Amazon’s stated vision is “to be the earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy.”
Now that’s a tall order.
If you know you want a specific good, you can find it on Amazon when it is impossible to do so in a local store.
And as much as you want to support local business, you find yourself ordering on Amazon because it is the most convenient place to do so. Especially if you are an Amazon Prime customer who pays $99 a year for membership.
Last Friday Amazon announced it would be purchasing Whole Foods Market.
Why?
Whole Foods tapped into an unmet need with a singular focus on healthy and organic food. This literally transformed how Americans eat, causing a competitive response. Today consumers can get healthy and organic produce at leading grocers like Kroger, Walmart and Costco but for cheaper.
Whole Foods success may have been its eventual demise.
Stiff competition from WalMart, Kroger, and Costco has been joined by low cost European retailers (like Lidl) who deliver quality private label (unbranded) goods, ramping up the price pressure on both retailers and consumer goods companies selling branded products.
Amazon is an industry disruptor due to its wide and deep economic moat. Instead of having a wide brick and mortar presence, Amazon has the world’s best, scalable fulfillment and distribution network giving it a cost advantage over competitors. Customers, once brought in, enjoy low prices, wide selection, convenience and superior customer service, which makes them loyal.
It’s not just a network of customers, but also a network of wholesalers and manufactures who sell directly on Amazon that are loyal.
Amazon makes Whole Foods more competitive.
But what’s in it for Amazon?
Remember, Amazon seeks to be the most customer centric company on the planet providing literally anything customers can buy. Groceries are 20% of all consumer spending.
The first, easiest, market to target was books. Unless you live in Portland, Oregon and have access to Powell’s it’s nearly impossible to provide the variety consumers seek.
The next markets to target were anything else that is not perishable.
But perishable food?
The acquisition of Whole Foods market allows Amazon to use existing Amazon fulfillment centers and distribution network of trucks to deliver groceries and other consumer goods.
It even allows Amazon to expand delivery, potentially to restaurants.
The higher the volume delivered through existing channels, the higher the potential profit. This means further downward price pressure and is good for consumers because it eliminates unnecessary waste.
A relevant question to ask is how this with affect John Mackay’s goal to provide “conscious capitalism?”
When John Mackay started Wholes Foods in Austin he was a hippie socialist, treating employees “fairly.” He grew to understand “being fair” just doesn’t work – some folks deserve to be paid more. While his view of “fairness” evolved, he has always been conscious of more stakeholders than simply shareholders (owners).
The movement John started, Conscious Capitalism, recognizes capitalism as the best way to run an economy. But it also recognizes that other stakeholders beside owners have rights and should be treated well. From a purely economic perspective this makes sense … a company treating employees poorly will face pushback. Employees can leave, and customers can vote with their feet (if they perceive employees to be mistreated).
But it also recognizes some of the imperfections of pure capitalism. Without competition one party can take advantage of another because bargaining power is not equal.
When one company buys another, often the buyer seeks to reduce costs. Observers fearing Amazon will lay off Whole Foods employees are missing the point. The combination will likely result in other benefits. And these are likely to be bigger than anyone thinks.
Amazon has gobbled up competitors. Amazon’s purchase of Goodreads created a monopoly channel to facilitate purchase of books (there’s no longer a link to Barnes & Noble on the website).
Amazon’s purchase of Audible allows customers to easily extend “reading” to listening (great way to spend time travelling).
You might be tempted to think this is out of a movie, because there is no end to how far this can go.
Remember the Pixar movie Wall-E. In this movie, a company called Buy-N-Large sold everything to obese consumers sucking down supersize “Smoothies.”
Or you might prefer Idiocracy, the movie where the main character wakes up 500 years in the future only to discover Americans have become really dumb, and that they buy literally everything at the Costco. On entering Costco, they are greeted with “Welcome to Costco, I love you.”
Today, where all routine jobs are affected by globalization (goods are produced where it is cheapest to do so and digitization (best idea gets all the profit) everyone should be concerned about which stakeholders capture the profits.
Over the last 20 years the beneficiaries of globalization and digitization have been consumers and owners. Not employees.
Having lived and worked many years in Europe and having worked for European companies I personally experienced this stakeholder model of capitalism. And when I read Mackay’s book Conscious Capitalism, this resonated with me.
But like Mackay, I am a realist. The forces eliminating jobs will get worse. That said, having people in Whole Foods to help with product selection and advise on purchases will remain valuable to Whole Foods consumers.
Where you choose to make your purchases impacts who keeps the profits from those purchases. At the end of the day this is the only power you have.
As for me, I buy locally where possible. This means I will work with local businesses, including local banks, where possible.
But Amazon provides a product breadth that can’t be rivalled by brick and mortar stores.
That’s is a valuable service to all consumers.
It is a mistake to see Amazon as a conglomerate entering other businesses. Every business is Amazon’s business. The only question is whether, in the near future, you will be using Alexa (Amazon’s virtual business) to order your groceries.
Exciting times.
Imagine if this ingenuity could be applied to healthcare and power generation.
Because I am an optimist, I believe it will. Because our grandkids future depends on it.