After approval from a shareholder meeting on Wednesday and approval from the FTC this week, Amazon is officially buying Whole Foods. The combined entities are projected to drive over $115 billion in annual sales, helping Amazon jump from seventh position on the National Retail Federation’s list of the top 100 retailers all the way to number two. The only bigger retailer is Walmart, which recorded $362 billion in US sales last year.
Amazon is already starting to think about how to leverage the strengths of Whole Foods. The combination of brands will create a juggernaut across pricing, merchandise, supply chain, and consumer loyalty, starting as soon as Monday. These are the major changes to look for, according to the company’s statement:
Amazon will lower prices on several bestselling items
Amazon is a notorious price arbitrageur. Its algorithms manipulate prices multiple times per day. Always willing to be a low-price leader on categories where it wants to win, Amazon announced that as early as Monday, prices would fall for key bestsellers and essentials at Whole Foods, including organic bananas, eggs, fish, produce, meat, and the perennial millennial favorite, avocados.
Whole Foods private label products will be sold on Amazon
Private label brands are already a major portion of the grocer’s business, generating $2.3 billion in sales every year. Amazon announced that several Whole Foods brands, including 365 Everyday Value, Whole Foods Market, Whole Paws, and Whole Catch, will be available through Amazon.com, AmazonFresh, Prime Pantry and Prime Now.
This leads to questions about how many consumers will abandon third-party platforms like Instacart (a Whole Foods delivery partner) when many of the products they typically order are available through their Prime memberships. L2 research finds that Whole Foods heavily promotes its private label products, owning 32% of listings in Instacart’s food category. This could also be a threat to national brands that distribute a large number of products on Amazon Fresh. Amazon’s earlier private label brands (like Wickedly Prime) only made up 2% of SKUs, a ratio that is likely to change as the Amazon Whole Foods partnership grows.
Amazon Prime Members will get exclusive benefits at Whole Foods
Jeff Bezos said in his 2016 letter to shareholders, “[W]e want Prime to be such a good value, you’d be irresponsible not to be a member.” Almost half of US households are already Prime Members, and Amazon will begin using Prime-exclusive discounts and in-store benefits to lure even more customers into Amazon’s Loyalty ecosystem — and Whole Foods stores. This will likely discourage Prime members from shopping at competing grocery retailers such as Costco, Sam’s Club, and Trader Joe’s.
As part of the integration, Amazon Prime will become the official loyalty platform for Whole Foods, replacing the failed “Whole Food Rewards” program that launched in 2014 but only ever expanded to two markets (Dallas and Philadelphia).
Loyalty, exclusive benefits, and the ability to capture individual consumer data are becoming increasingly important for retailers. The latter is particularly crucial for personalization, recommendations, and tailored merchandise. In L2’s study of 99 branded loyalty programs, the retailers making programs easy to discover and sign up for and offering a good mix of monetary and experiential benefits were clear winners, delighting consumers and boosting shareholder value.
Whole Foods will give Amazon even more physical distribution by allowing lockers in their stores
On Monday, when the deal closes, Amazon will have instantly gained distribution to 239 new cities. Consumers will be able to use those locations not only to buy fresh food, but also to get non-perishable products from Amazon via locker pick-up points. Investments like the Amazon Hub program, which places Amazon lockers inside apartment buildings, and the expansion of Instant Pickup to college campuses make clear that Amazon is focusing on making consumers feel comfortable ordering products online without fear of “porch theft”.
The use of lockers in stores proves that Amazon intends to use Whole Foods locations as more than just grocery shopping destinations. Consumers can pick up household supplies, electronics, and maybe someday prescription medication from these lockers, putting Amazon in much closer competition with mass merchants like Walmart and convenience stores such as Walgreens.
Online food purchases account for less than 5% of all grocery sales today, but that number is expected to increase to 20% by 2025. The future of grocery is going to be a mix of physical and digital experiences. In the upcoming battles for share of that market, consumers might win with lower prices and more convenience, but unprepared retailers will lose. With Whole Foods, Amazon added a new weapon to its arsenal.