Blog Post - Hugh Fletcher, Aug 11 2017

Crunch Time - why Amazon's purchase of Whole Foods matters

Crunch Time - why Amazon's purchase of Whole Foods matters

It can’t have escaped many peoples’ attention that Amazon recently bought Whole Foods for $13bn – but, unless you work in the grocery or ecommerce sector, why should you care? The truth is, any executive in any industry shaping their organisation’s strategic direction needs to take note.

Not only will Amazon’s grocery expansion launch a revolution in grocery retailing, it will also act as a template for how Amazon will expand into new industries in the future. So, should you allow yourself to be the next victim of Amazon’s more advanced, aggressive strategy, or should you learn from it? This article seeks to identify what Amazon is doing differently.

1. Growth and vision over profit, and aggressive horizontal expansion

Amazon’s value rocketed by $15.6bn following the announcement of the acquisition, meaning that the acquisition immediately started to pay back. Unlike other traditional companies, Amazon doesn’t need to make a profit – its value is judged by its shareholders on its vision and growth, resulting in constant reinvestment into innovative business models. The grocery sector is already fighting tooth and nail, as the prospect of a new competitor free from the constraints of profit, is a frightening concept.

It is extremely likely that Amazon will use the Whole Foods acquisition to use the physical stores as a test-bed for new technologies, such as Amazon go, as well as test how to pass customers from online to offline seamlessly. In so doing, Amazon will define the future of grocery and omnichannel retail.

However, any industry suffering from low margin challenges needs to be aware of Amazon’s aggressive horizontal expansion; within the first six months of 2017, Amazon announced further expansion into music events, B2B, and prescriptions. Therefore, any business that isn’t considering Amazon as a competitor is misguided.

While other organisations are struggling with digital transformation, Amazon is working out how to give their customers a better shopping experience. Its business strategy, puts the customer at the heart, innovates to remove friction points and uses huge quantities of data to drive it towards excellence.

So, what is stopping you from doing the same?

2. ‘Interface Imperialists’, and taking advantage of consolidated shopping

In recent years, a small number of retail and digital innovators have sought to tie customers into their products and services by trying to own every interface – website, mobile, app, voice and physical. Salmon call this “Interface Imperialism”. If you own the interface, you own the customer. If you own the customer, you own the data. If you own the data, you own the future.

To become an Interface Imperialist, Amazon has targeted every touchpoint with the customer – firstly through its website and apps, followed by its move into Zero UI and voice, with Echo, which signalled how it is defining the next generation of interfaces. In comparison, Google Home and Apple Home Pod appeared in the market almost three years after Echo surfaced in the US.

The physical store is just another interface. Therefore, it made sense for Amazon to enter this space through physical grocery. If Amazon can learn, streamline and sell groceries online, then the only spend (nearly 40%) that goes through Amazon will only increase.

Amazon’s move into bricks and mortar isn’t just about the grocery sector, it’s about how online and offline shopping are colliding. Salmon call this ‘consolidated shopping’, where multiple shopping experiences across multiple interfaces, will integrate to offer ease, convenience and price benefit to the customer.

For many, the expansion of a pure-play digital organisation into physical stores feels like a retrograde step. But, for the pure-plays, physical opens up a whole new revenue stream and enables them to take what is seen as ‘legacy’ and create the future. Although Whole Foods, for example, is a place to buy your groceries, it is, more simply put, a place for people to go. If you think of stores like this, you can see how the store of the future can perform multiple roles and be a place of consolidated shopping experiences.

3. The first mile, the last mile, and customer loyalty

The ecommerce sector has always talked about how the last mile – where products ordered online are delivered to you efficiently and cheaply – will put your organisation in rude health. But, recently, the first mile – how you get your customers to your site – has started to garner strategic attention.

Google’s role in the first mile has been an important one, as it has defined which sites you’re most likely to visit. However, recent statistics show that 55% of online product searches are now started via Amazon. Now, Google no longer owns the control of the first mile. Its future control is also weakened by devices, such as Amazon Echo, which interface directly into the Amazon ecosystem, so now Google no longer has control over what products you see – and Amazon does.

