It was only 11:30 a.m. on a Friday, and it had already been a busy day.
Amazon (NASDAQ:AMZN) kicked things off by announcing its intent to buy Whole Foods Market (NASDAQ:WFM) for over $13 billion. This sent Amazon’s stock up 3% while rocketing Whole Foods up 27% to the announced $42 per share price announced in the deal.
This comes just three months after Walmart picked up online women’s clothing line ModCloth.
In short, Amazon is pushing further into groceries, while Walmart pushes further into online retail.
I love everything about all of this.
Let’s focus in on the Amazon-Whole Foods deal here, though, as it’s the one making the big waves.
Amazon and Whole Foods: A perfect pair
Let’s talk about synergy. Synergy is a stupid word that is used incorrectly—and I’m ballparking here—806% of the time.
In this case, though, synergy is a real thing.
The factors at play here include:
- Increase in demand for goods
- Lowered barriers to getting those goods
- A new device to help Amazon buyers spend more on groceries
- A supply chain that would make any hedge fund manager weep
Amazon Dash to the rescue
First, let’s talk about how Amazon just relaunched its Dash Wand (I didn’t say the naming conventions were anything to celebrate), crediting buyers’ accounts with the $20 purchase price of the wand and making it “effectively free.”
The Dash Wand is an Alexa-powered product, designed to get Prime members buying more groceries with the power of their voice. Just say, “I need more Swedish Fish,” and the wand will add them to your cart, your wishlist, or just buy them for you.
Now we’ve got a free bit of tech that allows people to make grocery purchases from Amazon, i.e., Whole Foods.
Whole Foods and Amazon R&D
Jeff Bezos, founder of Amazon and general business visionary, is all about something called free cash flow. It’s a metric for how much cash a business generates after they’ve accounted for all the stuff a business has to pay for but before optional investments.
Imagine it like this: You get paid $1,000 each week. You know you have to pay $400 for rent, food, and transportation, but the other $600 is yours. You may be involved in something that’s close to essential—maybe you’re in school, costing $250 per week—but, theoretically, you could just drop out.
Free cash flow counts the $600. According to MarketWatch, Amazon generated $9.7 billion in free cash last year, racking up a mere $2.4 billion in profit.
Why the difference? Because Amazon spends a cruise liner full of cash on research each year.
Whole Foods also generates a nice heap of free cash, knocking out $400 million last year. Unlike Amazon, however, Whole Foods is currently spending nothing on R&D. That’s a perfect opportunity for someone with an eye for the future to step in and start making bold new changes.
Amazon has already been fiddling with the idea of employee-free grocery stores. This acquisition is a chance to tap into the Amazon development pipeline to, potentially, make a play for urban millennials, who lack time for things such as human interaction and checking out at a register.
Amazon and Whole Foods logistics
One of the major gripes made by Whole Foods investors—here’s a classic example from JANA Partners—has been the company’s inability to get its supply chain under control. There was a concern the grocer was too dependent on one logistics partner, namely United Natural Foods (NASDAQ:UNFI).
Amazon, on the other hand, has been topping Gartner’s supply chain management list for seven straight years. The IT research firm notes that “[hardly] a day goes by without another announcement of Amazon’s foray into a new market, ownership of its own logistics capabilities, or filing of patents to improve customer experience.”
If Whole Foods needs to work on its distribution, there is literally no better partner than Amazon.
The last mile hurdle
Of course, Amazon’s biggest challenge has always been last-mile delivery. Its reliance on the USPS, UPS, and FedEx has been its Achilles’ heel. The company can only make things run at a certain speed as long as it doesn’t control that final piece of the puzzle.
Whole Foods also needed a last mile solution for delivery, settling on Instacart as its provider of choice. Last year, Whole Foods signed a 4-year deal with Instacart, allowing it to deliver groceries same day.
Combined, this could go one of two ways, as I see it:
- Either Whole Foods jumps ship and takes on the new Amazon model, i.e., contractless drivers, OR
- Amazon doubles down on Instacart, turning it into an Amazon-wide solution
I lean toward the simplicity of the latter.
Amazon has needed some sort of local delivery presence for a long time, and piggy-backing on the network Instacart has already laid out seems like a natural fit. It would give Amazon more control, increase its speed in the huge number of areas Instacart already covers, and cut down on the headache that comes with managing a massive, on-demand workforce.
The long term view
Overall, I think this is a great meeting of the minds. It’s easy to see this whole thing as two massive operations being slammed together, but let’s take a more personal look at it:
Bezos and John Mackey (co-founder and current CEO of Whole Foods) both built empires on the idea that retail could be done differently.
- For Bezos, it was a belief in the power of the internet
- For Mackey, it was the idea that people would pay more for quality sourcing
Bringing the two under one roof is fascinating to me. I hope Mackey gets to stick around and make his mark on the new enterprise. It’s a chance for him to grow the thing he’s been working on for 37 years.
To Amazon’s credit, the company has managed to stay hands-off in the past. In its acquisition of Zappos, for example, it left Tony Hsieh at the helm and gave the company free rein over its destiny. This is another opportunity for that sort of combination.
The last mile part may end up being the most interesting storyline, but I’m fascinated to see how the whole thing plays out.
To keep an eye on it, check out Capterra’s logistics blog, where I’m sure we’ll be covering this for months to come.
Looking for Logistics software? Check out Capterra's list of the best Logistics software solutions.