business news in context, analysis with attitude

by Kevin Coupe

On Friday, MNB was one of a number of outlets that broke the news that Amazon plans to acquire Whole Foods for $13.7 billion, in an all-cash deal that MNB said would "dramatically increase the online pioneer's bricks-and-mortar presence while providing some relief for the organic grocer, which has been under pressure from shareholders to improve its performance."

You can read our initial coverage and commentary, which includes perspective from Amazon veteran and MNB/Innovation Conversation columnist Tom Furphy - here.

Now, in the interest of providing greater and Eye-Opening perspective for what in newspaper parlance would be called a "second day story," I want to offer some of the observations and points of view of a number of other writers and media platforms, with some italicized commentary from time to time...

• From Dow Jones: "The acquisition, if it goes through, will require Amazon Chief Executive Jeff Bezos and Whole Foods CEO John Mackey to work together to combine Amazon's technology and customer know-how with Whole Foods' brick-and-mortar grocery expertise.

"Messrs. Bezos and Mackey share some traits. The two men -- who only got to know each other a few weeks ago, people familiar with the matter say -- are iconoclasts whose outsize personalities shaped their companies. They pioneered new strategies in their industries -- Mr. Bezos by shifting retail online, Mr. Mackey by popularizing health food -- and they are intensely competitive, say people who have worked with them.

"But the two founders also have sharply different strategies and missions that could prove tough to marry. Mr. Mackey's Whole Foods, whose sales totaled $15.7 billion last year, has catered to wealthier customers with boutique brands and hands-on customer service.

"Mr. Bezos has appealed to the masses with low prices enabled in part by centralization and automation. And Amazon, with $136 billion in revenue last year, has achieved far larger success financially -- putting Mr. Bezos firmly in charge."

In some ways, it seems to me that Bezos and Mackey personified the notion that these days, you're either at the table or on the menu. And I think we know which one was which.

Business Insider writes that Amazon's purchase of Whole Foods "should terrify more traditional brick-and-mortar grocery retailers that are fighting to dominate the online grocery business. Shares of Kroger, Target, Costco, and Walmart all plummeted after the news was announced, with Kroger's shares hitting a three-year low ... With more than 460 stores in the United States, Canada, and the United Kingdom, Whole Foods is not nearly as large as Walmart's 4,692 locations. However, most of Whole Foods stores are in major US cities, providing crucial brick-and-mortar grocery centers for Amazon in these key markets."

I've been writing here almost since the inception of MNB that traditional retailers have been entirely too slow in reacting to the Amazon threat - and by that I mean not just Amazon's specific competitive operations, but the broader understanding of competitive and consumer realities that Amazon reflects. Way too slow. And now, they have no choice but to react ... and I would think/hope that pretty much every food retailer in the country called a Saturday meeting at which he/she said, "A) I want a plan for how to respond by Tuesday, and B) I want to know how we are going to implement that plan before Amazon closes on its purchase of Whole Foods. There are no alternatives, and will be no excuses."

• The Los Angeles Times reports that "Whole Foods' 440 stores gives Amazon access to refrigerated warehouses 'within 10 miles of probably 80% of population'."

That's a lot of access. Yikes.

• The Wall Street Journal speculates: "The partnership with Amazon may mean Whole Foods doesn’t need to rely as heavily on its storefronts. Recently, vendors on have increasingly been filling orders from their own facilities or those of third-party logistics providers, with Amazon never holding that inventory in its own fulfillment centers. Under that strategy, Whole Foods may see many of the products it stocks one day shipped to customers in much the same way, skipping the store stock room entirely and heading directly to customers."

It won't happen overnight, but it would be foolish to think that Amazon can't bring enormous efficiencies to the way Whole Foods operates ... without hurting the brand. Think Zappos.

