What do Amazon and Whole Foods customers have in common? Clarus Commerce CEO Tom Caporaso lays out the similarities in a byline for CNBC.
As originally published in www.cnbc.com.
Amazon‘s decision to acquire Whole Foods for $13.7 billion shouldn’t come as a surprise. Jeff Bezos has had his sights set on breaking into the grocery category since 2007.
That’s because grocery, if done right, is the ultimate grand slam for online retail. Unlike other categories, people buy groceries on a regular basis, sometimes daily.
Grocery and grocery delivery also fit in with Amazon’s strategy of continuing to add products and services that offer the most value to its Prime members.
They’ve already dipped their toes by launching and growing AmazonFresh in 2007, but a decade later, it’s still not nearly as strong as Prime. Why is that?
There are some inherent problems with grocery. Big problems.
Margins are extremely low, inventory can easily go bad before it is sold, and there are many more regulatory hoops to jump through than when selling regular retail products online or offline.
Loyalty, or lack thereof, has also been of concern in the grocery category. Traditional grocery store cards simply reward for card ownership, not loyalty. Shoppers receive discounts on purchases they would have probably made anyway and there is no incentive to remain loyal to one store. The average grocery consumers shops at multiple different stores.
Consumers are also extremely price sensitive when it comes to groceries. A program, like Prime, certainly fosters loyalty and repeat purchases. In fact, 91 percent of Prime members renew. What do Amazon Prime and Whole Foods customers have in common?
High income. As of the fourth quarter 2016, nearly 75 percent of households making over $112,000 a year are estimated to be Prime members and the average Whole Foods shopper has more than $1,000 in discretionary monthly income.
With the introduction of the first Amazon Go store in the first quarter of 2017, we were introduced to the concept of adding grocery cart items to a virtual cart via an app, picking them up at a physical location, and walking out with the items without waiting in a checkout line.
At the time, Amazon had planned on expanding its Amazon Go brick & mortar presence, so it’s probably safe to say that acquiring a major grocery with 431 existing brick & mortar stores will help move this expansion along.
This also helps cut down on delivery times. Prime Now, which is currently available to Prime members in select major cities, promises delivery times as quickly as an hour after ordering certain types of times. Currently, Amazon relies on about 70 warehouses to fulfill these orders. This acquisition will now allow Amazon to expand its food offerings under this program.
The acquisition also gives Amazon a competitive edge over other companies who have recently entered the market including Instacart (who had an exclusive grocery delivery agreement with Whole Foods), Peapod, FreshDirect, and Google’s new delivery service.
But, Amazon isn’t the only winner in the deal. Whole Foods has been in trouble for almost two years. It’s experienced declining sales and recently overhauled its board of directors. Amazon will allow CEO and co-founder John Mackey to continue to run the business after battling with activist Jana Partners, who acquired an 8 percent stake this year, but the business will probably be run much differently than in the past. The high prices at Whole Foods will most likely see a gradual deflation.
Amazon has always been concerned with offering low prices on popular items and with its increased buying power and expanded logistics in the grocery category, we may see lower prices on an expanded selection of high quality organic and prepared food. Amazon will lead the charge in making grocery shopping and delivery just as convenient as retail products and content.
Bezos’ focus has always been on the customer and at the end of the day, they’re the big winners here.
Commentary by Tom Caporaso, the CEO of Clarus Commerce, an e-commerce and subscription commerce solutions firm. Among its various properties, Clarus Commerce powers FreeShipping.com, the pioneer of the pre-paid shipping and cashback movement. ClarusCommerce also customizes and manages programs, such as Return Saver, which it co-developed with FedEx, and 2-Day Shipping by MasterCard, for clients across a wide range of industries.