When Amazon Inc. (AMZN) announced six years ago that it would buy Whole Foods Market for $13.7 billion, the retail world shook.
At last, Amazon would finally gain the means to leap frog from our computers and smart devices into corporeal form. The company would create a new format that married the immediacy of a physical store with the very things that made Amazon such an online colossus in the first place: technological wizardry, hyper-convenience, and unlimited selection of food and groceries that consistently undercut the competition.
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As if on cue, billions of dollars of market value for the nation’s top retailers like Target Corporation (TGT) and Walmart Stores Inc. (WMT) suddenly evaporated that day, leaving executives dazed and bewildered.
“It was the topic of conversation everywhere across the country,” Target CEO Brian Cornell later said. “People are sitting at dinner and asking what just happened and what does it mean?”
The answer, it turns out, is a resounding — not to mention highly anticlimactic — not much. A deal that many thought would transform the U.S. retail industry and send traditional brick-and-mortar retailers to their doom has instead been one giant snooze fest.
Just Another Cog in the Machine
Today, Whole Foods is just another cog in Amazon’s machine of next day shipping, cloud servers, and pricey streaming series. The deal did little to advance Amazon’s ambitions to dominate physical retail the way it did online shopping. And unfortunately for consumers hoping for a grocery store revolution, the situation is unlikely to change anytime soon.
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If anything, Amazon seems even more lost when it comes to opening a viable grocery chain.
“Unfortunately, Amazon right now does not have any strategy for physical grocery stores, just a bunch of ideas,” said retail consultant Brittain Ladd, who formerly worked as a strategist for the company’s grocery business.
Amazon’s biggest mistake was not following up its Whole Foods acquisition with any meaningful integration or expansion of the brand, Ladd said.
“Did the Whole Foods acquisition set the world on fire?” he said. “No. Did it take market share? No.”
Instead, the company just sort of set Whole Foods aside and experimented with formats like Amazon Fresh and the fully automated Amazon Go to little effect, he said.
Indeed, Amazon recently said it would start closing several Amazon Fresh and Amazon Go stores, including all of the latter’s locations in San Francisco, as a part of a broader effort to preserve cash. After years of expansion and hiring, Amazon, like other large tech firms, including Google (GOOGL), Microsoft Corporation (MSFT), and Facebook (META), is seeking to reduce costs.
Yet Amazon CEO Andy Jassy insists that physical grocery stores are still a top priority. In fact, Jassy thinks that the company will settle on the right format this year.
“We think grocery is a really important and strategic area for us,” Jassy told investors last week. “It's a very large market segment, and there's a lot of frequency in how consumers shop for groceries.”
“If you really want to have significant market segment share in perishables, you typically need physical stores,” he said. “We're doing a fair bit of experimentation today in those stores to try to find a format that we think resonates with customers. It's differentiated in some meaningful fashion and where we like the economics.”
“We've decided over the last year or so that we're not going to expand the physical Fresh doors until we have that equation with differentiation and economic value that we like, but we're optimistic that we're going to find that in 2023.”
Bottom line: Amazon is still tinkering, which means the company, now six years removed from its Whole Foods acquisition, is still nowhere near becoming a serious competitor for physical grocery sales.
That’s because food retailing is primarily about size and scale. In order to challenge the likes of The Kroger Company (KR), Walmart, Costco Wholesale Corporation (COST), and Albertsons Inc. (ACI), you need to get big — and fast. And the only way to do this is to buy competitors or rapidly build out stores. Given Amazon’s focus on cost cutting, neither option seems likely anytime soon.
High Hopes for Whole Foods Deal
In many ways, Amazon’s timidity toward physical stores is somewhat surprising, given its history of aggressively stealing market share from traditional brick-and-mortar competitors.
The company certainly has the financial resources: it held about $42.3 billion in cash as of the end of 2021, according to documents filed with the Securities and Exchange Commission. To finance deals, Amazon could have sold stock or easily borrowed money at low rates just a few years ago. The retailer also boasts the perfect vehicle to attract people to its stores: Amazon Prime, one of the most formidable loyalty programs out there.
And Amazon has plenty of experience selling groceries. The company reportedly generated $29.5 billion in online grocery sales last year.
Admittedly, selling groceries in physical stores is a much different — and difficult — business than selling them over the Internet. And Amazon had little to no experience with physical stores.
That’s why the Whole Foods acquisition seemed so significant. Not only did Amazon gain instant entry to an upscale market, analysts figured the retailer would use the chain’s nearly 500 stores as a learning lab to figure out how to run physical retail.
However, buying Whole Foods was not enough, Ladd said.
Amazon Lost Its Nerve
For one thing, Whole Foods and Prime customers are not natural fits, Ladd said. While the former specializes in selling higher priced organic foods, Prime members frequently buy soda, snacks, and other everyday groceries typically not found at Whole Foods.
That’s why Amazon needed to launch a new banner that combined Amazon Fresh with Whole Foods, he said.
“Amazon should have leveraged the Whole Foods brand name,” Ladd said.
More importantly, Amazon needed to make more acquisitions to gain scale. Though highly profitable, Whole Foods controlled less than 2% of the grocery market. Therefore, buying Whole Foods only made sense if Amazon aggressively followed up.
But the company ultimately lost its nerve, Ladd argues.
He said Amazon’s big mistake was letting Whole Foods founder and CEO John Mackey, who resisted any big changes, continue to run the business, Ladd said. As a result, aside from opening 60 more Whole Foods locations over the next few years, Amazon pretty much left the chain alone.
Instead, Amazon decided to develop its own grocery concept whether refining Amazon Fresh or launching Amazon Go in 2018.
Amazon Go initially attracted considerable attention. The 15,000 square foot format was fully automatic: shoppers could enter a location, pull items off the shelves, and then exit the store.
But the format never caught on, partially because the global pandemic that struck in 2020 drove away store traffic. And just as self-checkout stations failed to replace cashiers at other retailers, Amazon Go proved that consumers still wanted human help, Ladd said.
“Amazon learned a painful lesson that technology alone is not enough,” he said.
Grocery Limbo
So where does this leave Amazon’s grocery store ambitions? Nowhere good. The company is too small to seriously compete with existing supermarket chains.
In 2021, Amazon’s physical store sales totaled $17.5 billion, slightly less than two years prior, according to SEC filings. That figure represents only about 2% of the $818.6 billion supermarket and grocery market in the U.S.
And though Jassy says physical stores are crucial, the company seems content to tinker and refine. And given Amazon’s recent focus on cost cutting, the retailer’s quest to create a formidable grocery store chain seems stuck in permanent limbo.