USA Today writes that the acquisition "could slice into profits for food manufacturers, other supermarket chains such as the nation's largest by market share, Kroger, and behemoths like Walmart, which is currently the biggest seller of groceries in the U.S. with more than one-quarter of the market, according to Euromonitor. It also potentially creates a challenge for companies that deliver groceries such as Fresh Direct and Peapod, and ready-to-cook ingredients and recipes to customers' doors, like Blue Apron and Sun Basket."

"Could" slice into profits? That may be the understatement of the year.

• The USA Today story also says that the move may presage a wave of mergers and acquisitions (not just by Amazon and Walmart), that it establishes Amazon as being able to engage in a wave of "margin-busting negotiations," especially as Amazon continues to grow its private label business with the use of Whole Foods' 365 own-brand as a catalyst.

• From another Wall Street Journalpiece: "The move is already putting pressure on grocery store competitors, such as Kroger Co., Target Corp., Supervalu Inc., Costco Wholesale Corp. and Wal-Mart Stores Inc., which all saw declines in share prices after the deal was announced Friday.

Each of these companies has made significant investments in digital technology in recent years, together transforming the grocery store market."

But Amazon, the story notes, is way ahead ... and Stephen DiFranco, a former vice president at Hewlett-Packard and Lenovo, who founded big-data strategy firm IoT Advisory Group, tells the Journal that “Whole Foods will soon become Amazon’s experimental playground for developing more sophisticated big-data marketing strategies."

There will be no excuse anymore for marketing efforts that do not or cannot drill down to specific consumer behavior and react to it. Again, we've been making that point here for years ...

• Also from Dow Jones: "Mr. Bezos gains more than 460 stores across the U.S., a network that could let Amazon sell its private-label brands and devices in stores, expand its distribution network, and bolster its Prime Now and Fresh delivery businesses.

"Whole Foods gets access to Amazon's data and technology, and the combined buying power of Amazon Fresh and Whole Foods could win better prices from grocery suppliers. Also, Mr. Mackey's new boss has been tolerant of thin profit margins, a welcome relief after activist investor pressure over profit and other issues. Amazon has said Mr. Mackey will remain CEO of Whole Foods.

"Still, Mr. Bezos's team is likely to scrutinize Whole Foods' business practices seeking opportunities for change, former Amazon employees say. To better compete with rivals including Wal-Mart Stores Inc., for example, Amazon likely will push for lower prices, new technology, and more uniform stores to save costs, they say."

I have to wonder if Amazon will have the firepower to make the 365 by Whole Foods concept a lot stronger and more effective ... because Amazon knows how to offer lower prices, it knows how to effectively use technology, and it knows how to appeal to millennials. These are all things that the 365 format was supposed to do, but, in my estimation, did not.

• The Associated Press writes: "Amazon could try to use automation and data analysis to draw more customers to stores while helping Whole Foods cut costs and perhaps prices. Meanwhile, the more than 460 Whole Foods stores in the U.S., Canada and the U.K. could be turned into distribution hubs — not just for delivering groceries but as pickup centers for online orders ... Amazon already offers grocery-delivery services in five markets, but analysts say expansion is tough because its current distribution centers are set up for dry goods, not perishables ... Amazon could use Whole Foods stores as pickup locations for deliveries, an option Amazon already offers in many cities by installing lockers at 7-Eleven and other retailers."

• The New York Times had a piece over the weekend about the potential collateral damage from the acquisition:

"Our mental image of job-killing automation is robots in factories or warehouses. But the next jobs to disappear are probably ones that are a much bigger part of most people’s daily lives: retail workers and cashiers in stores and restaurants.

"For a long time, economists argued that routine jobs like factory and clerical work were vulnerable to automation but that jobs in both the service and knowledge sectors were safer. They require human skills that are hard for machines to imitate, like judgment and adaptability. These skills are useful when an executive makes strategic business decisions or when a chef fries one customer’s egg and scrambles another’s ... But it has become increasingly clear that parts of every job will be automated — and that the service sector is next. Although certain service jobs like health aide or preschool teacher still seem safe, others, like those in retail and food service, are already being displaced. It’s not hard to teach a machine to do routine tasks like scanning bar codes, stocking shelves or dunking fries in oil."

