Since graduating from college in 1985, I have seen the real estate market crash twice, witnessed an ugly tech bubble implosion and, of course, braved the great recession. What’s interesting is the cycle of euphoria and then panic that repeats endlessly and lead to these popping bubbles. But bubbles only pop when a bubble exists and something induces panic. Bubbles do not pop when there is no bubble to start with. As economist Paul Samuelson quipped fifty plus years ago, “the stock market has predicted nine of the last five recessions.”
The Amazon acquisition of Whole Foods strikes me as a panic without a bubble. No one underestimates Amazon’s ability to compete in retail. Given that, one would expect that it is priced into the market. In addition, the acquisition of Whole Foods is not Amazon taking over the grocery business. Whole Foods will not work in the majority of the country; it’s too high end. It also does not have that many stores (465) compared to other major grocery chains. If Amazon were planning a blitzkrieg on grocery, they would have gone more mainstream and they would have gone bigger.
Instead, I see this as an experiment with limited downside. Whole Foods has many characteristics that make it easier for Amazon to cut their teeth in brick and mortar with a reduced risk of failure. These are:
- Whole Foods prices are high. Amazon knows how to reduce costs and will likely have no problem achieving significant cost/price reductions at Whole Foods.
- Whole Foods customers are mostly tech savvy and will be able to take advantage of the technological advances that Amazon brings to the table.
- Whole Foods customer likely all have credit cards (the most recent data says 29% of Americans do not) which are required for much of Amazon’s business model.
If Amazon were planning a blitzkrieg on grocery, they would have gone more mainstream and they would have gone bigger.
Amazon knows that Whole Foods appeal is limited to a certain sector of the US. They know also that they are likely to learn a lot about brick & mortar retailing while being successful. But remember, in the meantime, their competition in the grocery business will be learning too. They will need to learn to play Amazon’s game to a point (maximum efficiency, online shopping with home delivery) but Amazon cannot be all things to all people. No company in the history of the world has ever done that and none ever will.
There will be winners and losers and Amazon will quite likely be a winner. But this is not the end of the grocery business. Therefore, it is not a time to panic. Instead, it’s a time to take a good hard look at the business and decide how to respond.