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Monday, 3 July 2017

The Amazon - Whole Foods conundrum

On 16 June 2017, Amazon announced that it will buy Whole Foods Market, a nationwide American grocery chain which is known for its organic produce, high prices, and high margins. Amazon is an online retailer mostly known for its non-food items. It's hard to find any useful information on the expected synergies between both companies. To some extent, it's a conundrum.

Since 2007, Amazon has gradually rolled out its grocery delivery services called AmazonFresh, "targeting specific parts of various metropolitan areas and partnering with local speciality stores for delivery of local items." In March 2017, Amazon announced AmazonFresh Pickup, "a drive-in-type grocery store []. It's a delivery service that lets users shop online, reserve a time to pick up the groceries and have them loaded into their car at the store." (Wiki).

Working with many local and independent partners creates challenges in several mutual departments, like Finance, IT and Operations. It's not always easy to enforce a Service Level Agreement on independent business partners. The acquisition of Whole Foods will solve these issues, allow for an expansion of AmazonFresh Pickup, and create synergies in turnover

On 29 June 2017, several media reported that Amazon is looking at the robotic replacement of thousands of supermarket cashiers and warehouse workers (eg, CNN, EconomistFortune). Such savings would allow Whole Foods to cut its retail prices and attract price sensitive customers. This would first create synergies on direct variable overhead and subsequently in turnover.

Further synergies could be reached in indirect variable overhead by integrating both organisations. This might happen when the acquisition would become successful. Such an integration would however also seriously complicate a future divestment of Whole Foods. Please refer to my 5 February 2015 blog on Shared Service Centers. 

The potential synergies between Amazon and Whole Foods explain why the shares of domestic and foreign competitors dipped since the Whole Foods acquisition (eg, AholdWalmart). Their 5%-10% dip in share price implies that shareholders are worried but still have a "wait and see" attitude. I concur as many acquisitions fail due to a lack of post-acquisition management.

A visit to a robotic warehouse is most impressive (eg, dimensions, speed, volume). I have seen a few in my business career. Considering items like theft, volume and waste, the logistics of low-priced bulk goods must be different from the one dealing with medium to high priced items. The Amazon stock logistics' algorithms may not apply to Whole Foods. 

Amazon has a track record of many acquisitions but only Twitch and Zappos came close to $ 1 billion (eg, CB, GeekWire, TechWiki). The Whole Foods acquisition amounts to $ 13.7 billion, 91,000 employees and 400+ locations. The success of this acquisition will depend on Amazon's ability to apply post-acquisition management. It's unfortunate in this context that CEO's tend to focus on the future and lose interest in the past.

Conundrum (2013) by The S.I.G.I.T. - artistsFBlyricsvideoWiki-1Wiki-2