When “Experts” don’t know anything

In case you lived under a rock and don’t check LinkedIn, Amazon bought Whole Foods. I know – incredibly hard to find it when literally every third news feed was about this. I get it – it’s unique, different, and a big merger. While I don’t shop at “Whole Foods” (aka Whole Paycheck), I understand some of you might and so you have a personal interest – and many questions.

Asking questions is fine – it’s how we get answers. The problem is now comes the week after many ‘experts’ have had a chance to draft articles to look knowledgeable and important. The sad part is they don’t. I’m not saying they are not educated – in fact some are highly educated and skilled. But as of this morning Amazon hasn’t given a reason for the purchase according to the national news I was listening too while getting ready for work and even their business reporters were speculating on why the merger. Point is its speculation – not fact. These experts may be right, but it’s not the reason until its expressly stated it’s the reason. I am pretty sure Bezos will post a reason why and talk about synergies and common competencies and other corporate speak – but at the end of the day, no one knows for sure. However, many ideas are tossed around so let’s go through some of the more popular ones and how it could be or not be the reason.

Amazon is looking to enter the B&M business model with an established footprint

For this idea, Amazon is looking to compete with Walmart on their established turf. They want a series of stores in which they can use to compete in the market in which people make purchases outside of online transactions. In one sense it makes sense – Whole Foods is in like 46 states and most major metropolitan areas. It would let them get started with a bang.

I don’t think this is the necessary answer, though there is some truth in the argument. If Amazon was to attempt this without acquisition, it would need to purchase land and build or capitalize on existing lease opportunities to start up and expand. Problem here is if they did it, they would be paying a premium. Like Walmart and HEB, they would first need to get into the real estate trading business in which they would need to consistently buy, sell, and hold plots of land either directly or through shell companies in order to avoid speculators inflating land prices. After all, Walmart opens a store and commercial land value skyrockets near it because Walmart will drive traffic to that area. HEB plays the ‘land game’ simply to position itself either for further growth or secure land at a reasonable price thru manipulation (they sell, everyone sells and prices crash then they sweep in and get the land they want). In addition, Amazon would need to hire and train an entire company full of new employees on their vision of customer service and deal with the pains of growth in this regard. Finally, there is no telling if the market can absorb additional competition and adds risk to this expansion. All of this lends to the thought that Amazon could buy a company and jump in running from the start.

Amazon is looking to expand their Amazon Fresh business line with a localized distribution network

To me in a supply chain point of view, this makes tremendous sense. Again Whole Foods is positioned in high value neighborhoods which would be the target market for Amazon Fresh. Thought would be to capitalize on the retail space and use these locations as ‘mini-hubs’ for local distribution to push their groceries out in a shorter lead time than out of a warehouse in a warehouse district travelling to a local neighborhood.

The problem with this idea (though logical) is Whole Foods isn’t a Kroger or Walmart. Whole Foods is known for high end, typically overpriced organic food items. As such, unless Amazon wants to launch “Amazon Organic”, someone is probably wanting to by their Kraft Mac & Cheese and Doritos. Both items are not generally known to be the bastion and cornerstone of a healthy dietary lifestyle. So Amazon would be facing a problem – take everything that made Whole Foods, Whole Foods and scrap it (and thus any brand recognition for it) to be another Kroger or Neighborhood Walmart. I am not saying it can’t be done, just seems to be the wrong candidate to purchase for this solution.

Amazon is looking to expand their SCM capacities which Whole Foods can offer

I have to credit a contact of mine for this one and seen it elsewhere now as well. The theory is Whole Foods has many trucks and trailers and these could be integrated into the Amazon Supply Chain for cold storage and transit. It does make sense since one of the largest logistics issues for previous attempts for food delivery was spoilage (after getting people to use your service).

Here is the problem with it – there are better targets out there for this. For example JB Hunt is rumored to be in talks with Schneider Trucking. Why not look at JB Hunt or another trucking company? Amazon bought a few trucking firms for their business a few years ago so it’s not unheard of. Now if we consider cold storage and few other factors, it starts making more sense, but even then Whole Foods doesn’t seem like the BEST solution of the opportunities (sorry Alan).

Amazon found a bargain and bought it

I think there is some truth in this. Amazon is not stupid and if they could purchase an undervalued asset and improve its efficiencies it could be a great revenue source. In addition it’s a high value brand that opens up Amazon’s marketing potential to premium markets.

There seems to be a problem with the synergies and culture of the organizations on the surface with this idea. Amazon is known for customer service and plays off the value matrix where Whole Foods comes off as the “premium” pricing strategy. Example of this is Amazon wants to dominate markets where Whole Foods never came off as wanting to be the largest grocery store chain in America but to have the highest margins. Whole Foods is great if you are single or have an excess of disposable income; however, if you have a family a Tomato is a Tomato to a large number of people. Therefore they don’t find any value in a 20% excess margin over say Walmart.

Bezos really likes Whole Foods

Since I do not personally know the man, I cannot really comment either way. But it wouldn’t be the first time someone loved a company so much they bought it (Remington or Harry’s Razors). It’s odd, but if you’re a billionaire with a ton of cash you can be as odd as you want to be. Look at Howard Hughes and his quirks – he even got a movie about himself with Leonardo DiCaprio as the main star.

Bezos wants to diversify his business portfolio

To me, this one makes the most sense because he has done it before. He purchased The Washington Post and there are rumors he has his eyes on the New York Times as well. Most investors wouldn’t look at a newspaper as a great investment, but to Bezos it might be a steady reliable source of cash or his planning on becoming the next Rupert Murdoch. Even I diversify my investment portfolio with stocks, bonds, and assets like real estate.

So why do experts comment without facts to back their conclusions?

My opinion is that it’s an ego thing. It’s not like they have an ego (some might not) and need to be more superior, but they don’t like not having the answers. So they apply assumptions to the situation and think that is the reason why something got done. After all, they are the ‘experts’ and somehow not having the answers is considered a ‘bad thing’. In reality is it’s a good thing because it can teach you about the problem.

Think about this – what if Jeff Bezos decided to buy Whole Foods simply because he could? Maybe the CEO is a friend of his and he wanted to help out his friend and said “Sure why not?” After all, I have invested money in some of my friend’s businesses (not much) not because I thought the idea was great but simply because it made them happy and a thing that friends sometimes do (after all who am I to say you dream is stupid if you believe it). Bezos can do this on a very significantly larger scale than me.

Point is until Amazon says why it’s all speculation. It might be something completely different or a combination of many things I listed. Where I think the disservice comes is these experts fail to realize they are applying false logic to the problem. We all think you need to have a good reason to do something. Heck in college I used to attempt some meetings on social issues not because I believed in the social issue but “man that girl that is interested in me is hot and I wanted to be around her” moment. We all make decisions without thinking much – this might have been that moment, I don’t know.

There will be a case study on this

I rest in the comfort of knowing that in the future, there will be a case study on Amazon buying Whole Foods and the impacts it had afterwards. Even conclusions gleaned from the case studies don’t always match the truth. Take the examples of "New Coke" and "Marlboro Friday". What people think isn’t always what the impact was.

For New Coke it’s commonly viewed that it was ultimately a way for Coke to change the formula of the original Coke without having to take a market hit. Of course as history shows there was a massive boycott and damage to the Coke brand that depending on your side of the argument they may not have yet recovered from. However, if you peel back the onion you see that if that was the plan (be able to recover off a controversy) there was a ton of better ways to do it. They could have slightly altered the formula over time from Sugar to Corn Syrup and achieved the same results. So comparing that to the new Coke fiasco, which made more sense? I conclude its was a stupid marketing move based on faulty market intelligence and focus groups.

On the other hand, many schools teach Marlboro Friday was a failure for Philip Morris. They teach Philip Morris gave up and surrendered to price competition over the positioning of their products. Reality was much different. Cigarette prices at the time were all over the board depending on the brand, size, and category. So PM USA said “No” to this, reduced price (once) and consolidated the categories to 2 price points – Premium Brands and Discount Brands. If failure means you recover all the money you lost and grew to become the largest market share by brand and company, then I think we need to work on definitions. In a business where a 0.1% market share can be a few hundreds of millions of dollars in revenue, this does matter significantly.

Hype Cycle – Lessons to be learned by the AOL Time Warner Merger

For many of you, you might not have ever understood the AOL Time Warner Merger or are even familiar with it. During the time all the ‘experts’ were saying it was the start of a new movement to combine the ‘new media’ with the ‘old media’. It was supposed to usher in an era of on-demand content and limited access content with complete synergies for both parties – Time Warner properties would be enhanced and worth more and AOL would pick up more subscribers. The internet was supposed to be keywords on AOL because they’d dominate the ISP world and Time Warner would dominate content with multi-media opportunities. Many years later, AOL and Time Warner divested and went their separate ways – neither worth the value they once were with AOL pretty much an afterthought. How could nearly every expert be so dead wrong?

Hype.

It was a self-feeding frenzy of hype. Much of the items they were talking about where not possible to much of the audience of AOL. They were dial up and streaming never took hold till broadband internet was affordable to much of the public which had almost nothing to do with the technology capabilities and offerings of AOL. Live streaming was not able to handle the bandwidth of such a task because compression was in its infancy – Remember we are talking of a time in which a webcam that transmitted 1 frame a second was considered ‘advanced’ and audio was ‘skippy’ at best. Over-hyped promises and underwhelming results did the merger in. While much was done in support of the merger by the companies, it’s not much different than the Whole Foods Amazon merger.

The Whole Foods merger is complete hype. The difference is Amazon isn’t doing it – everyone else is. Some people think everything Amazon does is golden. Reality is Bezos admits much of the 'success' of Amazon is about as golden as a turd. His idea is they try new things and do it. He expects most to fail, but those that succeed he hopes overtake the losses on the failures. AWS was successful but could have bombed. Logistics is still in the air, but could bomb – especially if they keep being vocal about replacing their current suppliers. The Amazon Smartphone was a bomb. Whole Foods could bomb – it varies on what they attempt to do with it.

With that and in the famous words of Public Enemy’s Chuck D – Don’t believe the hype.