Whether you believe this to be good, or bad, wrestling back control of the first mile is an epic strategy move from an Amazon strategy perspective. And, if we broaden our viewpoint from online to omnichannel, you can see how Amazon’s purchase of Whole Foods enables them to ‘own’ the physical contact with Whole Foods’ customer and, by a variety of means, it can own the first mile, too.

Generating customer loyalty is, for many organisations, a high priority. It’s accepted that it’s easier to retain a customer than to recruit one. But customer retention is easier when you have more products and services to offer, and even easier if they are complementary.

One of the earliest examples is the iPod, which was supported by the launch of iTunes, creating a musical ecosystem spanning hardware, software and product, all purchasable through Apple. Much of Amazon’s horizontal expansion has been driven by the concept of how one product can supplement another with data, insight, cross and upsell.

Its purchase of Whole Foods is a great example of this, as it now has foundations to offer a full grocery services – spanning physical, online, distribution, and consolidated shopping experiences. And, while we’re ordering our food, its data will tell us which supplementary products to buy. For ease and convenience, this is a revolution.

4. Data

When you look at the valuations of some of the technology companies with few physical assets, few discernible physical products and few barriers to entry, it’s hard to understand their worth. Simply put, it’s all about data. Facebook and Instagram, for example, can create virtual gatherings of people who share their details, views and experiences, leaving a digital footprint. Data tells you what people do, when they do it, and how often they do it; what they buy and how often they buy them.

Amazon’s purchase of Whole Foods enables it to crunch together different sets of data to link together how people shop online and offline, and create a single, golden record for a customer, using Prime as the glue to bring the data together. The data will, in turn, define what is stocked and when. It will enable more tailored customer targeting, and a better cross- and upsell. It will also enable Amazon to develop its own-brand strategy by identifying products and services that it could provide. The challenge for everyone, other than Amazon, is how do you compete with this amount of data?

5. Strategic Friction Point Analysis

Jeff Bezos loves to talk about Amazon’s day 1 philosophy, which has trained Amazon staff to constantly assess challenges with a fresh new approach. This constant re-assessment of experiences is what has enabled Amazon to expand into various revenue streams, including bookselling, content and loyalty.

At Salmon, we call this “Strategic Friction Point Analysis”. It begins with understanding a customers’ journey, then identifying friction points, then addressing them – and hardly anyone does it. Experience tells us that most organisations understand some of their customers’ journeys and know most of the friction points. But what most don’t do is address them. Amazon does.

For years, supermarkets have sought to address the issue of the checkout by committing to the reduction of queues with more staff, and investing in self-checkout and scanning. But not one of these solutions has solved the issue. Cue the Amazon Go concept. With its acquisition of Whole Foods, Amazon Go is more quickly, easily and financially possible. Amazon now has access to an international network of stores through which it can test its shopping innovations. It can learn how to marry online and offline grocery buying, and through technology, it can create a seamless, friction free omnichannel grocery industry.

6. Thinking ahead

Very few organisations think about what their product, service, or industry will look like in 10 years. It’s not what they’re incentivised against or what gets them promoted, but it is what ensures their long-time success. And therein lies the issue for most businesses today.

Amazon is thinking about 10 years’ time. Before anyone mentioned Zero UI, they produced Echo; before we expected one-day delivery, they invested in their distribution network. And you can be sure that they’re thinking about the future of grocery. In the States, almost 60% of online sales already goes through Amazon without their grocery offering. So, it was inevitable that Amazon would mature its grocery offering to achieve its aim of selling everything from A to Z. And if Amazon is doing this in grocery, then it’s probably modelling out and defining the future of your product, the services your offer and your industry.

So, there you have it. You may not be interested in Amazon’s acquisition of Whole Foods and the future of grocery, however Amazon’s continued retail dominance and growth is the sign of a company on the right strategic path. Your organisation may not be the Amazon of the future, but there are certainly strategic lessons that can be learnt that will make your company stronger and more prepared for the future of retail.

So, what actions can - and should - your business take? Read the full Salmon report with our compliments. Not only do we expand on the above points, but we present a list of viable actions your business can take.

Download "Why you need to wise up to Amazon" here