Amazon buys Whole Food: Why?
Read the new CSI blog by Tor W. Andreassen, Director at Center for Service Innovation.
The internet-giant Amazon will take over the grocery upscale chain Whole Food for USD 13.4 billion. Investors are asking: Did Amazon save Whole Food of did Whole Food save Amazon? The issue is irrelevant as the real issue is the disruption of the grocery industry which Amazon now is about to disrupt.
It is true that Whole Food was in decline. As such Amazon with its vast financial muscles, tech understanding and documented innovation power gives the grocery giant new hope. But it may also be argued that Whole Food gives new blood to Amazon. While it is true that Amazon’s market share within e-commerce is 43 percent, it is just a fraction of the USD 750 billion grocery market. This number becomes more interesting knowing that 90 percent of all shopping takes place in a physical store. In other words: only 10 percent takes place online - of which Amazon has 43 percent. Enter Whole Food!
I can see three reasons why Amazon wants to take over Whole Food: Access to brick-and-mortar data, Access to physical stores, learn more about the "real" shopping experience.
So far on-line retailing’s advantage has been access to vast amount of consumer data which they can gather without disrupting the shopping experience. But customers’ responses when shopping at one of Amazon’s seven physical Amazon Books stores indicate that shopping on-line is different than shopping of-line. “Not built for people who actually read” customers say according to the New Yorker when they walk through the many isles of books organized by Amazon’s algorithms in Amazon Books which newly opened in New York at Columbus Circle. From this we can learn that Amazon needs to learn more about customers’ physical shopping experience.
Access to stores
Whole Food’s 400 stores give Amazon a physical presence in 42 states in the US. Some have argued that Amazon will integrate Whole Food into their distribution centers for grocery-delivery services. This may be true if customers would shop all product categories online, which they will not. When it comes to buying food, many shoppers still prefer to touch and feel the product they buy rather than have an e-commerce fulfillment specialist or even a robot do the job. According to Retail Dive, 58 percent of the respondents would prefer a brick-and-mortar to an online store when buying household essentials like groceries. From this we can learn that Amazon needs stores to get into the grocery business.
The “real” shopping experience
Despite a general opinion, the new generations – Millennials and Generation Z - like to shop in physical stores – particularly groceries. What makes or breaks a retailer is the shopping experience. Compared to brick-and-mortars, on-line shopping is two-dimensional no matter how sophisticated its user experience is. On-line retailers cannot compete when it comes to bringing products alive. Service design thinking is a field, employed in a customer centric manner, can transform a physical shopping experience from something mundane to uplifting. Whole Food has a documented track record of doing just that. From this we can learn that Amazon needs to better understand service design thinking in a physical store context.
In summary, through Whole Food Amazon will have a) access to a new USD 750 billion grocery industry requiring physical stores and b) a playground to experiment and learn more about the off-line shopping experience. History has proved that Amazon is a quick learner and fast mover. My prediction is that no retail industry from now on is safe. Amazon will explore them all with a view to disrupt. As with e-commerce, they will take the shopping experience to a new level. Sadly, the problem for market leaders – those who are about to be disrupted – is that they are not ready for this disruption and are often in denial. Like the grocery industry, they did not see Amazon happen.