News that Amazon is to acquire Whole Foods for $13.7bn has taken us by surprise, however based on our initial thinking the move certainly has merit.
One of the major challenges Amazon faced when it decided to pursue the lucrative grocery market was its lack of credibility in food. From launch, Amazon Fresh started to address this challenge by borrowing equity from local markets and food businesses through partnerships. This move to acquire Whole Foods takes that strategy to the next level –buying credibility from a retailer with an exceptional reputation in food.
Another interesting consideration is the upmarket positioning of Whole Foods. Amazon would be wise to pursue a distinct and differentiated food strategy that can deliver a rich gross margin – strong enough to cover the costs of delivery and operations in a highly competitive market.
The impact on the UK market is yet to be seen. Whole Foods only operates around 10 stores here and awareness of the retailer is limited. Also, Amazon already has an arrangement with Morrisons for its supply of fresh food. Precisely how, if at all, the Whole Foods’ acquisition could impact the Morrisons relationship will become clearer over time.
What is clear for now is that Amazon is determined to take its share of the grocery market and is not afraid to dig into its deep pockets to make it happen.