole Paycheck get back to being Whole Foods.
2. Amazon Can Grow the Top Line through Digital. Whole Foods customers are already Amazon customers. Going shopping at Whole Foods, why not start shopping at home and pick up your groceries at Whole Foods. The Whole Foods experience can be more exploratory and discovery-based, all activities that will lead to more spending by shoppers.
3. Amazon Has a Lot More Data. Amazon is clearly one of the dominating firms in the mastery of Big Data Analytics. Now, they have historical data on purchases. Enter your Amazon Prime number and get some discounts in exchange for great data on your grocery purchasing habits.
4. Physical Location Matters (to Amazon). Amazon has been on a tear building distribution centers all over America. In crowded urban areas, there is just not enough space for all the boxes. It is a challenge for many apartment and condo buildings. Expect to pick-up or at least schedule delivery of some Amazon shipments from your local Whole Foods, especially in crowded places like New York, DC, Chicago, and San Francisco. Ironically, many retailers are trying to shed location. The prime Whole Foods locations give Amazon a location network with excellent penetration in higher income zip codes, exactly what Walmart and Jet are lacking.
5. Grocery Prices Will Come Down. This is good news to shoppers. Lowering of prices (generally) has been Amazon’s mantra in its approach to attacking industries. It will do the same, gain shoppers, gain data, and gain control over purchasing. Competing stores will attempt to lure Amazon/Whole Food shoppers with lower prices (because that is the only value they can leverage against Amazon's digital convenience to the consumer). The death spiral for many grocery outlets, especially in high income zip codes, has begun. It will make things harder for the producers of goods sold in Whole Foods, too. It will hurt every other grocery store chain. Expect Amazon to reduce labor forces at Whole Foods, leverage bots and automation in many areas. There are lots of winners when prices fall and some losers. The stocks of publicly traded grocery store chains all fell dramatically today.

The 466 billion-dollar gorilla just went out for lunch and bought a 13 billion-dollar snack. Let’s see what it eats for dinner - UPS, FedEx, AT&T Cable?

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About Russell Walker, Ph.D.

Professor Russell Walker helps companies develop strategies to manage digital strategy and harness value through analytics and Big Data. He is Clinical Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University. He has worked with many enterprises and leading marketing organizations through the Analytical Consulting Lab, an experiential class that he founded and leads at Kellogg.

His most recent book, From Big Data to Big Profits: Success with Data and Analytics is published by Oxford University Press (2015), which explores how firms can best monetize Big Data through digital strategies. He is the author of the text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management through business case studies.

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