Amazon’s Whole Foods Acquisition: The Losers

In late June, the digital retail giant announced its acquisition of Whole Foods. When the news broke, the internet held its collective breath for a moment: what does this mean for the retail food industry? E-commerce? Food subscription services?

While there’s been a lot of hype about which companies will fail, which industries will require overhaul, and which IPOs have been “destroyed,” the truth is that we have yet to see “losers” in the face of this new Amazon deal. It’s not old enough to point, definitively, to the writing on the wall…but there are a few groups we should be watching closely, just in case.

Grocery stores

  • Amazon, along with the entirety of the e-commerce world, has long been a threat to brick-and-mortar business. While the Borders chain struggled once the online bookseller became a behemoth, it was the release of the Kindle and Borders’ inability to compete that sent the retail chain under. Critics of the Whole Foods acquisition are concerned similarly for the grocery store world: if everyone can get everything they need from an Amazon warehouse, how will these brick-and-mortar stores be able to compete? Additionally, Amazon runs all their services on a zero-profit model: Whole Foods used to be considered “Whole Paycheck” because they needed to turn a specific profit margin on their goods. Operating on an Amazon-driven zero-profit model, think of all the ways Whole Foods can win business away from other grocery stores who don’t have that luxury.

    The upside: Amazon’s newly launched service Prime Now partners with grocery stores like Sprouts. It will likely fold Whole Foods into that service as well, and could potentially bring in other grocery partners to do the same. The zero-profit model is scary for grocers, as the smaller stores can’t possibly compete with that in the current system, but they may find a savior in delivery services like Instacart. Instacart possesses the technology that grocers don’t have in order to be able to compete with services like Prime Now. Brick-and-mortar stores could be kept alive and competing by grabbing hold of technology partners like this one.

Meal subscription services

  • This recent acquisition launched the ringing of a thousand bells and a thousand more cries heralding the demise of subscription services like Blue Apron. It was said that the marriage of the two companies completely destroyed Blue Apron’s recent IPO, sending the stock price into a tailspin from $15 to $17/a share to only $10. While Amazon does not currently have a rival service, it’s not hard to believe that they could launch one that would be the death knell to the once-hot service, as well as all other services like it.What these amateur coroners won’t tell you is that Blue Apron was already in trouble to begin with…and it had very little to do with Amazon. While the start-up even managed to turn a profit in one quarter, customer growth had begun to plateau long before the IPO. Cost of customer acquisition has been on the rise, and the customers that remain loyal to the service are spending less. While Amazon may have landed a blow, it was hardly a first-round knockout.The upside: While Blue Apron may have begun to stagnate in the last year, they are still surviving, along with services like Hello Fresh, whose own forecasted consumer spend balanced out between customers planning to spend more and those planning to spend less, and that percentage was still higher than Blue Apron’s own. The real question will be surrounding the novelty of the service: how much longer will customers continue to pay large mark-ups on meals—mark-ups akin to dining at a restaurant—simply for the convenience of chopped and measured ingredients? It remains to be seen.

Delivery services

  • It seems, with Amazon’s delivery service Amazon Fresh, coupled with the new launch of Prime Now, that Instacart could be the real loser. Instacart, offering $5-10 delivery fees and 2-hour delivery timeframes, was a game-changer for those looking for the added convenience of avoiding the grocery store altogether. Prime Now, however, also offers 2-hour delivery, on top of eliminating delivery fees for Prime customers altogether. In addition, Instacart’s biggest grocery partner is Whole Foods…now owned by what could be their largest competitor. If Whole Foods moves away from Instacart in favor of Amazon, the service could be in a world of hurt.The upside: Alex Mittal, an early investor in Instacart, said himself that he believes the acquisition actually spells better business for the delivery service. Even if Whole Foods goes away as an Instacart partner, the service can likely count on new grocery partners reaching out to them to avoid going out of business in competition with the online retailer. This acquisition could make Instacart obsolete…but it could also spell bigger business than ever.

Amazon itself

  • Wal-mart, Amazon’s largest competitor, has begun encouraging their own product partners to move away from Amazon Web Services as an e-commerce platform, in favor of Alphabet, IBM, or Microsoft’s Azure. In addition, the powers-that-be at Oracle have announced an intention to create a platform in competition with AWS. As Amazon appears to close in on these software giants, many of them—to include their biggest retail competition—are pushing back to remind Jeff Bezos just how big they are.

    The upside: Though Wal-mart is suggesting a move away from AWS for its clients, it’s not currently mandating a switch. Amazon’s real concern should be Oracle, but the development of such competitive software is still down the road; Amazon can get out in front of it if it’s really concerned.

Customers

  • In a free market, how do customers lose? Simple: Amazon launches services like Fresh, Prime Now, and additional features to include meal subscriptions and restaurant delivery, a la Blue Apron and Grubhub, respectively. They keep the cost for entry minimal, if not completely free. The competition fades away into obsolescence, leaving Amazon the lone gladiator on the field. Then, slowly but surely, they start charging premiums for these services…because where else will you go?

    The upside: Even if that happens, you can bet that other major companies will jump on the opportunity to engage in competition with Amazon. No one is just going to leave all the dollars on the table. We may pay a premium for the convenience, but it’s highly unlikely that one behemoth monopoly will every truly run all of our commerce needs.

It’s simply too soon to tell what Whole Foods acquisition really entails for competitors inside a variety of industries. For companies who could be affected, the important thing will be to remain vigilant and try not to get on Amazon’s bad side, for the time being. In a free market, it’s not required to make competitors, enemies. Learning how to partner for the best of business means potentially having one’s cake and eating it, too.

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Written by Danielle Bilbruck

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