The Times suggests that "companies won’t invest in technology unless it’s less expensive than employing people, and most retail workers make near minimum wage. But in a case study of grocery stores, McKinsey found that the savings from automation were three times the cost, and 68 percent of the savings were from reduced labor costs."

Like I've said here before ... these are the facts of life when it comes to progress, and they require a sophisticated and nuanced public policy approach that includes private enterprise and government in the process. But wailing about this progress as somehow being "evil" is like trying to stop the wind.

Fortune reports that sources inside Instacart believe that despite the purchase of Whole Foods by Amazon, it seems at least possible that it can hang onto the Whole Foods delivery business - in part because there are four years remaining on the contract.

Whole Foods reportedly makes up a bit less than 10 percent of Instacart's annual revenue.

However... the story also notes that Instacart "is doubling down on its anti-Amazon rhetoric. An Instacart representative told Bloomberg that the company’s mission is 'more important than ever given Amazon just declared war on every supermarket and corner store in America'."

I think it is a pretty good bet that Instacart will be sold to a major company - think Walmart, Google or Kroger - before the end of the year.

Wired writes: "The implosion of mainline retailing has multiple causes, but Amazon has clearly been a change agent that has accelerated the sector’s challenges and hastened the demise of some once dominant players. Retail stores are closing at a record rate—as many as 8,000 this year. That’s thousands more than in 2008, the previous worst year on record, which bore the brunt of a whole-scale economic collapse. Those stores employ hundreds of thousands of people, and when those jobs disappear to e-commerce, they don’t come back.

"So does Amazon create value by seamlessly distributing goods, or destroy it by demolishing jobs? The answer, of course, is both. While Washington focuses almost entirely on the last gasps of manufacturing and coal mining employment, e-commerce and Amazon threaten far more jobs. Yet Amazon also offers the potential of far more affordable goods at lower costs. It truly defines creative destruction."

See my comment about sophisticated, nuanced public policy approaches above.

Wired goes on:

"We don’t yet know, of course, what jobs will replace the ones being made anachronistic by e-commerce. We know what is being lost, with only a few inklings of how the gains will be distributed. The promise of a digitally-enhanced, voice-activated home where you only have to say what you need before your accounts are debited and goods delivered is both a utopian and dystopian vision. It is fitting that Amazon is at the apex of those changes, driven both by a utopian ambition and a dystopian drive to dominate competitors.

"The purchase of Whole Foods introduces those divergent urges to a new, intimate arena: food, which everyone needs and everyone consumes. If the company can succeed at the grandest level, it will result in better food for everyone—but it may take an unsavory path to achieving that goal. Amazon’s drive is as fraught with risk as it ever was, but looking a decade ahead, the result is likely to be enhanced quality of life for more people than ever before, even as the changes continue to be unsettling and tumultuous."

• In another piece, the Times posits that the Whole Foods purchase by Amazon puts it "on a collision course with Walmart to try to be the predominant seller of pretty much everything you buy.

"Each one is trying to become more like the other — Walmart by investing heavily in its technology, Amazon by opening physical bookstores and now buying physical supermarkets. But this is more than a battle between two business titans. Their rivalry sheds light on the shifting economics of nearly every major industry, replete with winner-take-all effects and huge advantages that accrue to the biggest and best-run organizations, to the detriment of upstarts and second-fiddle players.
That in turn has been a boon for consumers but also has more worrying implications for jobs, wages and inequality."

CNBC quotes Bill Simon, former CEO of Walmart U.S., as saying that the acquisition is "typical Bezos," and that it "really demonstrates his commitment to get into brick-and-mortar retail and to get into food, in particular, and that can't be good for anyone selling food right now ... if this is an indication of Amazon's commitment to get into grocery and get into fresh in a big way, then I think that will make everybody stand up and take notice."

