retail news in context, analysis with attitude

Content Guy's Note: The goal of "The Innovation Conversation" is to explore some facet of the fast-changing, technology-driven retail landscape and how it affects businesses and consumers. It is, we think, fertile territory ... and one that Tom Furphy - a former Amazon executive, the originator of Amazon Fresh, and currently CEO and Managing Director of Consumer Equity Partners (CEP), a venture capital and venture development firm in Seattle, WA, that works with many top retailers and manufacturers - is uniquely positioned to address.

This week's topic: The implications and likely ripples that will result from the proposed $13.7 billion acquisition of Whole Foods by Amazon.

And now, the Conversation continues...

KC: The proposed acquisition of Whole Foods by Amazon for $13.7 billion strikes me as illustrating a number of things about Amazon.  One is that it is prepared to do the unexpected;  I don't know anyone who saw this one coming.  Another is that it is willing to move fast;  if reports are to be believed, Whole Foods CEO John Mackey only met Amazon CEO Jeff Bezos six weeks before the deal was announced.

I've talked to a bunch of retailers about the story, and I have to say that the dominant reaction is that people are shell-shocked ... they understand that this deal points to a fundamental shift in the retail marketplace, but they seem uncertain about how to react or how fast to react.  Which I think is a real problem, because they don't understand that this is more than just Amazon buying Whole Foods;  with apologies to Buffalo Springfield, there is something bigger happening here, and while what it is isn't exactly clear, it is tangible, inevitable and problematic for conventional thinking.

Tom Furphy:
For anyone that’s followed our Innovation Conversations over the last couple of years, this acquisition should not come as a surprise. We have said, repeatedly, that Amazon will disrupt the grocery industry like they have all other retail segments. We talk about Amazon’s growth via shopping automation such as Subscribe & Save, Dash and Echo, and how that has already claimed the equivalent of over 1,000 traditional grocery stores. We talk about how Amazon is willing to experiment with different programs and formats. We’ve been clear that Amazon’s work with Amazon Fresh, pick up points and the Go store format are evidence that Amazon realizes that customers need to be touched on a number of fronts in order to serve the entirety of their grocery needs.

This transaction was completely on strategy for Amazon. They now have an incredible platform for further experimentation and innovation. Over 60% of US households are Amazon Prime members. They share tens of millions of customers with Whole Foods, most of whom are already Prime members. That’s a lot of customers that they can focus on and work backward from.

I’m not surprised that Amazon made the move within six weeks of initial contact. In the 2016 Amazon Letter to Shareholders, Jeff talked about agility. He talked about making decisions based upon having 60% of the data, because waiting for 90% will mean that you waited too long. Once the introduction happened, I’m sure the team dug in, determined the synergies between the companies, sketched out a vision for how they might use the stores in their future plans and then pulled the trigger.

Two weeks ago we talked about taking “big swings” to keep up with Amazon. And now we see the biggest swing taken by Amazon itself. We talk about the need for organizational agility. And then Amazon demonstrates that they can move from initial exploration to completed deal in six weeks. All the while every company in the industry stood still with the exception of a couple of announced Instacart partnerships. Any advantage that store-based retailers had over Amazon is now gone. I can only imagine the rationalizations and excuses in board rooms across the country.

We’ve tried to be diplomatic in this column by telling retailers they still have a chance if they react now. But now is slipping away. Amazon continues to prove that they are smarter, hungrier, faster, more technically advanced and more customer-centric than any other retailer. Many executives think that sticking to their current plans, strategies and roadmaps will get them to where they need to be. It won’t.

Every day, Amazon widens their lead. Each week shoppers shift at least $50M in incremental repeat volume to Amazon and away from other retailers. Now Amazon gets to integrate their shopping programs into physical store environments, local pickup and delivery. Imagine when the Whole Foods center store moves over to automated replenishment. Imagine what they could then do to reconfigure the space into the service model of the future. This transaction was nothing compared to what will come of it. Remember, it’s still Day 1 at Amazon!

KC: I saw you quoted in the Wall Street Journal as saying that you think  that once the deal is finalized - assuming it is - it will take several years for the two companies to integrate their operations.  Was that accurate?  And exactly what did you mean by that ... because that seems like a long time for Amazon to do anything.

Gotta love reporters. I did state the words in the quote, but they were presented out of context.

The day that the deal was announced, the reporter was asking me about the implications to Whole Foods’ employees and customers. My response what that it was good day for Whole Foods’ people, customers and shareholders.

I truly believe that this is a perfect match. From the customer overlap, to the potential to use customer data better, to the private label synergies, to the store/fulfillment synergies, both companies have a lot to gain. I also think that Amazon will take strides to make the existing Whole Foods business more productive.

From the outside, it looks like there are two areas that are ripe for Amazon’s touch. First, the use of data in running the business will become better. Amazon is very metric driven and Whole Foods’ distributed model does suffer from a lack of impactful standardized metrics. Second, I think that Amazon will find ways to make the model more efficient – on the procurement side in ensuring they are getting the best possible costs, on the supply chain side to make sure that goods are flowing through the model as efficiently as possible and on the administrative side to make sure their support costs are delivering appropriate return.

I told the reporter that I think Amazon will likely make some internal improvements relatively quickly and then will begin to experiment with the model. I told the reporter that you may not see sweeping changes on the surface in “two or three quarters, but you will in two or three years” as Amazon patiently experiments and applies the learnings to the model.

KC: There is a lot of speculation about another company - Kroger, for example, stepping in offer a higher competitive bid.  Who would you think is a likely candidate to do so?  Is there someone out there that you would recommend as a better fit than Amazon, or that would be well-served to prevent Amazon from making this acquisition?

I am certainly not in a position to speculate about any competitive bidders. Frankly, I don’t think there’s a better suitor out there than Amazon. And I think that another competitor placing a bid to block Amazon would be a foolish waste of capital, time and focus. They could spend far less capital resetting their current strategies and pivoting their existing, safe, tactical product roadmaps toward something with a little more potential impact.

KC: Finally, this is our last Innovation Conversation until after Labor Day.  (Though if something big happens, we'll bring it back for a special report.)  So here's my question for you - if you had to guess, what other major moves might take place in terms of mergers and acquisitions between now and then?  Who is vulnerable?  And who might be buying?

This is really not my strength. But if I had to guess, I think someone may buy Instacart. While I have doubts about the long term viability of tacking a fulfillment infrastructure onto the end of the current store model, Instacart does have a great customer base of 160 or so retailers, and could be attractive to the right suitor. While this may not be the best long-term model for any retailer or the industry as a whole, it’s the only innovation that is seeing any kind of wide scale adoption.

The Conversation will continue...

KC's View: