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Amazon’s Big Buy: What Whole Foods Brings to the Table

Amazon’s $13.7 billion purchase of Whole Foods has stepped up competition in the supermarket sector, an industry already dancing on razor-thin margins. The online behemoth is known for making strategic business decisions that pay off in big ways. But will this foray into brick-and-mortar grocery stores be as spectacularly successful as the company’s other endeavors?

Barbara Kahn, a Wharton marketing professor and director of the Jay H. Baker Retailing Center, Denise Dahlhoff, the center’s research director, and James Bailey, professor and fellow of leadership development at the George Washington University’s School of Business, joined the Knowledge@Wharton show, which airs on SiriusXM channel 111, to answer five key questions about the merger and what it means for both businesses and consumers.

This story originally appeared at Knowledge@Wharton website.

Was the Acquisition a Surprise?

Experts who watch the retail industry said conditions were ripe for a Whole Foods takeover. The store’s sales have been slumping for two years. Meanwhile, Amazon has been looking for the right opportunities to push fresh grocery options. The company has already launched Amazon Fresh in certain markets, but there are still a lot of logistics to work out.

“Whole Foods has been struggling, and Amazon has been trying to expand its footprint in grocery,” Dahlhoff said. “They have done pretty well in the online world with grocery; however, they don’t have a footprint in the real world. An offline presence definitely helps their online business.”

The announcement of the merger sent the stock of Whole Foods skyrocketing, and Amazon shares are higher as well. Bailey said that’s an indication that shareholders see Amazon as a sure bet.

“For those that currently hold Whole Foods shares, this is really wonderful news. For Amazon, this was just part of business,” he said. “They know [Chief Executive Officer] Jeff Bezos. They know how bold he is. They know his big picture. I don’t think [this move] took shareholders or potential buyers by so much of a surprise that they would have rushed in and bought more shares.”

What Will Amazon Do with All That Space?

Ostensibly, Amazon will use the Whole Foods stores as distribution centers for its online offerings. It’s also highly likely that Amazon will continue to operate the stores with an eye toward drawing in new, different customers.

“I believe Walmart is going to compete on low price, but I don’t think Amazon is. Amazon is going to compete on convenience, and therefore there will be different segments that are attracted to different platforms.”–Barbara Kahn

Amazon could entice its Prime subscription members into shopping at Whole Foods, for example. “Many of Whole Foods’ customers are members of Amazon Prime, which is not surprising given it’s a pretty upscale audience going after Amazon Prime as well,” Kahn said.

Kahn was recently in Seattle, Washington, where she caught a glimpse of an Amazon grocery store still in beta mode. The store was designed to operate through an app, offering virtual checkout. She said that’s something Amazon could certainly export to the Whole Foods model, once it works out the tech bugs.

Amazon also could use the physical stores to accept returns of merchandise purchased on Amazon.com.

“I’m sure there will be a huge ripple effect on the market because Amazon is upping the ante so much now … making online shopping really easy,” Dahlhoff said. “The pressure on other traditional grocery retailers will be growing, and I expect that many more chains will implement in-store pickup.”

But What About Walmart?

Amazon still has to contend with America’s other reigning retail giant, Walmart. The latter is expanding its online offerings to compete in the digital space — including through the purchase of retailers with e-commerce expertise, like Jet.com, Bonobos and Modcloth — and has started free in-store pickup for products ordered online.

“It will be interesting to see what the strategy is,” Kahn said. “I believe Walmart is going to compete on low price, but I don’t think Amazon is. Amazon is going to compete on convenience, and therefore there will be different segments that are attracted to different platforms.”

Bailey pointed out that Walmart stores are plentiful in suburban areas and small towns, “where they have literally run other grocers out of business.” But Whole Foods, with its considerably higher prices and high-end products, is mostly in upscale communities.

“I think a lot of the Whole Foods loyalists think of it as an urban phenomenon, so perhaps there isn’t as much overlap early on because of that distribution issue,” he said. “Also, Walmart’s going to have problems in urban areas because their stores are not centrally located in those urban areas.”

Will Alexa Replace Real People at Whole Foods?

Whole Foods isn’t just a store; it’s a brand with a distinct culture. The experts talked about the customer experience for Whole Foods shoppers, who want to chitchat with store associates about the right kind of exotic mushrooms for making soup or the tangiest European cheese to spread on a whole-grain cracker.

Bailey thinks Jeff Bezos will respect that culture. He recalled Bezos’ purchase of The Washington Post, which raised concern that the Amazon CEO would change the journalistic standards of one the world’s most venerated newspapers. Bezos made it clear that he would stay out of the newsroom.

“It was kind of a rich man’s toy the way the St. Louis Cardinals used to be the Busch family’s,” Bailey said. “Nevertheless, it was an indication that he is sensitive to culture and that he might not bull in to Whole Foods as quickly with some of the innovations and advances that we’re talking about here.”

“Amazon is a data maven. They know how to use that data to really keep you loyal to Amazon Prime and within their universe.”–Barbara Kahn

Is The Merger Really About Fresh Produce?

The answer to that question is a definitive, resounding “no.” Shoppers should remember that Amazon is, at its core, a technology company. It collects reams of digital information on shoppers’ habits, and it uses that information to its advantage.

Kahn again pointed to the Amazon test grocery store in Seattle.

“The idea in that beta grocery store and their bookstores is that everything is done through mobile, so you do it through the app. At the grocery stores, you don’t have to go through the checkout line, so that’s amazing,” she said. “But much more importantly is it can track the data at an individual level in a way that’s never been done before. Amazon is a data maven. They know how to use that data to really keep you loyal to Amazon Prime and within their universe.”

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