While Simon says that "for the near-term and probably the medium-term, I think Wal-Mart will be just fine," he also says that it can't be seen as anything other than a "transformational" move, and that " "Wal-Mart needs to watch their flank."

• Even smaller competitors are on alert. NBC News has an interview with five-store retailer Stew Leonard, Jr., who says that "his company has been looking at new strategies like food delivery and having even more take-away options for younger customers."

"We can’t just be focused on the food store now," Leonard tells NBC. "There are a lot of the millennials that want things delivered. They want food that maybe they can just come and pick up ... “I view as a competitor to anyone who has the lights on and sells food."

The thing is, Stew Leonard's is the classic example of experiential marketing ... but Stew Jr. is absolutely right to say that this may not be enough in the current competitive environment.

Fast Company writes: "A decade from now, not only will the way you shop for groceries in the United States have changed, but Amazon could well have begun transforming the way people around the world get their food. Because for Amazon, perishables represents much more than an opportunity to beat this country’s largest grocer, Walmart. It’s an opportunity to rethink the entire process of food sourcing and distribution ... The laboratory for Amazon’s grocery experiment is now global ... In the last two years, Amazon has launched grocery initiatives in the United Kingdom, Spain, Italy, France, Germany, and Japan. These moves are already seeking to upend decades and even centuries of entrenched behavior."

• Food analyst David Portalatin of the NPD Group tells National Public Radio's The Salt that Amazon now has to be considered "a very substantial brick-and-mortar food retailer. I think ultimately, this is good for consumers." Especially, he says, the 24 percent of millennials who bought something from Whole Foods last year. That's an extraordinary penetration for a supermarket chain with just 431 stores," he says. "The deal now gives Amazon control of those 431 stores, nearly all of which are in neighborhoods that are more affluent and younger than America as a whole. Those stores solve much of Amazon's 'last mile' delivery challenge for fresh groceries."

• The AP also notes that "just two years ago, Whole Foods CEO John Mackey told Bloomberg BusinessWeek that Amazon’s foray into grocery delivery would be ‘'Amazon’s Waterloo.' But it was Whole Foods that fell behind as shoppers found alternatives to the organic and natural foods it helped popularize since its founding in 1978."

• One quote that seemed to get a lot of play over the weekend was from Whole Foods CEO John Mackey, who told Texas Monthly recently that "there's widespread distrust with how many big corporations operate: 'It’s the idea that business is about a bunch of greedy bastards running around exploiting people, screwing their customers, taking advantage of their employees, dumping their toxic waste in the environment, acting like sociopaths'."

And, Mackey told the magazine, "“These people, they just want to sell Whole Foods Market and make hundreds of millions of dollars, and they have to know that I’m going to resist that. That’s my baby. I’m going to protect my kid, and they’ve got to knock Daddy out if they want to take it over.”

It should be noted that when Mackey signed the deal, it got Whole Foods' shareholders (including him) a 27 percent premium over its at-the-moment share price.

• In a New York Times column provocatively titled, "In Whole Foods, Bezos Gets a Sustainably Sourced Guinea Pig," Farhad Manjoo writes:

"An Amazon presence in groceries might transform it from a company you shop at every once in a while to one you think about several times a week. This is not a novel idea: It was the key reason Walmart got into the grocery business in the 1980s, a move that accelerated its shift from a regional chain into the world’s largest physical retailer.

"Yet if there’s one thing I’ve learned about Jeff Bezos, Amazon’s founder and chief executive, after years of watching Amazon, it’s that he doesn’t spend a lot of time predicting future possibilities. He is instead consumed with improving the present reality on the ground, especially as seen through a customer’s eyes. The other thing to know about Mr. Bezos is that he is a committed experimentalist. His main way of deciding what Amazon should do next is to try stuff out, see what works, and do more of that.

"So the best way to think of this deal is to look at Whole Foods as a kind of guinea pig for Amazon — a pricey, organically sourced one, perhaps, but a guinea pig all the same."

• The Huffington Post cast a skeptical eye on the deal's implications:

"Our communities and the way we engage in commerce will change. Imagine walking into a Whole Foods store and seeing different prices depending on whether you are a member of Amazon Prime — or seeing different prices depending on any other way that you interact with Amazon.

"This isn’t implausible. It is what the company does when it opens up stores. For instance, Amazon is creating a chain of physical book stores to take the place of the book stores the company destroyed. In these stores, there are no price tags at all: You scan the items with your phone and have a price delivered to you, personalized by Amazon. Why wouldn’t Amazon extend this to Whole Foods?"

The story goes on: "Amazon’s takeover of Whole Foods means that it can target and eliminate regional competitors one by one as it did with its online competitors. When emerged as a competitor to Amazon, Amazon simply sold diapers below cost until the company capitulated and sold itself to Bezos. There’s no reason to assume Amazon wouldn’t bring the same predatory pricing strategy to bear in every city in America. Why wouldn’t it? Even though predatory pricing is illegal, the government hasn’t enforced those laws for decades. Whole Foods tends to source from local farms as part of a commitment to localism; these farms will now be negotiating with a much bigger entity that is committed to a ruthless model of efficiency.

"There is only one force that can stop Amazon from organizing and regulating basically all American retail commerce — our democratic institutions and our political system ... The public should speak out in opposition to this merger. More than that, the government should take this opportunity to reject the entire pro-finance pro-concentration philosophy that has taken hold in this country since the Reagan era. It is no accident that Whole Foods founder John Mackey was forced to surrender his life’s work because financiers looking for a quick buck bought up a large bloc of shares in his company and pressured him to sell the company to Amazon ... This merger should frighten all of us. But it should also embolden anyone who believes that America should not be in thrall to monopolists like Bezos."

I get it. But I also think the argument can be made that Mackey was forced to surrender his life’s work because Whole Foods lost momentum and relevance over time, because it did not adapt to changing consumer demands and realities. Sure, that enabled the financiers to step in and push for a sale ... but Mackey gave them the opening.

• The Times writes in yet another piece, "Unlike almost any other chief executive, Amazon’s founder, Jeff Bezos, has built his company by embracing risk, ignoring obvious moves and imagining what customers want next — even before they know it.

"Key to that strategy is his approach to failure. While other companies dread making colossal mistakes, Mr. Bezos seems just not to care. Losing millions of dollars for some reason doesn’t sting. Only success counts. That breeds a fiercely experimental culture that is disrupting entertainment, technology and, especially, retail."

Go back and read the "Innovation Conversation" I did with Tom Furphy last week, before the deal was announced. You can read it here. Tom's been making this point for years.

However long it takes, Manjoo writes in his Times analysis, "Mr. Bezos and his team will most likely spend years meticulously analyzing and tinkering with how Whole Foods works. They will begin lots of experiments. When something works, they will do more of that, then more, and then even more. They may take over the world all the same — and, in the process, probably usher in big changes to large swaths of the economy, affecting everything from labor to urban planning — but they’ll do it in ways we won’t be able to predict now."

Manjoo goes on: "I suspect that the Whole Foods deal starts less with a strategic end-goal and more with this insight: Shopping for food is broken. Both the in-store experience and the many attempts at online delivery — from Webvan to Instacart to Amazon’s own service, Amazon Fresh — have failed to create the sort of seamless buying experience we enjoy with nonfood e-commerce."

This, he writes, is almost certain to change ... and probably at a far greater velocity than would've been achieved had Amazon remained in its e-segment. "In a single purchase ... Whole Foods gives Amazon a playground to try out lots of ideas. Should stores be laid out more like warehouses, to optimize for online delivery? Could you make grocery checkout lines invisible, the way Amazon is trying to do with its experimental grab-and-walk-out convenience store in Seattle? Or maybe there’s some other innovation lurking in the deal that no one has thought of yet."

• In other words, Today is Day One.
KC's View: